Pride Before the Fall: The Trials of Bill Gates and the End of the Microsoft Era

Citation preview

Praise for Pride Before the Fall "I don't know a more important story right now than US v. Microsoft, or a better, more illuminating chronicle of it than Pride Before the Fall. This is an absolutely terrific book -smart, tough, fair, knowing, and packed with first-rate reporting." -- Kurt Andersen, author of Turn of the Century "Heilemann slices through jargon and hype like an eye surgeon wielding a laser -- and gives us not just a cunning exposé of Microsoft but also a brilliant exposure of the dark side of the bright new economy." -- Robert B. Reich, former U.S. Secretary of Labor, author of Locked in the Cabinet “As a reporter who covered the Microsoft trial, I thought I had a pretty good grasp of what went on behind the scenes. Boy, was I wrong. Heilemann has uncovered dozens of neverbefore-told anecdotes, has interviewed key sources no one else tracked down, and has filled his narrative with startling new insights. In the process, he has done something remarkable: he has shed new light on an important event we all thought we understood. Pride Before the Fall is a reportorial tour de force.” -- Joseph Nocera, Editor-at-Large, Fortune

Pride Before the

FALL The Trials of Bill Gates and the End of the Microsoft Era

JOHN HEILEMANN

HarperCollinsPublishers

PRIDE BEFORE THE FALL. Copyright © 2001 by John Heilemann. All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews.

John Heilemann asserts the moral right to be identified as the author of this work. Adobe E-Reader edition v 1. February 2001 ISBN 0-06-621313-4 Print edition first published in 2000 by HarperCollins Publishers 10 9 8 7 6 5 4 3 2 1

For my mother, whom I miss. For my father, whom I love. And for Katrina Heron, who believed.

Pride goeth before destruction, and a haughty spirit before a fall. —PROVERBS 16:18

Contents

Prologue

THE HUMBLING

Chapter 1

THE CASE THAT ALMOST WASN’T

Chapter 2

THE ACCIDENTAL TRUSTBUSTER

Chapter 3

THE SHADOW OF THE MAN

Chapter 4

THINGS FALL APART

Chapter 5

IN THE DOCK

Chapter 6

IN THE BUNKER

Chapter 7

SHOWTIME

Chapter 8

ROUGH JUSTICE

Chapter 9

WHISTLING IN THE DARK

Chapter 10

THE VERDICT

Trial Transcripts, Filings, and Documents Acknowledgments About the Author Credits About the Publisher ix

Prologue

THE HUMBLING

THE JUDGE in Chicago wanted his signature. Just two little words on the bottom line: Bill. Gates. It was early in March 2000, three full months after the formal, court-ordered mediation between Microsoft and the government had begun, and Bill Gates knew he hadn’t much time. Any day now, federal judge Thomas Penfield Jackson would unveil his verdict in United States v. Microsoft, one of the largest, most consequential, and most controversial antitrust actions in American history. Nobody doubted what the outcome would be. The previous November, Jackson had disgorged a 207-page “findings of fact” that was searing in tone and staggering in the totality of its rejection of Microsoft’s version of the events in question. If the 1

JOHN HEILEMANN

verdict fit the findings, it was going to be ugly—maybe ugly enough to bring about the dismemberment of the most valuable company on earth. Microsoft’s last hope for averting disaster lay in the hands of a different judge: the judge in Chicago, Richard A. Posner. The chief justice of the United States Court of Appeals for the Seventh Circuit, Posner was a conservative jurist with a towering reputation—a man described by the dean of the University of Chicago Law School as “the single greatest antitrust scholar and judge of this generation.” Shortly after Judge Jackson had issued his findings of fact, he rang Judge Posner and implored him to step in as mediator between Microsoft and the Department of Justice (DOJ), whose relationship had degenerated during the lawsuit to a state of mutual contempt. Jackson wasn’t sure if Posner would even take his call; so he was surprised and delighted when Posner accepted the invitation without batting an eye. For anyone else, trying to forge a peace between these two combatants would have been a fool’s errand. But given Posner’s exalted stature, Jackson hoped—prayed—he might just find a way to pull it off. Posner kept his chambers on the 27th floor of the Everett M. Dirksen federal courthouse in downtown Chicago. Every week since the end of November, he had summoned a team of lawyers and economists from the DOJ and a similar team from Microsoft, always meeting the two sides separately, never letting them in the same room together. In the first two months of the mediation, according to one participant, Posner in effect “retried the case”— rehearsing the arguments, reviewing the evidence. Posner’s dedication and thoroughness impressed Gates mightily. In January, Microsoft’s chairman flew out from Seattle for a face-to-face session with the judge; afterward, they spoke by phone on nearly a 2

Pride Before the FALL

dozen occasions, delving in extraordinary depth into the details of Microsoft’s business. “The guy’s super-smart,” Gates told me later, bestowing on Posner his highest plaudit. By February, Posner felt comfortable enough with the business issues to start trying to hammer out a settlement. (His grasp of the technology was shakier; even after weeks of tutoring, the concept of a “default Web browser” still baffled him.) Posner’s method of seeking common ground was to draft a series of proposed consent decrees that would place certain limits on Microsoft’s conduct. After presenting each draft to the opposing parties, Posner solicited their comments and criticisms, then cranked out another draft to push the ball forward. For a month or so, it went on like this, back and forth, to and fro, round and round—until they arrived at Draft 14. With Draft 14, Posner thought he’d come close to crafting a settlement that was tough enough to satisfy the DOJ but not so tough that Microsoft would recoil. When the t’s were crossed and the i’s dotted, Posner asked Gates if he could live with Draft 14. When Gates said that he could, Posner told him he wanted to demonstrate emphatically to the DOJ that Microsoft was serious—and the best way to do that would be for Gates to put his name to the proposal. At Microsoft there were many who thought Posner naive. The government would never be satisfied, even if the firm were to sacrifice its firstborn—or, something rather more precious, its source code. Others simply thought Draft 14 too draconian. But although Gates saw the skeptics’ points, he was anxious to put this whole nightmare behind him. He swallowed hard and scrawled his signature. The skeptics were right: it wasn’t enough. The DOJ wanted more restrictions on Microsoft’s behavior, and fewer loopholes, than Draft 14 contained. Yet Posner still believed that a settlement could happen. For another month, he kept churning out drafts— 3

JOHN HEILEMANN

Draft 15, Draft 16, Draft 17. In the last week in March, Posner called Judge Jackson and asked for 10 days more; he was near, very near, to securing a deal. (So confident was Jackson that Posner would succeed, he took off on vacation for San Francisco.) By March 29, Draft 18 was complete. It reflected the DOJ’s final offer. In Gates’s office in Redmond, Washington, the chairman’s inner circle convened for one of the company’s most fateful debates. Throughout the mediation, Gates had relied for advice on a handful of people: Microsoft’s newly elevated CEO, Steve Ballmer; its general counsel, William Neukom; the senior executives Paul Maritz, James Allchin, and Robert Muglia. The document before them required that Microsoft set a uniform price list for Windows, barred it from striking exclusive contracts with Internet service and content providers, and forced it to open its application programming interfaces (APIs), the software hooks that allow programs to run on top of an operating system. And although Draft 18 would let Microsoft add new features to Windows—features such as Web browsing, which had spurred this lawsuit in the first place—PC manufacturers were granted the right to demand versions of the operating system without those features; and also the right to license the Windows source code, so that they could modify the computer desktop, integrate rival software, or add features of their own choosing. There was no shortage of critics who would say this was all trivial tinkering, modest stuff of marginal utility. But the Microsoft high command didn’t see it that way. Even for those executives who had been asked by Gates to play the devil’s advocate in favor of settlement—Maritz and Muglia—Draft 18 was a bridge too far. It was not a proposal that Gates could sign on to. In Silicon Valley and in Washington, DC, Gates’s decision to reject Draft 18 was viewed as the crowning blunder in a succession of 4

Pride Before the FALL

blunders that had marked his three-year battle with the federal government. It was an act of bloody-mindedness, of myopia, of hubris. Yet in the weeks and months that followed his refusal to settle, Gates never displayed the slightest hint of doubt about the decision he’d made and the offer he’d spurned. The son of a lawyer, steeped in the language of contracts, Gates believed that he knew a bad deal when he saw one; and that Draft 18 was a deal which would have wrecked his business. He was also aware that the courts were imperfect, and he considered Judge Jackson’s more imperfect than most. But Gates had “faith,” he told me, “that in the final analysis, the judicial system will come up with absolutely the right answer.” Whatever the logic of Gates’s gamble, its immediate effect was swift and irrevocable. On March 31, Microsoft’s Bill Neukom sent material to Judge Posner that would form the basis of Draft 19, which Posner then read by phone to the DOJ. The very next afternoon, April 1, still four days shy of his self-imposed deadline, the mediator declared his mediation a failure. In public, and even more pointedly in private, Microsoft blamed the breakdown on the coalition of state attorneys general who had been the DOJ’s partners in prosecution since the beginning of the case. In the crazy final days of the negotiations, the states had sent Posner a laundry list of demands considerably in excess of the DOJ’s. In his only public utterance about the mediation—a written statement issued the day he called his efforts to a halt—Posner was studiously ambiguous about the precise cause of the collapse. Citing only “differences among the parties,” he praised the professionalism of Microsoft and the DOJ, but made no mention of the attorneys general—an omission that seemed to many observers freighted with meaning. However, in an early version of his statement, which Posner shared with only a few people, the judge had gone out of his way to rap the states on the knuckles for 5

JOHN HEILEMANN

their left-field intercession, while at the same time indicating that the truly insurmountable gap was “between” Microsoft and the DOJ. With the mediation kaput, Judge Jackson hustled back from the coast and delivered his verdict on April 3. It was nearly as gruesome as expected. A month later, the DOJ and the states asked that the court split Microsoft into two companies: one containing its operating-system business, the other containing its applicationsoftware and Internet businesses. On June 7, Jackson agreed, ordering exactly the breakup the government requested. It was the spring in Redmond when illusions were shattered, when old verities crumbled and the stock price tumbled, when everything that was solid melted into the air. By the time Jackson handed down his breakup order, Microsoft’s value on the Nasdaq stock exchange had been chopped nearly in half since March, wiping out more than $200 billion in wealth. Competitors crowed. The press piled on. Private class-action antitrust lawyers began to swarm. In late June, Microsoft unveiled with great fanfare its grand new Internet strategy, and an industry that for so long had hung on its every hiccup, that had trembled at the sound of its virtual footsteps, dismissed the initiative as half-cooked vaporware— or, more charitably, yawned. Three months later, a yearlong exodus of talent reached its peak when Paul Maritz, the most powerful executive at Microsoft after Gates and Ballmer, announced he was leaving. Even for the truest of true believers, it seemed, faith had become a scarce commodity.

THE HUMBLING of Microsoft was the last great business story of the 20th century and the first great riddle of the 21st. There are fancier ways of putting it, but the riddle was this: How did it happen? 6

Pride Before the FALL

Perhaps no corporation in history had ever risen so far so fast. Having celebrated its 25th anniversary in 2000, Microsoft was no longer a fresh-faced child or even a gangly adolescent: adulthood was upon it. Yet among the totemic firms of the past century, from Standard Oil and US Steel to General Motors and General Electric, none had attained such stature, power, or profitability in so breathtakingly short a time. Even within the computer industry, where awareness of Microsoft’s ascent had always been acute, people often forgot just how quickly it had happened. As recently as 1992 or 1993, the company, though plenty influential, was by no means seen as some omnipotent leviathan. Five years later, that had changed. In the autumn of 1997, when the Justice Department first took after Microsoft in a serious way, Gates’s many rivals in Silicon Valley applauded. But their pleasure was tempered by a daunting perception that Microsoft was so indomitable, and the government so “dynamically anticlueful,” as one digital quip-merchant put it, that nothing much would come of the DOJ’s pursuit. Theories abounded as to why things turned out so spectacularly otherwise. Some observers maintained that the outcome was more or less inevitable; that Microsoft’s business practices, once brought to light, would have been enough to convict it in any court in the land. As a DOJ lawyer once said to me, “It was the stuff they did before the case was even filed that sealed their fate.” Others suggested that Microsoft’s history was bound to catch up with it from another direction; that its enemies in the Valley had been lying in wait, ready to strike at the first sign of weakness. (Not surprisingly, this was a theory that found favor with Gates.) Still others dwelled on Microsoft’s tactical errors—on the ineptitude of its lawyers and its incompetence in the realm of high politics. And still others focused on Gates himself; on his arrogance, and on the insularity and isolation of the culture he’d wrought. 7

JOHN HEILEMANN

There were kernels of truth in each of these theories, but even taken together they fell short of eureka. What they failed to capture was the sometimes random confluence of forces at work: the way people with disparate agendas and mixed motives came crashing together to produce an outcome that seemed obvious only in retrospect. All through its conduct, the Microsoft trial was compared to a war. “The War of the Roses,” said Judge Jackson, or “the fall of the House of Tudor. Something medieval.” But war is hell not simply because it’s so bloody. War is hell because it’s so unpredictable, so chaotic, so hot and dusty and shot through with confusion. The Microsoft trial was a war that neither side actually wanted to fight, in which unexpected alliances arose and old enmities surfaced at the most inopportune moments. It was war in which one hand rarely knew what the other was doing and carefully planned offensive ganged aft agley. Coincidence, timing, and blind shithouse luck all played their parts. And so did large acts of cowardice and small acts of courage, often committed by unknown soldiers. This is the story of the generals in that war, of Bill Gates and Bill Neukom, Joel Klein and David Boies. But it is also the story of those unknown soldiers—people you’ve never heard of, whose tales have never been told. It’s the story of Susan Creighton, the sweet-tempered antitrust lawyer who was Netscape’s secret weapon. It’s the story of Mark Tobey, the Texan crusader who took up the case when the Feds were still sleeping. It’s the story of Mike Hirshland, the Republican Senate aide who found in Microsoft an unlikely passion, and it’s the story of Dan Rubinfeld, the economist whose theories helped push the DOJ where it was hesitant to go. It’s the story of Steve McGeady, the Intel apostate who took the stand against Gates. And it’s the story of Mike Morris, the lawyer from Sun Microsystems who mounted a lobbying campaign that 8

Pride Before the FALL

brought together some of Microsoft’s most powerful opponents, and that was one of Silicon Valley’s most closely guarded secrets— until now. Acting sometimes in concert and sometimes alone, these unheralded characters and others like them accomplished things long regarded as impossible. They thrust Silicon Valley neck-deep into the swamps of Washington, DC. They put the high-tech industry’s dirty laundry on display for all to see. They made antitrust law into national news. And they felled a giant that had once seemed invincible. This is the story of the end of an era—and also of more than one kind of innocence.

9

Chapter 1

THE CASE THAT ALMOST WASN’T

THOUGH NO ONE at the company knew it at the time, Microsoft’s troubles with the Department of Justice began in earnest in the spring of 1996, with the literary aspirations of two amateur authors in Silicon Valley. Since 1990, when the Federal Trade Commission (FTC) opened the first government probe into the firm’s practices, Microsoft had been under the antitrust microscope more or less constantly; not a year had passed without it receiving at least one civil investigative demand (CID) for documents. As one federal inquiry morphed into the next, Gates and Ballmer gradually came to view the investigations not merely as legal scrutiny but as a kind of proxy warfare (and, later, as nothing less than a vast high-tech conspiracy) instigated by their enemies 11

JOHN HEILEMANN

in the Valley and elsewhere. Yet as suspicious as they were about the source of their regulatory entanglements, Microsoft’s leaders could scarcely have dreamed that so much damage would be unleashed by a quiet woman who called herself a “law-and-order Republican,” a shrill man who was regarded by some as mildly unhinged, and the book they wrote together—a book that was never published in any form, and whose contents would long remain shrouded in secrecy. Susan Creighton and Gary Reback were not, however, your typical wannabe wordsmiths. They were lawyers and antitrust specialists with Silicon Valley’s preeminent law firm, Wilson Sonsini Goodrich & Rosati. They were passionate, smart, articulate, and angry. They had been retained by Netscape to tell the world, not to mention the DOJ, about the myriad ways in which Microsoft was endeavoring to drive the pioneering start-up six feet under. And they were rapidly approaching the end of their rope. It was Reback who served as the duo’s frontman. Throughout the computer business and the government, he was known as a guy who got paid to complain about Gates—the rough Silicon Valley equivalent of drawing a salary for breathing. Over the years, Reback had amassed a client roster that included some of the industry’s most prominent firms—from Apple and Sun to Borland and Novell, though not all of them admitted it—and had earned a reputation as Redmond’s most relentless and strident critic. The cover of Wired in August 1997 declared him “Bill Gates’s Worst Nightmare.” Nightmarish or not, he was a piece of work. A Tennessee-born Jew in his late forties, Reback wore sharp suits, wire-rimmed glasses, and a perpetually pained expression. When he talked about Microsoft—which was pretty much constantly—his demeanor was fretfulness punctuated with blind outrage. His 12

Pride Before the FALL

voice teetered on the edge of whine. “The only thing J. D. Rockefeller did that Bill Gates hasn’t done,” Reback would wail, “is use dynamite against his competitors!” Crusader and showboat, egotist and quote machine, he had a taste for avant-garde economic theories and a tendency to level extravagant accusations without much hard proof to back them up. He was, in the strictest sense, a zealot: a man both fanatical and fanatically earnest in his beliefs. Later, when the DOJ decided to go after Microsoft, a government lawyer was assigned to “deal” with Reback. “His heart’s in the right place,” this lawyer said. “But he’s twisted. He leaves me these voicemails in the middle of the night, raving about all kinds of stuff. He really needs some help.” History might well have judged Reback a marginal figure, just another Gates-hating ranter, were it not for one inconvenient fact: almost everything he claimed turned out to be true. In Reback, Microsoft faced an adversary with a rare combination of technical savvy and antitrust expertise. As an undergrad at Yale, he had worked his way through school by programming computers for the economics department; as a law student at Stanford, he had studied antitrust under the late William Baxter, who, as the head of the DOJ’s antitrust division under Ronald Reagan, would oversee the breakup of AT&T. Susan Creighton recalled, “Gary liked to tell the story of how Baxter once said, ‘We want companies to succeed, and when they succeed so well that they become monopolies, we should give them a tickertape parade down Wall Street—and then break them up.’ I don’t know if Baxter actually said that, and if he did say it whether he meant it literally, but Gary thought it sounded pretty good.” Reback’s history with Microsoft was long, tangled, and not without its ironies. In the early 1980s, he secured for Apple the copyright registration for the Macintosh graphical user interface, a 13

JOHN HEILEMANN

copyright over which Apple would eventually wage a nasty and protracted lawsuit with Microsoft. Not long afterward, a bearded, elfin entrepreneur from Berkeley appeared on Reback’s doorstep and asked for help in selling his fledgling software company. The company was called Dynamical Systems Research; the entrepreneur, Nathan Myhrvold. After Apple passed up the deal, Microsoft stepped in, buying Myhrvold’s start-up and Myhrvold along with it for $1.5 million. Forever after, Reback would be convinced that this transaction had been pivotal to the rise of Windows, in which Myhrvold played a key role. It was a conclusion that filled Reback with no end of guilt. The lawyer became an anti-Microsoft missionary. As first the FTC and then the DOJ looked into the company, Reback peppered the Feds with briefs alleging a litany of predatory sins. In July 1994, the DOJ sued Microsoft for violating the Sherman Antitrust Act, only to drop the suit shortly thereafter and enter into a consent decree with the company. The agreement contained only a few mild curbs on Microsoft’s behavior; Gates himself summarized its effect bluntly: “nothing.” At the behest of a clutch of Microsoft’s rivals in the Valley, who saw the decree as a Potemkin remedy, Reback spearheaded a spirited, but ultimately futile, campaign in federal court to scuttle it. Indeed, all of Reback’s warnings went unheeded, with one exception. That fall, Microsoft announced a plan to take over the financial-software firm Intuit for $1.5 billion. Reback, working primarily on behalf of an anonymous client (it was, in fact, the database company Sybase), prepared a white paper on the deal for the DOJ. Replete with novel economic concepts such as “network effects” and “increasing returns,” the paper argued that if the merger wasn’t stopped, Microsoft would come to rule online financial services just as it had the PC desktop. Reback was warned 14

Pride Before the FALL

by the DOJ’s chief economist that his analysis might be rejected as “totally preposterous.” But it wasn’t. In April 1995, the government moved to block the Intuit deal, and, rather than wage a costly battle, Microsoft bailed. The victory was sweet for Reback, but all too fleeting. Two months later, on June 21, he received a call from a longstanding Wilson Sonsini client, Jim Clark. Clark was a well-known figure in Silicon Valley, a former Stanford professor who in the early 1980s had founded the 3-D workstation powerhouse Silicon Graphics. In 1994, Clark left SGI and teamed up with Marc Andreessen, the technical wunderkind who as an undergrad had led the team of student hackers that developed the first graphical Web browser, to found Netscape Communications. By the middle of 1995, Netscape’s Navigator browser was the world’s most rapidly proliferating piece of software and Netscape was the Valley’s hottest start-up, one that was attracting attention throughout the industry—not least from Redmond. Earlier that June day, Clark told Reback, a team of Microsoft engineers and executives had visited Netscape’s headquarters in Mountain View, met with its CEO, Jim Barksdale, its marketing chief, Mike Homer, and Andreessen, and offered them a “special relationship.” If Netscape would abandon much of the browser market to Microsoft, if it would agree not to compete with Microsoft in other areas, if it would allow Microsoft to invest in Netscape and have a seat on its board of directors, everything between the two companies would be wine and roses. If not . . . “They basically said, OK, we have this nice shit sandwich for you,” Mike Homer said later. “You can put a little mustard on it if you want. You can put a little ketchup on it. But you’re going to eat the fucking thing or we’re going to put you out of business.” The next day, Reback phoned Joel Klein, the former deputy White House counsel who had recently been named the second15

JOHN HEILEMANN

ranking lawyer in the antitrust division, and persuaded him to send Netscape a CID for some detailed notes Andreessen had taken during the meeting. A few weeks later, Reback flew out to Washington with Clark, Andreessen, and Homer to state their case in person. The DOJ lawyers listened politely, jotted a few things down, said thanks—and then promptly forgot about it. Thus began a pattern that would repeat itself again and again over the next two years. By the following spring, Barksdale & Co. were hearing a stream of reports about Microsoft’s efforts to “cut off Netscape’s air supply”—a phrase that would later acquire talismanic status—not least that Microsoft had threatened to cancel Compaq Computer’s Windows license when Compaq tried to replace Microsoft’s browser, Internet Explorer, with Netscape Navigator on some of its machines. With the browser war turning vicious and Netscape’s complaints to the government getting nowhere, Reback and the company’s general counsel, Roberta Katz, decided that desperate measures were in order. They would put Netscape’s story down on paper, find a publisher, and present their plight in the bookstores of America. The task of penning this opus would fall to Reback’s colleague, Susan Creighton. Cerebral and literary where Reback was blustery and verbal, Creighton was a Harvard- and Stanford-educated attorney who had clerked on the Supreme Court for Justice Sandra Day O’Connor. She was every bit Reback’s intellectual equal, and, they both agreed, the far better writer of the two. On May 1, therefore, Creighton sat down at her desk at home, surrounded by reams of documents, her infant child perched on her lap, and began tapping away. Three months later, Creighton emerged with a 222-page piece of anti-Microsoft agitprop (including charts and tables courtesy of her husband, a local professor and desktop-publishing enthusi16

Pride Before the FALL

ast). The tome would eventually bear the dust-dry title “White Paper Regarding Recent Anticompetitive Conduct of Microsoft Corporation,” but its substance was anything but arid. Explicitly written for a broader audience than lawyers and techies, Creighton’s book read less like a legal treatise than a true-crime potboiler, a high-tech Executioner’s Song. Creighton spun the tale of Microsoft’s 20-year rise to power; of how it had employed a blend of strategic brilliance and nefarious tactics to destroy its competitors and hence “to acquire virtually complete control over what is arguably the most important tool in the American workplace”; and of how, faced with a potent new challenger, it had “engaged in a variety of anticompetitive acts that surpass its previous illegal conduct.” Chief among those acts was what Creighton characterized as a naked attempt to divide the browser market at the meeting with Netscape the previous June. The white paper alleged that Microsoft had been withholding APIs that Netscape needed for its browser to plug into Windows 95, which was due to be released a few months later. “If we had a special relationship, you wouldn’t be in this position,” one of the men from Redmond had said, according to Andreessen’s notes. The Microsoft people made clear that their company planned to build a browser for Windows 95, but also that they had limited interest in doing the same for the Macintosh, or for the Unix operating system, or even for older versions of Microsoft’s OS, like Windows 3.0 and 3.1. “Would you be interested in having a partnership where NS gets all the non-Win95 stuff and MS gets all the Win95 stuff?” Andreessen’s notes described a Microsoft executive as saying. “If NS doesn't want to, that’s one thing. If NS does want to, then we can have our special relationship.” When Netscape spurned Microsoft’s offer of collusion, Creighton wrote, Gates’s firm had used its muscle with Internet 17

JOHN HEILEMANN

service providers (ISPs) and original equipment manufacturers (OEMs)—as PC manufacturers are known—to shut down Netscape’s distribution channels. The white paper accused Microsoft of illegally tying its browser to Windows. And of predatory pricing. And of exclusive dealing. And even of offering “secret side payments potentially amounting to hundreds of millions of dollars” to distributors to keep Netscape software off their customers’ desktops. The evidence for these claims was sometimes thin, and based almost completely on hearsay. (Given the fact that Creighton did not have subpoena power, that was unavoidable.) But the claims were colorful, incendiary, and entirely plausible. Equally plausible, if equally controversial, was Creighton’s hypothesis as to Microsoft’s motives. With help from Reback and Garth Saloner, a leading-edge Stanford economist who had assisted in drafting the Intuit white paper, Creighton put forward a nuanced theory of “monopoly maintenance”: that Microsoft’s primary objective was not to dominate the browser market for its own sake, but rather to protect its dominance over operating systems. What Gates realized, Creighton argued, was that the browser was more than just another software application—it was potentially a rival platform that held out the possibility of turning Windows into a commodity, and, as Gates himself put it, an “all but irrelevant” commodity at that. “This is, at bottom, a very simple case,” the white paper concluded. “It is about a monopolist (Microsoft) that has maintained its monopoly (desktop operating systems) for more than ten years. That monopoly is threatened by the introduction of a new technology (Web software) that is a partial substitute—and, in time, could become a complete substitute—for the monopoly product. Before that can happen, the monopolist decides to eliminate its principal rival (Netscape), and thereby protect its continued abil18

Pride Before the FALL

ity to receive monopoly rents. The monopolist is aided by the fact that circumstances are ideal for its predatory strategy: The monopolist has vast resources, while its rival has very modest ones; barriers to entry are high; and, once the rival is out of the way, the monopolist’s road ahead looks clear.”

THE IMPLICATIONS of the white paper were stark and chilling— perhaps too chilling. For when Creighton and Reback delivered the finished document to Netscape, the reaction was unexpectedly schizophrenic. On one hand, Creighton remembered, “Barksdale and the others said to us, ‘Thank you! Someone has finally put into words what we’ve been trying to say; it’s like we’ve found our voice.’ ” Yet the white paper made painfully clear how dire Netscape’s predicament was. “As people at the company saw what their position looked like in black and white, there was increasing concern about making it public,” Creighton said. “They said, ‘Jeez, there’s no way we can let this get out.’ ” In particular, Barksdale was worried about the reaction of Wall Street. “My fear was that people would read it as the whinings of some sad-sack loser,” he recalled. “What would the markets think if we said, ‘If the government doesn’t help us, we’re doomed’?” And so it was determined that, rather than aiming for an audience of thousands, the Netscape white paper would have an audience of one: the DOJ. Creighton was crestfallen; Reback, enraged. Not only had the DOJ already demonstrated its lack of interest in Netscape’s ongoing evisceration, but now Joel Klein had been named the acting head of the antitrust division. Reback had no love for Klein, whose first major victory at the DOJ had come in 1995 when he defended the government’s consent 19

JOHN HEILEMANN

decree with Microsoft against Reback’s challenge in federal court. Reback’s suspicions, along with those of many in the Valley, only deepened when soon thereafter Klein took the lead in deciding that the DOJ would do nothing to halt Microsoft’s plan to put an icon for its fledging online service, the Microsoft Network, on the Windows 95 desktop. A few months later, when the two men appeared together on an antitrust panel at the Harvard Law School, a fight broke out between them, during which Reback lambasted the DOJ as being full of “Microsoft’s running dogs.” At a dinner later that evening at the Harvard Faculty Club, Klein surprised even those at the table less adamant than Reback with his reluctance to pursue the company. “What if we hurt them and in the process we hurt the economy?” Klein asked. On returning to California, Reback told Creighton, “Joel doesn’t get it. He’s just fucking hopeless.” For one brief moment, Reback’s pessimism seemed mistaken. In September 1996, not long after the Netscape white paper was shipped off to Washington, the DOJ announced it was opening an investigation into Microsoft’s Internet activities. Years later, after their triumph in court, Klein and his allies would point to this as evidence that, as soon as Netscape came forward with credible allegations, the DOJ had jumped on the case like a dog on a bone. But this was revisionist history on a massive scale. The DOJ’s investigative team consisted of a couple of lawyers working parttime in the San Francisco field office. In the course of the next year—a year in which, for all practical purposes, Netscape was reduced to rubble—those DOJ lawyers sent Microsoft a single CID, limited in scope to the company’s dealings with Internet access providers, and a single CID to Netscape. There were no interviews, no depositions, no phones ringing off the hook. And when Reback or Creighton talked to the DOJ’s lawyers, the conversations were marked by “a complete lack of meaningful engage20

Pride Before the FALL

ment,” Creighton said. “It was like, ‘We’re the police and you’re taxpayers, so we have to listen to you complain. But don’t expect us to do anything anytime this century.” Reback recalled, “One of them actually said to me, ‘browser, schmowser.’ ” Up in Redmond, the impression of the Justice Department’s interest in the case was much the same. In the spring of 1997, Bill Neukom received a call from Phil Malone, the DOJ lawyer who was heading up the Microsoft investigation out of the San Francisco office. Malone informed Neukom that the government wasn’t planning to challenge the company’s recently announced acquisition of a Silicon Valley start-up called WebTV. “Then Malone says, ‘It doesn’t look like this browser thing is going anywhere,’ ” another Microsoft lawyer recalled. “A little while later, we got another signal from him that it would all be over pretty quickly. We were popping champagne corks up here.” The bubbly turned out to be somewhat premature. Down in the Valley, Reback and Creighton, insanely frustrated though they were, had yet to concede defeat. If Klein wouldn’t act of his own volition, they would simply have to goad him, or bait him, or shame him into doing it. The Netscape lawyers began lobbying anyone willing to lend them an ear. The FTC. The Senate Judiciary Committee. The European Commission. They drafted new white papers, these less confidential. And they trawled for allies among companies outside Silicon Valley—American Airlines, Walt Disney, publishers, banks—that might one day find themselves reliant on, or beholden to, Microsoft. The most promising nibble came from an unlikely pond: the office of the Texas Attorney General. Reback, of course, knew that Texas was home to a thriving high-tech economy, and to two of the world’s biggest PC OEMs, Compaq and Dell. But he wasn’t aware that it was also home to a populist, reformist assistant 21

JOHN HEILEMANN

attorney general named Mark Tobey, who’d become suspicious of Gates’s power after reading a story in Time magazine about the browser wars. Within weeks of examining the original white paper, Tobey issued a set of CIDs to Microsoft and Netscape. When the documents arrived, he was fast persuaded that the case was worth pursuing. From then on, Tobey became Reback’s staunchest ally in lobbying his peers in the offices of other state attorneys general around the country to look into Microsoft’s behavior. At first, the state AGs were more than reluctant, but as the summer of 1997 unfolded, Microsoft seemed intent on providing them with ample reasons to change their minds. First there was an article in The Wall Street Journal in which Reback’s old friend Nathan Myhrvold was quoted as saying that Microsoft’s strategy for Internet commerce was to get a “vig” (short for “vigorish,” bookmakers’ slang for a cut of the action) from every transaction on the Net that used Microsoft technology— every transaction on the Net, that is. Then came stories that Microsoft was negotiating a similar arrangement with cabletelevision firms when it came to digital TV. There was also Microsoft’s high-profile, $150 million investment in Apple, a deal which marked the official end of what was once computing’s fiercest rivalry, demonstrated that Steve Jobs’s company was dependent on Bill Gates’s for its very survival, and was seen in the Valley as a mortal blow to Netscape, whose browser was being ousted from its last refuge, the Mac desktop. Suddenly, in state AGs’ offices and on Capitol Hill, people began to wonder if Microsoft really was the new Standard Oil. And, just as suddenly, Reback found that his alarmist alarums were being met with the most welcome three words an agitator can hear: “Tell us more.” 22

Pride Before the FALL

His campaign finally starting to catch sparks, Reback planned to ignite a conflagration. After submitting to the DOJ another Netscape white paper—in which he and Creighton contended that Microsoft’s goal was to gain a chokehold over all of online commerce—he quickly orchestrated a series of secret meetings with many of the allies he’d managed to round up, arranging for the DOJ’s Phil Malone to witness the proceedings. “I had tried to start a fire with flint, I had tried to start a fire with a magnifying glass, I had done everything I could to start this fire, but I was still being ignored,” Reback said. “I had to create an event that couldn’t be ignored.” For two solid days in the last week of August, Reback turned Wilson Sonsini’s Palo Alto offices into a kind of anti-Microsoft three-ring circus. In one conference room, lawyers on the staff of the Senate Judiciary Committee’s chairman, Utah Republican Orrin Hatch, huddled with an assortment of Silicon Valley executives, collecting leads and gathering evidence of Microsoft’s alleged malfeasance. In another conference room down the hall, the general counsels to a number of Microsoft’s competitors, including Netscape, Sun, and Sabre—the airline industry’s computerized reservation system, which Microsoft planned to take on with its travel site Expedia.com—held brainstorming sessions to map out a wide-ranging political campaign against Redmond on Capitol Hill, in the statehouses, and in the press. The meeting would prove to be the birth of ProComp, the leading anti-Microsoft lobbying outfit in Washington, DC. But the center ring was in the law firm’s main conference room, where Mark Tobey, seated beside Malone, Reback, Creighton, Netscape’s Roberta Katz, and representatives from the AG’s offices of several other states, conducted the first-ever depositions in what would become US v. Microsoft. There, Marc Andreessen, 23

JOHN HEILEMANN

Mike Homer, and other top Netscape executives laid out detailed accounts of many of the incidents in the white papers, including, most important, the June 1995 meeting at which Microsoft had allegedly made its proposal to carve up the browser market with Netscape. When Tobey asked Andreessen why he had taken notes on the meeting, the tyro replied, “I thought it might be a topic of discussion at some point with the US government on antitrust issues.” (During the trial, Microsoft would cite this comment as evidence that the meeting was a setup, while Netscape and the DOJ would retort that Andreessen was just being sarcastic. “Bullshit, on both counts,” Andreessen said later. “I’d read all the books. I knew their MO. We were a little start-up. They were Microsoft, coming to town. I thought, Uh-oh. I know what happens now.”) As the depositions went on, Malone sat silently and took it all in. For the past year, he had been in charge of the DOJ’s desultory inquiry; now, incredibly, he was watching as a state-level lawenforcement official—from Texas, no less—seized the initiative in an investigation of what was then the world’s second most valuable corporation. Reback was taunting him mercilessly: “Phil, whaddaya think? That didn’t sound like a market-division proposal, now did it?” But Malone somehow managed not to lose his composure. Until the very end, that is. “When the depositions were over,” Reback recalled, “Tobey goes up to Malone and says, ‘This looks like the endgame. The only remedy I can see is to break Microsoft up.’ And Malone turned purple. Purple! Here the DOJ isn’t doing anything, and Tobey is saying, Hey guys, it’s over. I really thought that Phil was about to have a coronary.” For Reback and Creighton, the August meetings at Wilson Sonsini marked a turning point. The lawyers from the Senate Judiciary Committee were leaning their way, and had started talking 24

Pride Before the FALL

about the possibility of holding hearings on competition (or the lack thereof) in the software industry—and even, perhaps, of summoning Gates himself to Capitol Hill. Tobey and the states, a contingent that had grown to include Massachusetts and New York, were in hot pursuit. With the founding of ProComp, Microsoft’s congenitally disorganized competitors seemed for once to be getting their act together. And, through the good offices of a shaken Phil Malone, the Netscape attorneys had fired a loud, bracing shot across the DOJ’s bow. The message was clear: the Microsoft matter wasn’t going away. Yet the real question remained unanswered: was Joel Klein finally ready to listen?

25

Chapter 2

THE ACCIDENTAL TRUSTBUSTER

MIKE HIRSHLAND thought not. Hirshland was Orrin Hatch’s number two staffer on the Senate Judiciary Committee. He was barely 30, garrulous, and wicked smart, a former clerk for Supreme Court Justice Anthony Kennedy. He was also a diehard Republican, a free-marketeer, and therefore a man instinctively averse to government meddling in the affairs of commerce. But what Hirshland had learned about Microsoft’s behavior troubled him deeply. Returning to Washington from Silicon Valley in the fall of 1997, he began calling up computer manufacturers such as Compaq and Internet service providers such as EarthLink to see if the allegations in the white papers about Microsoft’s exclusionary practices held water. After a few weeks of poking around, Hirshland was 27

JOHN HEILEMANN

convinced that “this was pretty damn serious.” So he phoned the DOJ and arranged a meeting with Klein and his deputies. On a gorgeous autumn day, Hirshland and the Judiciary Committee’s chief counsel, Manus Cooney, walked down from Capitol Hill to the DOJ’s Pennsylvania Avenue headquarters. Settling in at the long walnut table in the conference room that adjoined Klein’s office, the Senate lawyers explained that they’d reached the conclusion that, at the very least, Microsoft warranted a serious investigation; and that, from what they could see, the DOJ wasn’t conducting one. “They told us, ‘If what you’re basing this on are the Netscape white papers, forget about it,’ ” Hirshland recalled. “They said, ‘A lot of those leads just didn’t pan out. Reback? You can’t trust that guy; he makes stuff up. And besides, we’re not really sure that tying the browser to the operating system is illegal anyway.’ ” Hirshland was prepared for the DOJ’s resistance. Plucking a sheet of paper from his briefcase, he rattled off a list of the most blatantly questionable examples of Microsoft’s conduct that he’d discovered. “What about all the exclusionary contracts?” Hirshland asked. “What about the OEMs? The ISPs? EarthLink? AOL? Gateway? Compaq?” Klein and his team fell silent. “The next thing you know,” Hirshland remembered, “they pulled their notebooks out and were writing everything down.” After the meeting was over, Hirshland and Cooney walked back to the Hill. “Jesus Christ, Manus, that was all news to them!” Hirshland exclaimed. “Those guys aren’t going to do jack.” This was not a unique assessment in the fall of 1997. Joel Klein had been around Washington a long time, and a fairly clear consensus had emerged as to what kind of an antitrust chief he was likely to be. The thumbnail sketch read like this: Klein was brilliant, scholarly, and sophisticated; also careful, cautious, and 28

Pride Before the FALL

pathologically pragmatic. Politically astute and avowedly probusiness, he was nobody’s idea of a tough-talking trustbuster in the tradition of Teddy Roosevelt or William Howard Taft. He would take only cases he knew he could win. And so, therefore, he’d steer clear of Microsoft. In his early fifties, Klein was short and slight, with a perpetual tan and a shiny bald pate. He walked and talked softly, and seemed on first inspection to carry no stick at all. The son of a postman, he’d grown up in Queens, hoping to become a professional athlete. Robbed of that dream by the cruelties of genetics, Klein focused on academics, graduating magna cum laude from both Columbia University, where he majored in economics, and the Harvard Law School. After stints as a clerk to Supreme Court Justice Lewis Powell and as an advocate for the mentally ill, he went on to be a founding partner in a boutique Washington law firm specializing in complex trial and appellate work. In the 1980s, he earned a reputation as one of the most accomplished Supreme Court advocates of his generation, arguing 11 cases before the Court and winning eight. Nearly three decades in the capital had turned Klein into a consummate Washington insider. He played tennis with Justice Antonin Scalia (Klein: “Nino can’t quite believe that his authority as a Supreme Court justice doesn’t mean he wins every shot”) and was a certified FOB, having gotten to know President Clinton at Renaissance Weekends in the 1980s. Klein was also a close friend of the late David Ifshin, a well-known and much-beloved Washington lawyer who was an adviser to Clinton’s 1992 Democratic primary campaign. When the very first story about the scandal that would come to be known as Whitewater appeared in The New York Times that year, Ifshin’s instinct was to ask Klein to go to Little Rock and get to the bottom of the tangle of business dealings 29

JOHN HEILEMANN

that would ultimately cause the Clintons so much heartache. But Ifshin’s plan was scotched by the campaign, so Klein’s skills remained untapped by the Clintons. Not for long, however. When the deputy White House counsel, Vincent Foster, committed suicide in 1993, Klein was chosen by the President to be Foster’s replacement. As Whitewater and its ancillary scandals mushroomed, Klein was a voice for sanity in the White House, arguing that the Clintons should make all the relevant documents public, and quickly. His probity kept him from being tainted by the scandals; and it earned him respect in some unlikely quarters, not least the offices of Orrin Hatch. But it also irritated many of Clinton’s political operatives, as did his sometimes high-handed manner. When the time came, in 1996, to pick a new Solicitor General—a job Klein pined for—he was passed over. The antitrust post was his consolation prize. Even that post was almost denied him. Having sailed through his confirmation hearings in the spring of 1997, he hit unexpectedly turbulent waters in the Senate when his name came up for final approval. The reason had little to do with Microsoft and much to do with telecommunications—in particular, with Klein’s approval of the controversial $23 billion merger of the giant telephone companies Bell Atlantic and Nynex that April. Democrats were livid over the decision. “We’ve got an antitrust fellow here who rolls over and plays dead,” said Democratic Senator Ernest Hollings of South Carolina, one of several who put a formal hold on his nomination. With The New York Times calling Klein “a weak nominee” and editorializing that the Clinton administration should withdraw him, and with his opponents obstinate and apparently committed, he seemed for a moment to be in serious trouble. 30

Pride Before the FALL

One of those opponents was Gary Reback. Already working to bypass Klein with his lobbying of the state AGs and Capitol Hill, Reback spent hours on the phone briefing the staff of Republican Senator Conrad Burns of Montana, chairman of the communications subcommittee of the Senate Commerce Committee and one of those with concerns about Klein’s views on telecom policy—although unlike Democrats, Burns thought Klein was too tough, not too wimpy. Then Reback dispatched Susan Creighton to Washington to fan the Microsoft flames with the senator and his people. In a limited way, it worked: Burns was the first of the senators to put a hold on Klein’s confirmation. But Klein had cultivated some crucial allies in the Senate, including Hatch, who regarded him as a man of high integrity even while disagreeing with him on many areas of policy. Once Klein had a chance to chat with Burns, and to whisper a few sweet somethings in the Montanan’s ear, the senator relented, helping to clear the way for Klein’s approval. At Netscape, there were those, including chief counsel Roberta Katz, who feared that Reback’s gambit might backfire (and who insisted that the company never officially opposed Klein’s nomination). They were right to be worried. On Capitol Hill, where the only thing that moves faster than a senator sprinting toward a TV camera is confirmation scuttlebutt, word spread quickly about Reback’s maneuvers, and found its way, inevitably, to the ears of Joel Klein. “Of course I heard,” Klein said later. “It did make me smile when Microsoft said I was carrying Netscape’s water. I had no loyalty or debt to them whatsoever—not that that kind of thing matters anyway. This isn’t about politics. The principles are what matter.” Reback’s finaglings may not have hurt Netscape’s cause, but they certainly didn’t help. Given their history, Klein had never 31

JOHN HEILEMANN

been especially fond of Reback; now their relationship went from rocky to rotten. Some of Klein’s colleagues recall that, for a time, he refused even to utter Reback’s name, preferring instead to call him simply “that lawyer.” The growing animosity between the two men—along with several episodes in which Reback seemed more intent on pursuing his own agenda than on advancing Netscape’s—was a central factor in Katz’s decision to hire Christine Varney, a former FTC commissioner and an old pal of Klein’s, as Netscape’s lead antitrust counsel in Washington, DC. “The situation wasn’t good,” Varney recalled. “Netscape found itself in a position where its principal antitrust lawyer had fought tooth and nail to defeat Joel’s nomination, and now, lo and behold, Joel was the antitrust AG. As I said: not good.” Making matters worse for Netscape were the inclinations of many of the people surrounding Klein in the antitrust division. As was the case at every federal agency, the staff of the DOJ divided neatly in two: appointees and career bureaucrats, the latter outnumbering the former by a wide margin. Typically, career staffers, however talented and intelligent, tended to be skeptical and slightly jaundiced at best—and, at worst, unimaginably inert. After all, they had seen it all before. Not surprisingly, then, Klein’s career staff seemed reluctant to go after Microsoft. Some thought the company had done nothing wrong. Some, having been badgered, hounded, and occasionally insulted by Reback for years, had no interest in lifting a finger to help one of his clients. Others seemed not to believe in antitrust enforcement at all. “Remember, we have people who came here during the Reagan administration,” a DOJ official remarked. Then there was Klein’s second-in-command, Doug Melamed, an appointed official. Intellectual and rigorous, discreet and conscientious, Melamed made Klein look impetuous. If brevity is the soul 32

Pride Before the FALL

of wit, Melamed was the soul of prudence. He had never met a nit he could not pick. His disposition on suing Microsoft: wait and see. Amid the hypercautious consensus that held sway in the antitrust division there was, however, at least one dissenter: Dan Rubinfeld. Rubinfeld was a joint professor of law and economics at the University of California at Berkeley who had just taken over, at Klein’s invitation, as the division’s chief economist. Like his new boss, Rubinfeld was a small bald man—though the fringe of hair he retained was snow-white, while Klein’s was dark brown—with a low-key demeanor and a high-pitched metabolism. He seemed at first glance no more likely than Klein to be eager to take a whack at Bill Gates. Quite the contrary. As a private-sector consultant, Rubinfeld had a lengthy record of appearing as an expert witness in corporate lawsuits, almost always on the side of the defense. In fact, years before, Rubinfeld had served as Microsoft’s main expert in its prolonged, and successful, copyright litigation with Apple. “I had no anti-Microsoft bias when I came to Washington,” he said. “I knew those people well. I respected them. I had spent a lot of time up there.” Rubinfeld paused. “Though I don’t expect I’ll get another invitation to Redmond anytime soon.” When Rubinfeld arrived at the DOJ in the summer of 1997, he was somewhat surprised to find that the Microsoft investigation wasn’t anywhere near the division’s front burner. But on the assumption that it soon might be, he took a look at the Netscape white papers. “I wouldn’t say they were very influential on the whole of the department,” he said. “But I took them very seriously.” Rubinfeld was impressed less by the catalog of abuses that the white papers accused Microsoft of perpetrating than by the clarity of Reback’s and Creighton’s strategic and economic analysis. Since the 1970s, antitrust economics had been dominated by the free-market orthodoxies brought into vogue by a group of Univer33

JOHN HEILEMANN

sity of Chicago scholars, including Milton Friedman and Ronald Coase, who argued that the market functioned so well—so effectively, so efficiently—that government intervention was unnecessary and even harmful. As an academic, Rubinfeld was one of a growing vanguard of “post–Chicago School” economists who rejected those orthodoxies; Garth Saloner, the Stanford professor who worked closely with Creighton and Reback, was another. Like Saloner, Rubinfeld had spent the past few years thinking hard about dynamic high-tech industries and had embraced the new economic ideas, from network effects to technological “lock-in,” being advanced to explain how such industries work—ideas at the heart of the Netscape briefs. To Rubinfeld, the white papers’ central thesis seemed convincing: that the browser war was about more than browsers; it was about Microsoft protecting its operating-system monopoly. The more he studied the situation, the more he worried about the impending launch of the new version of Microsoft’s browser, Internet Explorer 4 (IE4), which was designed to be more tightly bound to Windows than any previous browser had been. If the DOJ did nothing, Rubinfeld feared, the browser market might hit its “tipping point,” with Netscape’s share being driven rapidly toward irrelevance and Microsoft extending its monopoly into a vital new market. Soon after he moved to the DOJ, Rubinfeld received a call from Reback, pleading to let him send Saloner in for a meeting. Rubinfeld readily agreed, in no small part because he wanted his warier colleagues in the division to hear what Saloner had to say. A few days later, Saloner showed up and took a seat on the small couch in Rubinfeld’s cluttered office. Facing a clutch of DOJ economists and attorneys, Saloner, a native South African, held forth at length (“quite emotionally,” Rubinfeld recalled) about what was really at 34

Pride Before the FALL

stake in the battle between Microsoft and Netscape. “Nobody would fight over which browser is on the desktop,” Saloner said. “This is about control of the gateway to electronic commerce. This is about somebody”—Microsoft—“potentially owning commerce. We’re talking airlines, cars, banks, you name it.” For the next couple of hours, Saloner fielded a stream of questions, the most hostile and incredulous of which seemed to come from the lawyers. Saloner was surprised. All along, he and Reback and Creighton had assumed that the DOJ’s economists, traditionally a fairly conservative bunch, were the biggest obstacle in their path. But now Melamed was grilling Saloner like a salmon filet, while Rubinfeld was quiet, and apparently quite receptive. What was Rubinfeld thinking? Saloner just couldn’t tell. After the meeting, Rubinfeld walked Saloner down the hall to the elevator. “He said, ‘Thanks for coming, I really appreciate it. Really. I want you to know I’m concerned about this; it’s my top priority.’ I don’t know why, but it seemed like he was trying to send me a message. When I got back to California, I said to Gary, ‘Gee, I think we may be getting somewhere with Dan Rubinfeld.’ ” They were. “What I wanted to tell him was, ‘Garth, I’m on your side; you’ve confirmed everything I’ve been thinking already,’ ” Rubinfeld said later. “But it would have been totally inappropriate, so I kept my mouth shut.”

WITH THE fall 1997 launch of IE4 just around the corner, the time was swiftly approaching to fish or cut bait. At the urging of Rubinfeld and a few other hawks within the division, Klein called Phil Malone in San Francisco and told him to send another CID to Microsoft. Broader than the document demands a year earlier, it 35

JOHN HEILEMANN

focused particularly on the company’s OEM licensing agreements with respect to the forthcoming browser. As reams of internal material from Microsoft began to pour in, the DOJ was startled not only by what the documents said but by the sheer baldness of how they said it. An email sent in late 1996 and another in early 1997, from Jim Allchin, Microsoft’s top executive overseeing Windows, to Paul Maritz, stood out. In one, Allchin began, “I don’t understand how IE is going to win. The current path is simply to copy everything that Netscape does packaging and product-wise. Let’s suppose IE is as good as Navigator/Communicator. Who wins? The one with 80% market share . . . My conclusion is that we must leverage Windows more.” In the other, he wrote, “you see browser share as job 1. The real issue deals with not losing control of the APIs on the client and not losing control of the end-user experience . . . We have to be competitive with [browser] features, but we need something more—Windows integration.” With the Allchin emails and a raft of other damning documents, the DOJ’s long-dormant inquiry suddenly sprang to life. Soon the investigators also had in hand evidence supporting several key allegations leveled in the white papers and by Mike Hirshland about exclusionary contracts with OEMs and ISPs, and especially about Microsoft having threatened to revoke Compaq’s Windows license if it removed IE in favor of Navigator. Yet even then, a debate raged in the DOJ about what to do. There were many voices urging Klein to hold his fire; to investigate the matter further and bring a broad lawsuit, if that were justified, later. The most influential voice was that of Melamed, who argued that, however unsavory some of Microsoft’s practices were, it was still unclear whether the company had actually done anything illegal. Melamed pointed out that the law regarding illegal “tying”— whereby a firm with a monopoly in one market forced consumers 36

Pride Before the FALL

to buy another product as a condition of acquiring the first—was hazy and tended to favor defendants. And, despite the documents that had come in, he felt the evidence remained sketchy. If the DOJ planned to bring a major antitrust case against Microsoft, Melamed said, there was still a great deal of work to do. Rubinfeld took a different tack. Under the 1995 consent decree between the DOJ and Microsoft, the company was explicitly prohibited from requiring OEMs to license any other product as a condition of their Windows licenses. But according to Microsoft’s marketing plans, that was exactly what it intended to do with IE4. Indeed, the DOJ now had proof of something everyone in the computer industry had known for months: that this was Microsoft’s practice with its current browser, IE3. Rubinfeld asked, Why not just sue the company for violating the consent decree and put off any decision about a broader case for the time being? “The browser market hasn’t tipped yet, but it’s really close,” he said. By filing a narrow case immediately, perhaps the DOJ could keep that from happening. In the end, of course, the decision was Klein’s. For all his legal experience and expertise, he had entered the DOJ with scant background in antitrust. But in the past two years, Klein had absorbed enough to know not only that Melamed was absolutely right about the murkiness of the law on tying, but that the case would be made all the murkier by the subtle, abstract nature of the product in question: code. Still, it was hard for Klein to imagine a more compelling instance of illegal bundling than what Microsoft was planning with IE4, nor one more manifestly at odds with the letter and spirit of the consent decree. Moreover, he was aware that in the months since his Senate confirmation the political winds gusting around Microsoft had shifted appreciably. He knew that the contingent of state AGs looking into the com37

JOHN HEILEMANN

pany, which seemed to swell by the week, was charging ahead, and was likely to take action whether he did or not. After a few more conversations between his staff and Mike Hirshland and Manus Cooney, he knew the Senate Judiciary Committee was planning to hold hearings. He knew that Democrats on the Hill still had doubts about whether he had the stomach to joust with big business—and he was keen to dispel them. And, while he still was far from sure about bringing a broader suit, he sensed in his gut this was one he could win. “I’ll tell you what happened,” said a government lawyer who was an admirer of Klein’s. “For a year, the guys at the DOJ had dragged their feet and hadn’t really investigated the thing. Then they finally dug into it a little and what they found was this flatout case of tying, where Microsoft was saying, ‘If you don’t take IE, we’re not going to give you Windows.’ So here was Joel, saying to himself, ‘I almost didn’t get confirmed because people weren’t sure I was tough enough. Well, here I’ve got this blatant violation—I’m going to court.’ ” And so he did. On October 20, 1997, Klein stood next to Attorney General Janet Reno, with flashbulbs popping and cameras whirring, as she announced that the DOJ was not only seeking an injunction against Microsoft for violating the consent decree, but was asking a federal court to impose a fine of $1 million a day— the largest civil fine in Justice Department history—until the company stopped tying its browser to Windows. “Even as we go forward with this action today,” Klein added, “we also want to make clear that we have an ongoing and wide-ranging investigation to determine whether Microsoft’s actions are stifling innovation and consumer choice.” Out in Silicon Valley, Gary Reback heard that, laughed, and wondered if Klein was just blowing smoke. “This filing is a fine 38

Pride Before the FALL

first step, but it’s only a first step,” Reback muttered over the phone. “All we can do is hope that it’s just the first shoe to drop.” What no one could have guessed—not Reback, not Klein, and certainly not Bill Gates—was that, for Microsoft, it was the start of a hailstorm of footwear that would continue, amazingly and unabated, for the next three years.

39

Chapter 3

THE SHADOW OF THE MAN

THE MORNING the news from Washington broke, Gates was in the desert outside Phoenix, attending a high-end high-tech conference called Agenda at the famously opulent Phoenician hotel. Under normal circumstances, Gates moved easily among the Agenda crowd, for these were his people—the established leaders and the up-and-comers in an industry he had done as much as anyone to invent and then to place at the center of the world economy. Andy Grove, the chairman and CEO of Intel, was there; so were John Chambers of Cisco, Steve Case of AOL, Scott McNealy of Sun Microsystems, and the legendary venture capitalist John Doerr, all mingling in the hallways, speculating about what the DOJ’s announcement might portend. 41

JOHN HEILEMANN

Yet the main subject of this feverish kibbitzing was nowhere to be found. For most of the day, Gates kept to his room, conferring with his lieutenants and lawyers by phone and dissecting the situation with Ann Winblad, the Silicon Valley venture capitalist who had once been his girlfriend. His only appearance in the grand ballroom where the conference program was taking place came late in the afternoon, when he stood for a while in the rear of the hall and heckled his rival Scott McNealy in a stage whisper, as Sun’s CEO critiqued the government’s action as too little too late. That night, rather than mingle with the rest of computerdom’s A-list, Gates retreated to a private supper with a handful of his friends: Dave Marquardt, the venture capitalist who had backed Microsoft and become a member of its board of directors; William Randolph Hearst III, scion to the storied newspaper family and now a Valley VC as well; the software entrepreneur Heidi Roizen; Winblad; and a few others. When the conversation turned to the DOJ, Gates explained in a tone at once dismissive and defiant why the government was wrong, why Microsoft was right, and why, in the end, he had nothing to worry about. He spoke at some length on these subjects, but it was a single sentence from Winblad that most perfectly encapsulated his attitude toward the lawsuit: “These people have no idea who they’re dealing with.” The next day, the man the government was dealing with took his turn on the Agenda stage. Dressed in a madras-plaid shirt and a pair of khakis, Gates laid out his company’s arguments in unequivocal terms: that the consent decree specifically allowed Microsoft to develop “integrated products,” and that IE was just such a product—fundamentally melded into Windows. “There’s no magic line between an application and an operating system that some bureaucrat in Washington should draw. It’s like saying that as of 1932, cars didn’t have radios in them, so they should 42

Pride Before the FALL

never have radios in them.” The central question, Gates contended, was this: “Is one company excluded from innovation, or not?” From the audience, Gates was asked about public opinion, about the growing sense, not only in Washington but in the industry at large, that Microsoft was wielding its power too wantonly. “You’re sort of asking us if we’re going to change, to start telling engineers, ‘Slow down, slow down. Go home,’ ” Gates replied. “No, we’re not.” Through most of the session, Gates was calm and collected, if occasionally curt. Then Rob Glaser, a former protégé of his at Microsoft and now the CEO of the Web media-streaming firm RealNetworks, stepped up to the microphone. “Bill, do you really think there is no limit to what should or should not be included in the operating system?” Glaser asked. “If there is a limit, who should set it? Microsoft? The Justice Department?” “Look, look, this is called capitalism!” Gates snapped. “We create a product called Windows. Who decides what’s in Windows? The customers who buy it.” For Gates, the Q & A at Agenda was a gentle preview of what lay ahead. With the onset of the consent-decree case, questions that previously had been raised only within the insular confines of the computer business and behind closed doors in Washington began to be asked in television newscasts and on the front pages of newspapers and magazines across the country. And although the DOJ was the primary provocateur, it wasn’t the only one. The European Commission had opened an investigation of its own. In short order, the government of Japan would do the same. Ralph Nader, the old economy’s hoariest rabble-rouser, was organizing an antiMicrosoft summit in Washington, featuring some of Redmond’s most vocal foes. The most prominent of them was McNealy, who had just filed a separate lawsuit over Microsoft’s use (or, as he con43

JOHN HEILEMANN

tended, misuse) of the trendy Sun software technology Java, a suit in which Sun accused Microsoft of breach of contract, trademark infringement, false advertising, and unfair competition. Thus in the fall of 1997 did Microsoft find itself subject to public scrutiny unlike any it had received in its 22-year history. The company’s reaction was telling. It began with Steve Ballmer, standing on a stage in San Jose a few days after the DOJ’s filing, bellowing five ill-considered words that he would struggle to live down for years to come: “To heck with Janet Reno!” Then there was Microsoft’s first formal response to the consent-decree case, a legal memorandum that labeled the DOJ’s arguments “perverse,” “uninformed,” “misguided,” “misleading,” “wrong,” “just wrong,” “simply wrong,” and “without merit,” and that suggested the government was not acting on behalf of consumers but at the behest of the firm’s competitors. “The only persons in this country unaware that the DOJ is fully receptive to complaints about Microsoft,” the document sneered, “is Rip Van Winkle.” Next came the business with the ham sandwich. When the DOJ issued its reply brief to Microsoft’s memorandum, one passage fairly screamed out for attention amid the otherwise drowsy legal prose. “Microsoft asserts that ‘integrated’ means whatever Microsoft says it means,” the brief said. “Indeed, in its discussions with the government before the Petition was filed, Microsoft flatly stated that its interpretation of the [consent decree] would enable it to require OEMs to put ‘orange juice’ or ‘a ham sandwich’ in the box with a PC preinstalled with Windows 95.” Microsoft had said exactly that. At a meeting with the DOJ just before Klein pulled the trigger, Richard Urowsky of the New York law firm Sullivan & Cromwell—Microsoft’s primary outside legal counsel—let his flair for the dramatic run away with him. 44

Pride Before the FALL

Years later, Microsoft’s legal team would still be fuming over what it called the government’s “ham sandwich leak.” “It was taken totally out of context,” a Microsoft lawyer complained. “What Urowsky said was, ‘We could put in a ham sandwich but nobody would buy it.’ It was a perfectly legitimate thing to say. People wouldn’t buy it if we put a ham sandwich in the OS. It was a metaphor for consumer choice.” Unfortunately for Microsoft, Urowsky’s rhetorical flourish, repeated endlessly in the press, was taken as another sort of metaphor entirely: a metaphor for the company’s arrogance, for its unwillingness to acknowledge any limits to its power. As autumn began to fade into winter, Microsoft was being roughed up in the national media, and its reaction grew only clumsier and more paranoid with each passing day. The trend reached new extremes at the company’s annual shareholders meeting, when Gates lashed out at the “witch-hunt atmosphere” being ginned up by his enemies in the Valley and in DC. All through its history, Microsoft had been adroit, even masterful, at presenting a positive public image; now it looked as if it was melting down. The sight was so strange, so unexpected, I was sure the press accounts had to be exaggerated. There was simply no way Microsoft could really be that rattled. Then I went to see Steve Ballmer. Ballmer had long been Gates’s best friend. They were classmates at Harvard—though Ballmer graduated while Gates dropped out—after which Ballmer worked briefly at Procter & Gamble and then spent a year at Stanford’s business school before joining Microsoft in 1980. Ballmer wore a number of official hats at the company, but, unofficially, he had been Gates’s number two through most of Microsoft’s history. (Paul Allen, Gates’s cofounder, left Microsoft in 1983, after learning he had Hodgkin’s 45

JOHN HEILEMANN

disease, from which he later recovered.) Even more unofficially, Ballmer played the role of Gates’s mirror image: outgoing where Gates was shy, tactical where he was strategic, instinctual where he was contemplative. If Gates was Microsoft’s ego, Ballmer— beefy, boisterous, a natural-born cheerleader—was its rampaging id. To say he was excitable was akin to saying Al Gore was wooden. Once, at a company pep rally, Ballmer shouted the chant “Win-Doze! Win-Doze!” at such decibels that he damaged his vocal cords. Even so, I wasn’t ready for what occurred when we met on a chill December afternoon in San Francisco, where Ballmer was delivering a speech to some customers. Sitting in a windowless conference room at the Westin St. Francis hotel, I asked Ballmer about an internal Microsoft document concerning its licensing of Java, which had come to light in the DOJ’s investigation. In this document, Paul Maritz stated that the company’s goal was to “get control of ” and “neutralize” Java, which was then being sold as a kind of digital Esperanto that would let software coders create programs that could work without changes on any operating system—a raison d’être that was seen as posing a threat to Windows. Scott McNealy had told me he considered the document prima facie evidence that Microsoft had signed its Java contract in bad faith. I asked Ballmer if McNealy was right. “Sun is just a very dumb company,” Ballmer began. “We always honored our license. We always intended to. We always have.” His voice quickly rising, Ballmer continued, “Sun wasn’t confused. We weren’t coming in there saying, ‘Hallelujah, brother! We love you, Sun!’ We said, ‘We don’t like you as a company’—nice people; I like Scott—‘and you don’t like us!’ We said, ‘Hey Sun, you want to get on the back of us and ride, baby, ride! You want on? OK, here’s the terms!’ ” 46

Pride Before the FALL

Ballmer’s face was beet-red now, and he was screaming so loudly that, had there been any windowshades, they would have been rattling. Up on his feet, leaning across the table so that his face was no more than six inches from mine, pounding his meaty fists on the tabletop so hard that my tape recorder leapt and skittered, he roared, “Nobody was ever one little teeny tiny bit confused that we and Sun had this wonderful dovetailing of strategic interests! Those sub-50-IQ people who work at Sun who believe that are either uninformed, crazy, or sleeping!” I took this as a Yes.

“SUB-50 IQ people.” “To heck with Janet Reno.” “Ham sandwich.” “Witch-hunt.” Extending one long, thick middle finger to the United States government and to your competitors is not conventional behavior among the top executives of blue-chip companies. But then, Microsoft hadn’t got where it was by behaving like most other blue-chips. Microsoft was different, self-consciously so. The differences had made it great—maybe the greatest corporation of the second half of the 20th century. But now, those very differences were driving it down a path toward the worst kind of trouble. Microsoft was a very young company in almost every way that mattered. This was a fact easily obscured by the extent of its dominance, and by the head-snapping speed at which it had attained its power. As recently as 1990, Microsoft had been seen both within and without the computer industry as an exceptional outfit with enormous promise, but it was by no means the 800-pound ape it would soon become. Two things guaranteed its gorillahood. The first was Microsoft’s success, with the introduction of Windows 3.0 47

JOHN HEILEMANN

in 1990 and Windows 3.1 in 1992, at knocking its graphical OS into decent shape, or at least decent enough shape for most consumers and corporations. The second was the roll-out in the early 1990s of Office, Microsoft’s suite of productivity software (Word, Excel, PowerPoint), which commenced the process by which the company wiped out most of its rivals in the desktop applications market. As Roger McNamee, a Silicon Valley investor and former stock analyst who tracked the company for many years, put it, “That’s when Microsoft went from being standard-setters, the best software company in the industry, to being gods in their own religion.” Microsoft was a young company in another important respect. From day one, Gates and his lieutenants had focused their recruiting on kids who were clever but green. For a long time, even after the company had swollen to tens of thousands of workers, the average age at Microsoft was under thirty. “We found it was easier to create a culture with people who were fresh out of school rather than hiring people from other companies and other cultures,” Charles Simonyi, one of Microsoft’s most senior and most revered programmers, once said. “You can rely on it, you can measure it, you can predict it, you can optimize it: you can make a machine out of it.” On the surface, there was nothing machinelike about life in Redmond, the details of which are, by now, familiar enough. The rambling campus, strewn with low-slung buildings and stands of evergreens. The free sodas. The shorts, backpacks, sandals, and flannel. By now, it’s also well known that this supremely casual vibe belied a supremely aggressive culture, whose inhabitants liked to describe themselves as “hard-core.” Populated by an army of young men (mainly), most of them unusually bright, many of them abnormally wealthy, working endless hours and pulling frequent all-nighters, Microsoft had always retained the air of a fra48

Pride Before the FALL

ternity—a fraternity of rich eggheads, but a fraternity nonetheless. For years, Softies were wont to sport buttons that read FYIFV: Fuck You, I’m Fully Vested. Another favorite acronym, meant to suggest the lengths to which the company would go and the humiliations it would endure, in Ballmer’s words, to “get the business, get the business, get the business,” was BOGU: Bend Over, Grease Up. Machismo, callowness, and profanity were not exactly unique to Microsoft; they were staples of life in Silicon Valley, too. What was unique, though, was the intense insularity of the Redmond culture. Situated hundreds if not thousands of miles from its competitors and partners, staffed mostly by folks who had never worked anywhere else, Microsoft was the frat house from another planet. Time and again, its engineers expressed apparently genuine surprise and a lack of comprehension that other high-tech companies harbored deep and abiding suspicions of Microsoft. Even Ballmer, a sharp guy despite all the hollering, was quoted in June 2000 in Newsweek saying, “People say a lot of things about us, but never has anyone said we’re untrustworthy.” Hello? At the very heart of the Microsoft culture was technology—an assertion that will sound either axiomatic or ludicrous depending on your prejudices. To most Americans, Microsoft was more than a technology culture; it was the technology culture. In the Valley, however, the view was vastly different. There, even among some Microsoft allies, it stood as an article of faith that the company was incapable of innovating; that it was a copycat, a “fast follower,” an assimilator of breakthroughs achieved elsewhere; that its products, despite their awesome popularity, were crashingly mediocre. But no matter what outsiders might have thought, no matter how much sniping and dismissiveness was hurled at them, Microsoft executives believed ardently that their company did in fact inno49

JOHN HEILEMANN

vate. In support of that belief, they pointed to the extraordinary $3 billion the company spent each year on research and development, in areas ranging from voice recognition to artificial intelligence. At Microsoft, people did not take their pride in the company’s marketing or salesmanship. They took it in the belief that they were great technologists, confecting great software. Which was not to say that Microsoft didn’t care about marketing and salesmanship. Since the early 1990s, the company had devoted vast resources to buffing its image, waging multimilliondollar advertising campaigns, and carefully orchestrating press coverage to turn Microsoft, Windows, and Gates himself into household names. One of the clearest indications that Microsoft was becoming as much a marketing culture as an engineering culture came in 1994, when Gates hired Robert Herbold to be chief operating officer. A mild fellow of middling age, middling stature, and a certain bland charm, Herbold was a computerscience PhD who had risen to become the top marketing executive at Procter & Gamble. He spoke the lingo of branding, of corporate identity, of making “deposits” in the “key mental bank accounts” of customers. On arriving at Microsoft, Herbold quickly implemented the full complement of consumer-research techniques that he’d used at P&G, from extensive polling to focus groups. As Microsoft began its recalcitrant flailing in the fall of 1997, I couldn’t help wondering what Herbold was thinking. Here was his company, at which he was still a relative newcomer, violating every conceivable rule in the big-brand handbook of crisis management. Consider: What would McDonald’s have done if it found itself in similar straits? What would Coca-Cola have done? Or Disney? Answer: Their CEOs would have appeared on the doorstep of the Justice Department and asked, in voices sugary with solicitude, 50

Pride Before the FALL

“What can we do to make the problem go away?” Yet this approach seemed never to have occurred to anyone of any consequence at Microsoft. A few months later, I visited Herbold in Redmond and asked if it made sense to interpret the company’s belligerence as a sign that Microsoft had failed to internalize the notion that its success rested on its image as well as its technology. “Yeah, it does,” Herbold said. “But there comes a point in any company’s life where, if a fundamental principle as to how you operate is being threatened, you have no choice but to stand tall.” By temperament, Herbold was the antithesis of hard-core—he was soft-core. Yet, like Gates and seemingly everyone else up in Redmond, Herbold was adamant that the consent-decree case threatened to undermine the firm’s ability to innovate. If thwarting that threat meant taking extreme and even potentially self-destructive measures, so be it. “Always keep in mind, Microsoft is a company run by engineers,” a departed Microsoft executive, himself an engineer, commented later. “Engineers like simplicity. They like clarity. They like rules. They don’t like nuance. They don’t like shades of gray. They’re totally binary. Ones or zeros. Black or white. Right or wrong. Innovate or not innovate. That’s how Bill sees the world. And if it’s how Bill sees the world, it’s how Microsoft sees the world. “Remember, no one has ever accused Microsoft of being a democracy.”

“THIS MORNING, just after 11:00, Michael locked himself in his office and he won’t come out,” begins Doug Coupland’s 1995 novel Microserfs, still the most perceptive rendering of the Microsoft culture ever written. “Bill (Bill!) sent Michael this totally wicked 51

JOHN HEILEMANN

flame-mail from hell on the e-mail system. Michael is certainly the most sensitive coder in Building Seven—not the type to take criticism easily. Exactly why Bill would choose Michael of all people to whale on is confusing. “We figured it must have been a random quality check to keep the troops in line. Bill’s so smart.” “Bill is wise.” “Bill is kind.” “Bill is benevolent.” “Bill, Be My Friend . . . Please!” Nowhere in the annals of modern business did Emerson’s aperçu that “an institution is the lengthened shadow of one man” hold more abundantly true than at Microsoft. From the moment the company was founded, everything about it—good and bad, strong and weak—had been a pure crystalline reflection of Gates’s mind, his personality, his character. In the computer industry, few founders had been able or willing to stick with their firms as the companies grew, guiding them from birth to maturity. Scott McNealy was a notable exception; so was Larry Ellison, of Oracle. But although both McNealy and Ellison were forceful and dynamic CEOs, neither had come close to exerting the type of hold over his company that Gates maintained over Microsoft. The feelings that many Microsoft employees had for their boss went beyond respect or loyalty or admiration and crept right up to the brink of infatuation: in one way or another, everyone in Redmond seemed to have a crush on Bill. Gates inspired this intense following without being, in any conventional sense, a charismatic or especially winning figure. What he was, was very smart, and in the Microsoft culture that he himself had engendered, smartness was valued above all. To be deemed smart—or, better still, supersmart—was to be awarded the greatest accolade in the Microsoft 52

Pride Before the FALL

lexicon. And to be paid the compliment by Gates himself . . . that was the true and only heaven. “There are probably more smart people per square foot right here than anywhere else in the world,” the former top Microsoft executive Mike Maples said. “But Bill is just smarter.” The slavish fealty accorded Gates at Microsoft drew gales of derision from critics and competitors. Netscape’s counsel, Roberta Katz, contended that it was the “blind obedience, the willingness to suspend all judgment and follow the party line, all this zombielike devotion to the Maximum Leader” that led Microsoft inexorably to its fate in court. “It’s the whole voice-of-God thing,” said Bill Joy, Sun’s chief scientist and a longtime nemesis of Gates. “At Microsoft, they’re always asking, ‘What would Bill think?’ As if Bill is the oracle. As if Bill always knows best. It’s very hard to be creative in that kind of environment, and it’s even harder to do cleansheet work, because all the old stuff is the oracle’s stuff, and who’s going to tear that up and start fresh? It’s why they can’t innovate no matter how many smart people they hire.” Gates, said Joy, was “the low priest of a low cult.” Gates had always been prone to caricature, which made his leadership of Microsoft all the harder to parse. In the 1980s and much of the 1990s, his PR handlers succeeded magnificently in having him portrayed in a flattering but one-dimensional fashion: he was the original golden geek, a brilliant, bespectacled nonthreatening nebbish, whose firm was creating neat software to bring the wonders of computing to the masses. After becoming the richest man on the planet, in the mid-1990s, Gates underwent by necessity a slight image upgrade, in which he was recast as a stillbrilliant, still-benevolent captain of industry and technological visionary. Now, with his company being dragged into court and with controversy swirling all around, he was being turned by his 53

JOHN HEILEMANN

foes into another caricature: the postmodern robber baron, whose sensibilities were attuned to the new economy but whose greed and rapacity were reminiscent of the old. None of these portraits did even rough justice to the multisided figure poised at Microsoft’s helm. Indeed, if Bill Clinton was the priapic president, Bill Gates was the prismatic CEO: a man who reflected a wide array of sometimes contradictory qualities— brusque but reticent, imperious but insecure, far-seeing but myopic—depending on what day of the week it was and which angle he happened to be sighted from. Gates himself cringed at another of the cartoon versions of his persona—“the ultracompetitor,” he called it. But in this case, the cartoon captured something essential. Competition compelled Gates; it propelled him forward. It had been that way since he was growing up in upper-crust suburban Seattle in the 1960s. As a kid, Gates was reedy and obsessive, fixating on his passions—books and computers—at the expense of everything else, including bathing, grooming, and other aspects of personal comportment. Born in 1955, he had two sisters, and together with his parents they formed a family that was unnervingly energetic. The Gateses seemed determined to fill every spare moment with an organized activity, and to turn every organized activity into some form of contest. Sports, games, puzzles, quizzes, races—you name it, they did it, and ceaselessly. “I really like Bill’s family,” a former Microsoft executive once remarked. “But it would be nice if you could talk to them once in a while when they weren’t in a human pyramid.” Gates was close to his mother, Mary, a regent at the University of Washington and a chairwoman of the United Way, who died of breast cancer in 1994. But he had been, and he remained, very much his father’s son. William Gates Jr. (Microsoft’s chair54

Pride Before the FALL

man was William Henry Gates III, which accounted for his childhood nickname, Trey) was one of Seattle’s most prominent lawyers and civic brahmins. He was tough-minded, gracious, and free of ostentation. Powerfully built, standing six-foot-six, and powerfully connected, he fostered in his son an enduring fascination with the law. For a time it seemed possible that young Bill might become a lawyer, which was what his father had vaguely hoped for. Steve Ballmer recalled that some of his first serious conversations with Gates when they met at Harvard were about the law; in particular, Ballmer remembered his friend talking animatedly about an antitrust case involving Wonder Bread in which Gates’s father had played a role. The elder Gates was also an active player in the political arena in Washington State. Senators, congressmen, and governors came to dinner at the family’s house when Bill was a boy. In the summer of 1972, the father helped his son land a job as a congressional page on Capitol Hill. Gates had a ball, collecting the signatures of all 100 senators and making a few bucks, he recalled, by “cornering the market” on Tom Eagleton campaign buttons and reselling them after Eagleton withdrew from the vice-presidential slot on that year’s Democratic ticket. Between politics, the law, and business, Gates inherited from his father a far more conservative and establishmentarian outlook than most observers have ascribed to him. In this light, it would come as no surprise that two of his close friends outside Microsoft—and he had very few—would be Warren Buffett and Katherine Graham, both venerable symbols of the old elite. There was nothing establishmentarian, however, about Gates’s decision, in the summer of 1975, to quit Harvard after just two years and team up with his high-school chum Paul Allen to start what was known at first as Micro-Soft. But Gates was in love with 55

JOHN HEILEMANN

computers and with the idea of personal computing—a wild, borderline lunatic concept at the time. Together, he and Allen wrote the software for one of the first primitive home computers, the MITS Altair. At 19, Gates was skinny, smelly, unkempt, unsocialized. An archetypal hacker, that is, except for one thing. The hackers of the 1970s were grounded in academia, communitarian in their philosophy, and saw software as something to do for fun. Gates was entrepreneurial, an instinctive capitalist, and saw software as a way of making money. Gates’s hacker roots became a central element of his public legend, which depicted him as a technological genius. The legend elicited eye-rolling (and less charitable responses) in computing circles, where his technical gifts were regarded almost universally as solid but unexceptional. “Neither Bill nor Paul was tremendously technically sophisticated when they started Microsoft, and they’re not now,” said David Liddle, the former director of Allen’s now-defunct think tank, Interval Research, and a friend of both men. In 25 years working in software, Gates personally had made no significant contributions to computer science. He held but one patent. Yet at Microsoft, top-flight scientists spoke of his technical fluency in tones of awe. Gates, they suggested, was a fox and not a hedgehog; a technologist whose strength was breadth, not depth. Craig Mundie, a senior Microsoft executive who in 2000 spent more time than anyone discussing the future of technology with Gates, explained, “Bill’s great gift is synthesis: his ability to accumulate a huge amount of information and then synthesize it on a grand scale.” In a way, the myth of Gates as a mighty technologist overshadowed his rightful claim to genius as a businessman. Of course, Gates was often credited, and justly so, with being among the first to discern that software could be the basis of an enterprise; with 56

Pride Before the FALL

having appreciated that software, not hardware, was where the big money would be made in personal computing; and with having shrewdly persuaded IBM, when it asked Microsoft to provide an operating system for its first PC, in 1980, to allow his firm to retain the rights to that software, MS-DOS. But Gates’s insights were far more sweeping than that. Before he arrived on the scene, the computer industry had always been organized vertically. That is, it consisted of companies like IBM and DEC that built their own machines, designed and manufactured their own microchips, and developed their own operating systems and applications, all of them proprietary. Side by side with Intel’s Andy Grove, Gates envisioned a different structure, a horizontal structure, in which specialized competition would take place in each layer of the industry: chip company versus chip company, software company versus software company, computer company versus computer company. He figured out, again with Grove, that the position of maximum power and profit in this new structure came from owning one of two critical industry standards: the OS or the microprocessor. And, finally, he understood that Microsoft’s control of the OS standard could be leveraged in ways that would give the company enormous advantages in competing for other software markets. Gates’s strategic foresight was twinned to a tactical discipline and a single-mindedness that were unusually fierce. For a long time, he seemed oblivious to the marginalia of corporate life, the perks and status symbols, that distract so many major-league executives. His office was modest, exactly twice as large as those of junior employees. He disdained titles. He flew coach. And while he never suffered from a deficit of ego, he was relatively immune to intellectual vanity, keeping close tabs on ideas and trends gaining currency beyond Microsoft’s borders. “He carefully reads the wind 57

JOHN HEILEMANN

and weather,” Liddle said, “and he does not have false pride about admitting he’s wrong”—as he did, famously and remarkably, in turning Microsoft around in the mid-1990s after initially underestimating the significance of the emergence of the Internet. Nor was he prone to technical vanity. Where other high-tech CEOs often squandered time and money in pursuit of perfect, elegant solutions, Gates refused to let the great be the enemy of the good, or even to let the good be the enemy of the minimally serviceable. Over and over, he attacked new markets with the same pragmatic sequence of moves: dive in fast with a half-assed product to establish an early foothold, improve it steadily (even Microsofties joked that the company never got anything right until version 3.0), then use clout, low prices, and any other means necessary to gobble up a dominant share of the market. About the extent of Microsoft’s appetites, Gates and his lieutenants were unabashed. “My job is to get a fair share of the software applications market,” Mike Maples said back in 1991. “And, to me, that’s 100 percent.” Gates’s hunger for new conquests left a trail of bloody bodies strewn in Microsoft’s wake. Digital Research. WordPerfect. Novell. Lotus. Borland. Apple. “Bill [had an] incredible desire to win, and to beat other people,” the former Microsoft executive Jean Richardson recalled in the popular PBS documentary Triumph of the Nerds. “At Microsoft, the whole idea was that we would put people under.” But while Gates’s style of competition was at once relentless and remorseless, it seemed to be fueled as much by anxiety as by cruelty. Long before Andy Grove made “Only the paranoid survive” the watchphrase of Silicon Valley, Gates was living the mantra at Microsoft. “Bill runs scared much more than people think,” said Will Hearst, one of Gates’s closer friends. “He does 58

Pride Before the FALL

what he does out of fear, not sadism. The history of business is full of guys looking out the 50th-story window of their corporate headquarters, seeing some little pipsqueaks down below, and going, ‘Oh, forget it; how could they ever threaten us?’ And then getting their clocks cleaned. Bill just knows he doesn’t want to be one of those guys.” Or, as Gates himself said to me one day in his office, “The fact that you can’t name the place you’re going to die doesn’t mean you shouldn’t pay attention to your health.”

THE MORTALITY of skyscraper-dwelling overlords was a phenomenon with which Gates was intimately familiar. When his company’s partnership with IBM began, Big Blue was arguably the exemplary corporation of the modern age. It was 3,000 times the size of Microsoft and had defined commercial computing for three decades. “It’s easy to forget how pervasive IBM’s influence over this industry was,” Gates recalled. “When you talk to people who’ve come into the industry recently, there’s no way you can get it into their heads: IBM was the environment.” Then the men from Armonk met Gates, and everything changed. By the early 1990s, not only had IBM’s hegemony been shattered, but the company was on the ropes—losing billions of dollars a year, laying off employees by the thousands, struggling for its very survival. Meanwhile, Microsoft was ascendant. In January 1993, it surpassed IBM in market value and never looked back; a few weeks later, IBM’s board tried in vain to recruit Gates to become the company’s chairman. The role reversal was complete: Microsoft was the environment. The fall of IBM was a seminal experience for Gates and Ballmer, shaping their perspectives in countless ways, both obvi59

JOHN HEILEMANN

ous and subtle. “If you asked me where I learned more about business than anyplace else, I wouldn’t point to school, I wouldn’t point to my two years at Procter & Gamble, I wouldn’t point to Microsoft,” Ballmer said. “I would point to my ten years working with IBM.” With the passage of time, he and Gates came to extol and even to emulate IBM’s strengths—its devotion to research, its attentiveness to customers. But during Microsoft’s formative period, their opinions were somewhat less favorable. “We hated IBM,” said Peter Neupert, an ex-Microsoft executive who worked closely with Big Blue on the joint development of the operating system OS/2 and then became the CEO of the start-up drugstore.com. “We hated their decision-making process, which was incredibly bureaucratic and stilted. We hated their silly rules and requirements: the red tape was unbelievable. And we had zero respect for their engineering talent. The core of Microsoft is: Great talent matters. We had a great team; theirs was big, slow, and sloppy.” (Among Microsoft’s OS/2 coders, IBM stood for Incredible Bunch of Morons.) “Bill always believed small teams were better, and that belief was magnified by seeing how IBM worked. As a result, we fought bigness at every stage. We had no processes. We had no planning department. Anything that would slow decisions down was rejected by design. Bill wanted to preserve a freewheeling style, where you made decisions fast and didn’t get bogged down. It all comes from his programmer orientation. The people who were rewarded most at Microsoft were cowboys and misfits— the guys IBM would never hire. That was a point of pride.” If IBM provided Gates with an object lesson in the perils of gigantism, it also offered him a case study in how debilitating a constant fear of government intrusion could be. From the early 1950s until the early 1980s, IBM had been continually under investigation by, or in litigation with, federal antitrust authorities. In 1956, the 60

Pride Before the FALL

company had signed a consent decree that forced it to license its patents at a “reasonable” price to all comers; and in 1969, the DOJ had launched its landmark 13-year lawsuit accusing IBM of illegal monopolization of the computer industry—a lawsuit which, despite being dropped in 1982, saddled the company with a legacy of competitive restraint and legalistic caution that played no small part in its vulnerability to the PC revolution that Microsoft spearheaded. “Every decision they made—on products, packaging, marketing— was based at least in part on legal constraints or perceived legal constraints,” Neupert recalled. “It was screwy.” And it made a large and lasting impression on the boys from Redmond. “Bill thought a lot about it,” Neupert said. “In dealing with IBM, they’d have lawyers in technical meetings. Ludicrous! So the question for us was: How important are we going to let the lawyers be at Microsoft?” Gates’s answer was: not very. It would prove fateful. In 1985, the year before Microsoft went public, its legal department consisted of Bill Neukom and two other employees. Over the next 15 years, the legal department would steadily expand to more than 400 employees, 150 of them attorneys. Yet despite all those warm bodies, through the 1980s and most of the 1990s Microsoft failed to adopt an official antitrust-compliance policy or a comprehensive antitrust-training regime for its employees. After the DOJ filed its case, Microsoft’s lawyers were at pains to deny this. They produced documents listing an array of programs (Executive Competition Counseling, Consent Decree Training, Legal Road Shows) intended “to ensure that Microsoft employees understand and comply with legal obligations under US and other antitrust laws.” Antitrust training had even been incorporated into the “Microsoft 101 training vehicle” for all new employees—although that incorporation took place in 1999, well after the company’s imbroglio with the government began. 61

JOHN HEILEMANN

Ballmer insisted that Microsoft had had “antitrust audits, antitrust reviews, antitrust training” since the mid-1980s. “Now, do we train every Tom, Dick, and Harry in the company?” he asked. “No. But it’s not every Tom, Dick, and Harry that’s making the decisions.” Yet in dozens of interviews with current and former Microsoft executives, I found few who could recall having received antitrust training, and of those who said they could, even fewer who remembered anything they’d been taught, beyond the vague instruction to “obey the law.” In the fall of 1998, Business Week reported that Mike Maples had only recently been enlisted to draft a code of conduct for the company—an assignment he acknowledged having failed to complete. “I can’t find the principles that would mean the world would like us more,” Maples said. “We can’t tell people not to be so aggressive or don’t compete so hard.” And a few months later, on the stand in the trial, Paul Maritz would testify under oath that he knew of no formal antitrust-compliance policy at Microsoft. To trustbusters such as Joel Klein, Gates’s unwillingness to implement a thorough antitrust program was a plain sign of his immaturity as a CEO. “Major corporations in America have these things—they just do,” Klein said. “It’s just sensible; it’s just prudent.” Even in the high-tech industry, the absence of such a program at Microsoft raised eyebrows, including those of Gates’s ally, Andy Grove. Grove, who would no more have conceded that Intel had a monopoly on PC microprocessors than he would have admitted a sneaking fondness for New Age management techniques, had instituted a far-reaching antitrust regimen at his company as far back as 1986. For years thereafter, he periodically raised the issue with Gates and complained to other Intel executives about Gates’s “pigheaded” refusal to follow suit. Yet something more complex and calculating than mere pigheadedness was at 62

Pride Before the FALL

work. To Gates’s way of thinking, being without an antitrust program may have carried with it certain legal risks, but the risks of enacting one were even greater. “Bill’s thought was that once we accept even self-imposed regulation, the culture of the company will change in bad ways,” a former senior Microsoft executive explained. “It would crush our competitive spirit.” Gates put an even finer point on his fear. Talking privately once with another of the industry’s top CEOs, who had asked him if Microsoft was taking sufficient precautions to ward off government scrutiny, Gates said flatly, “The minute we start worrying too much about antitrust, we become IBM.” Years later, when bemused analysts and commentators tried to explain the behavior that got Microsoft into such hot water with the government, one theory in particular came into fashion: after years of seeing itself as David, the feisty underdog doing battle with the industry’s behemoths, Microsoft had failed to realize that somewhere along the way it had become Goliath—and that Goliaths were subject to a stricter set of rules than Davids were. The truth, however, was slightly different. Gates hadn’t failed to recognize anything. Having witnessed the collapse of IBM up close and personal, he was determined not to allow Microsoft to fall prey to a similar syndrome, and had repeatedly taken explicit steps to preserve the company’s Davidian attitudes and attributes in spite of its mass and muscle. The result was a culture built on a willing suspension of disbelief; a culture whose official stance was neatly—and ridiculously—summed up in 1997 by COO Bob Herbold thus: “Think about the technology business in its broadest sense. Microsoft is a small but important player in that very large industry.” That was the company’s public posture. In private, though, when the man who ran Microsoft let down his guard, he betrayed 63

JOHN HEILEMANN

no confusion about what he and his company had become. A close friend of Gates’s recalled a dinner with him and his then-fiancée (and later his wife) Melinda French back in 1993. “We were talking about Clinton, who’d just been elected, and Bill was saying blah, blah, blah about whatever the issue was,” this friend remembered. “Then Bill stopped and said, ‘Of course, I have as much power as the president has.’ And Melinda’s eyes got wide, and she kicked him under the table, so then he tried to play it off as a joke. But it was too late; the truth was there. If Bill ever thought of himself as a scrappy little guy, he didn’t anymore.”

BY THE middle of the 1990s, Gates may have been as powerful as the president in some ways, yet he remained as paranoid as a speed freak at the end of a long and extravagant binge. The proximate cause of his paranoia was Netscape. In May 1995, in a memo entitled “The Internet Tidal Wave,” Gates argued that the start-up’s browser held the potential to “commoditize the underlying operating system”—Windows. What worried him, Gates explained later, wasn’t merely the threat posed by the browser or other forms of “middleware” (software that fell short of being a full OS but which might still be a platform for applications) but the sudden momentum Netscape had gained in the industry. “Lightning struck,” Gates said. “There was a belief that they were the exciting thing, they were the coming company. You’d go to their developer conferences, go to Marc Andreessen’s press conferences, read the article about what flavor of pizza he ordered. That phenomenon was getting developers to pay a lot of attention to the Netscape browser.” He added, “Expectations are a form of first-class truth: If people believe it, it’s true.” And people were believing in Netscape. 64

Pride Before the FALL

As was Microsoft, in a sense. When Andreessen and his colleagues first started talking about turning their lean little browser into a full-blown platform, the idea struck Gates and Ballmer as perfectly plausible—not surprisingly, since Microsoft itself had pulled off the same trick.“Let me tell you a story,” Ballmer told a reporter at the time. “Once upon a time there was a piece of software that was an extension of an operating system, and it had a nice little user interface, and it had some programming interfaces, and people kind of liked it. One day, the thing that it was built on top of wasn’t all that important anymore, and it kind of got subsumed inside of the thing that was originally an extension.” This tale, Ballmer continued, was the story of what had happened in the course of 10 years with Windows, which was originally nothing more than an application running on top of DOS. “If I wanted to compete with Microsoft,” Ballmer concluded, “I would do what Netscape is doing. I’d say, I’ll build on top of Windows and I’ll take their future away from them.” The only thing that surprised Microsoft about Netscape’s strategy was the brazenness with which the upstarts shouted it to the world. Nathan Myhrvold said, “There’s a good analogy to bicycle racing. In bicycle racing, you don’t want to be first until the end. What you want to do is draft the guy in front of you. And then, in the last minute, you dart out. The middleware gambit is about drafting the leader.” Yet here was Andreessen baldly and publicly proclaiming in the summer of 1995 that Netscape’s plan was to reduce Windows to “a poorly debugged set of device drivers.” “They didn’t save it up,” Myhrvold said. “They fucking pulled up alongside us and said, ‘Hey, sorry, that guy’s already history.’ ” Netscape’s brashness drove Redmond into a rage. The day after Andreessen’s quote appeared in the press, John Doerr, the venture capitalist who bankrolled Netscape and sat on its board, received a bone-chilling email from the Microsoft executive Jon Lazarus, a 65

JOHN HEILEMANN

friend of Doerr’s and one of Gates’s key advisers. In its entirety, the email read: “Boy waves large red flag in front of herd of charging bulls and is then surprised to wake up gored.” Over the next three years, Microsoft would impale Netscape on an assortment of horns. But its very first thrust was the one that led to the consent-decree case: the decision to bundle and then integrate IE into Windows. Even apart from its effect on Netscape, Gates firmly believed that Web browsing was a natural addition to any OS, one that would serve consumers and make computing easier. Adding IE to Windows for free, he said, was “the most defensible thing we’ve ever done.” It was also indisputably legal, he maintained. When Microsoft had bargained with the DOJ (and the European Commission, which was simultaneously pursuing its own investigation) over the consent decree in 1994, Gates had taken great care to ensure that the provision on tying was worded broadly enough to give Microsoft unfettered freedom to put new features into Windows. At one point, when Neukom presented Gates with a proposed draft of the decree which stated that Microsoft would not be prohibited from “developing integrated products which offer technological advantages,” Gates barked, “Remove those last four words!” Gates, Neukom, and Microsoft’s legal team were therefore stunned when the DOJ filed the 1997 consent-decree case. It seemed to them that the Feds were either woefully unaware of the negotiating history of the decree (a deal that was cut under Anne Bingaman, Klein’s predecessor) or had willfully chosen to ignore it. Equally maddening was the premise of the DOJ’s claim: that because Explorer was distributed to PC makers on a different disk from Windows, and because it was also marketed as a stand-alone product, it was by definition not “integrated.” At a meeting between the DOJ and Microsoft’s lawyers that fall, Klein held 66

Pride Before the FALL

aloft the two disks and said, “See? Two separate products.” To Microsoft, the gesture was glaring evidence of Klein’s technological cluelessness. Once IE and Windows were installed together, they fused into one seamless whole; the fact that they were distributed on separate disks, as software products frequently are, was irrelevant. “It’s all just bits,” Neukom said. “Antitrust law isn’t about how you distribute the bits; it’s about how the bits relate to each other.” Klein may have been clueless about the commingling of code, but the DOJ’s argument found a friendly pair of ears on the large round head of Thomas Penfield Jackson. Jackson was the gruff, grandfatherly federal judge who had somehow lucked into hearing the consent-decree case. After nearly two months of legal volleys, on December 11 he issued a stopgap split decision that cut sharply against Microsoft. On one hand, Jackson said, the company had offered a “plausible interpretation” of the term “integrated” and a “reasonable explanation” as to why its behavior was kosher under the consent decree; so the judge rejected the government’s motion to fine Microsoft $1 million a day. On the other hand, although Jackson remained undecided on the merits of the case and needed more time to sort out the issues, he found that the DOJ “appears to have a substantial likelihood of success” and that “the probability that Microsoft might also acquire yet another monopoly in the Internet browser market is simply too great to tolerate indefinitely until the issue is finally resolved.” And so Jackson handed down a preliminary injunction ordering Microsoft to “cease and desist” from requiring PC makers to install IE as a condition of their Windows licenses. Until the case was decided, Microsoft was to offer them a browser-free version of the OS. Microsoft felt that Jackson’s order put the company in an impossible bind. In its filings in the case, Microsoft had said again 67

JOHN HEILEMANN

and again that taking the browser code out of Windows would break the OS—it would no longer boot properly. Yet removing that code was precisely what Jackson was telling them to do. In a conference room down the hall from Gates’s office in Building 8 on Microsoft’s campus, the CEO and his minions mulled over the dilemma. Naturally, the company would appeal Jackson’s decision immediately. But what to do in the meantime? After a grueling series of weekend meetings, the Microsoft executives reached a conclusion that was flagrant, provocative, and ill-considered. To comply with the judge’s order, they would offer OEMs a choice of either a two-year-old version of Windows without IE or a current version that simply didn’t function. That is, no choice at all. At the session on Sunday afternoon when Gates approved the decision, everyone concurred that Microsoft was adhering precisely and carefully to the letter of the law. Even so, one Redmond bigshot acknowledged the inevitable: “We’re going to get hammered.” Did they ever. In a blistering motion filed in response by the DOJ, the government accused the company of a “naked attempt to defeat the purpose of the Court’s Order” and a “flagrant disgregard” for Jackson’s authority. It asked again that the judge find Microsoft in contempt. Several weeks later, Klein was still spitting mad over what he saw as a shocking disrespect for the rule of law. “The federal court comes down with this decision and they somehow think, without coming to us, without going to the court, that the answer is to put out a product that breaks?” Klein sputtered. “Usually the phrase ‘contempt of court’ is metaphoric. In this case, it was literal.” Two days after the DOJ’s motion, Jackson summoned the parties to his courtroom in Washington, DC. Before a packed gallery, the sixtysomething judge leaned into the microphone and made an unlikely statement: he and his clerks had been doing some hacking. The day before, Jackson said, he had instructed a techni68

Pride Before the FALL

cian to run the “uninstall” process on Windows 95 to try to make IE disappear. After “less than 90 seconds,” he continued, a message flashed on screen that Explorer was no longer operative—yet Windows was functioning “as flawlessly as before.” Jackson growled, “If the process is not that simple, I’d like to have it refuted by any evidence Microsoft wishes to introduce.” A dramatic pause. “I want to know whether to believe my eyes.” A few weeks later, in mid-January, after another hearing in which Jackson heaped scorn on Microsoft and its witnesses, the company backed down. In consultation with the DOJ, it agreed to offer computer makers a version of Windows that still contained some IE code, but in which the browser was disabled and hidden from view. Through all the trouble that followed, Gates and his lawyers would refuse to admit that this was what they should have done in the first place, not least because most PC manufacturers would have continued (and in fact did continue) to take the version of Windows that included IE. “Do I wish we’d found a more politically, personally, atmospherically palatable response?” one of Microsoft’s senior attorneys mused. “Sure. But we couldn’t then and we still can’t.” “Maybe we should have gone to the DOJ and said, Hey, this won’t work. Why don’t we go to the judge and try to figure it out?” another Microsoft lawyer allowed. “But we were in an adversarial situation, remember. And we were trying to make a point that was lost on the court.”

THE PRICE of making that point would prove to be greater than Microsoft could ever have imagined. Two and a half years later, when Judge Jackson issued his order that the company be split up, he cited its “illusory” and “disingenuous” compliance with his 69

JOHN HEILEMANN

injunction in the consent-decree case as probative evidence that Microsoft was “untrustworthy” and that conduct remedies alone weren’t sufficient to rein in its power. And even in the short term, the damage was severe. In America and abroad, in the news columns and in editorial cartoons, criticism, sarcasm, and even mockery of Microsoft suddenly appeared where once there had been little besides adulation. For the first time ever, Ballmer acknowledged, the company’s polling and focus groups had begun to show that the negative publicity was taking a toll on Microsoft’s image. “It’s not cataclysmic, but it’s clear,” he told The Wall Street Journal. At the same time, Microsoft’s insolence seemed only to have emboldened the DOJ and the states as they turned their attention to the question of whether to launch a full-scale antitrust action against the company. If anyone had a doubt that they were serious, one piece of news should have instantly obliterated it: the news that Klein had retained David Boies, the famed New York litigator who had successfully defended IBM against the government’s antitrust charges in the 1970s and 1980s, as a consultant to the DOJ. The gathering storm was unlike anything Gates had ever weathered. For all his social unease and childlike (some would say childish) tendencies, he was anything but naive. He was not unused to the rough-and-tumble. He reveled in competition, hard-edged competition, complete with low blows and high-flying elbows. Contrary to the popular perception of high technology as an industry rife with fresh-faced idealists and barefoot billionaires—an image with astonishing resilience, even after the wretched excesses and over-the-top moneygrubbing of the dotcom boom—the computer business had never been a pretty place. It had always had more than its share of personal vilification, ego70

Pride Before the FALL

driven vendettas, and postindustrial espionage. Competitors had been assailing Gates and his company in every fashion imaginable for more than a decade. And although he could be thin-skinned, and although he had a tendency to blow his stack, and although he would lash out at the anti-Microsoft posse when its members took potshots at him in the media or behind his back, Gates was well aware that all this was part of the program. And, of course, he gave as good as he got. But what was happening now . . . this was different. This wasn’t business. This was the US government, an adversary not unknown to him, but one against whose slings and arrows his defenses weren’t nearly so robust. In the months ahead, it would be repeated ad nauseam that, for a firm of its importance and stature, Microsoft had paid dangerously little attention to politics over the years. This was true: as recently as 1995, the company had no government-affairs office in Washington, DC. Yet Gates didn’t think of himself as a political innocent. He had never been partisan, but who was anymore? He had issues he cared about—trade, immigration, encryption, taxes—and had lobbied on behalf of. He had even dabbled a bit in the art of the schmooze. He had golfed with Bill Clinton on more than one occasion. He had dined with Newt Gingrich back when that meant something. He had hosted Al Gore on a visit to Microsoft. (For a time, Gore’s daughter Karenna had worked at the Microsoft-funded online magazine Slate.) More to the point, Gates believed that he and Microsoft had delivered to the Clinton administration perhaps the greatest political gift of the postwar era: the new economy. Who had done more than he had to spark the PC revolution? What company had done more to provide the underpinnings of the information age? Directly and indirectly, Microsoft had generated untold wealth. In Windows, it had built a platform on which much of the high-tech 71

JOHN HEILEMANN

economy stood. It had created products on which millions of workers relied. It had spurred the Nasdaq to improbable heights. And now, after all this, after all he had done, the government that should have been showering him with praise and gratitude was casting him as a villain, a scoundrel, a grasping monopolist. It was crazy, infuriating. And it was starting to get under his skin. As the consent-decree contretemps wound to a close, the blind outrage that had colored Gates’s mood for months remained intact, but increasingly it was overshadowed by something darker. Among his small circle of close friends, word began to spread that Gates had fallen into a deep blue funk. “His own government suing him, that’s not chocolate sundae,” his father would later tell Newsweek. “He was concerned, he was angry, he was distracted from things he’d rather be doing.” Actually, it was much worse than that. According to one old friend, “He was going through a period where he kept saying, ‘I hate my job. I hate my life. I hate this situation. I don’t know what to do.’ ” Seeing Gates demoralized to the point of despondency disturbed his friends. It also worried the Microsoft board. On January 24, the directors (Paul Allen, ex–Microsoft president Jon Shirley, venture capitalist Dave Marquardt, Mattel CEO Jill Barad, financier William Reed, and Hewlett-Packard executive Richard Hackborn) gathered for their monthly meeting. It was a gray Saturday just 72 hours after the company had come to terms with Jackson and the DOJ on the preliminary injunction, and the board expected that much of the meeting would be taken up with discussion of the consent-decree case and the broader suit that the government was known to be contemplating. At least a few of Microsoft’s directors were hoping to raise another issue as well: the possibility of promoting Ballmer to president from his current position as executive vice president of sales and support—in 72

Pride Before the FALL

order, one board member later confided, “to take some of the burden off Bill’s shoulders.” Yet it was only when Gates began to speak that anyone fully realized how great the burden had become. Looking haggard, as though he hadn’t slept in days, Gates plunged into an extended and emotional tirade, railing at the DOJ, castigating the judge, bemoaning the sheer irrationality of what had befallen him and his company. Everyone in the room was familiar with Gates’s outbursts, which were an unfortunate but inescapable signature of his leadership style. But this was a different brand of diatribe—more stream-of-consciousness than usual, and far more personal. His voice quavered; his body quaked. And where Gates in full lather was normally condescending and sometimes cruel, now he was seized by unbridled self-pity. The DOJ was demonizing him. The press hated him. His rivals were conspiring to take him down. The political establishment was ganging up on him. His enemies were legion; his defenders, mute. How had this happened? What could he do? Gates’s eyes reddened. “The whole thing is crashing in on me,” he said. “It’s all crashing in.” And with that, the richest man in the world fell silent, and began to cry.

73

Chapter 4

THINGS FALL APART

EVEN MIRED in the depths of despair, Bill Gates was no fool. As nasty a turn as his fortunes had taken in the past three months, he must have sensed, however inchoately, that his situation was about to get much worse. Before the consent-decree case, Gates’s world had been a well-ordered place. Tempestuous, unpredictable, often brutal—no doubt. But it was a world Gates understood, and one he had mastered as thoroughly as anyone could. But now, with the repercussions of the dust-up with Jackson still sinking in, and with the DOJ reportedly edging closer to accusing the company of having violated the 100-year-old Sherman Antitrust Act, Microsoft stood at the threshold of a more complex and chaotic universe. 75

JOHN HEILEMANN

Complexity was Gates’s strong suit. It was said by admirers and antagonists alike that he was endowed with a greater ability than perhaps any CEO in history not only to see several chess moves ahead but to do so on several chessboards simultaneously. Yet no matter how many chess games are being played, the same rules apply from board to board. Knowable rules. Fixed rules. The trouble for Gates and Microsoft was that the ordeal they now confronted was less like a chess match than a piece of improvisational theater, where the stage is full of actors armed with different scripts, motivations, and objectives. At times the players— Microsoft, the DOJ, the states, Silicon Valley, Judge Jackson, and the rest—would stay in character; at times not. At times they would read out well-rehearsed lines; at times they would extemporize wildly. Careening around the proscenium, this motley cast would send the Microsoft drama hurtling forward in ways that none of them expected, intended, or necessarily even desired. For Microsoft, the most baffling of subplots was the one playing out in the realm of politics. Starting in 1997, a number of prominent Valley figures had begun building bridges to Washington, DC, in a manner unprecedented in the high-tech industry. The institutional form this outreach took was a bipartisan organization called TechNet, whose cochairmen were Netscape’s Jim Barksdale and John Doerr, the venture capitalist who had funded not only Netscape but Sun, Intuit, @Home, and an array of other Microsoft rivals, and who was conspicuously tight with Al Gore. (So tight that the joke in the Valley went “Gore and Doerr in 2004.”) In Redmond, suspicions ran rampant that Barksdale, Doerr, and other TechNetters were using their newly minted access in the capital to lobby the administration and Congress to take on Microsoft. These suspicions weren’t entirely unfounded. In the 76

Pride Before the FALL

late summer of 1997, TechNet had arranged a trip to the Valley for the White House’s then-deputy chief of staff, John Podesta, who met with top executives at firms such as Cisco, Adobe, Sybase, and Marimba. At many of those meetings, Podesta acknowledged, the subject of Microsoft was broached, “often obliquely—as in, concerns about technology control, concerns about the concentration of power,” he said, but at times more bluntly—“as in, they’re screwing us.” And although Doerr and other TechNet officials swore to the skies that they never discussed Microsoft with Gore, a person connected to the group said that, on at least one occasion, a leading Silicon Valley figure spoke about it with Clinton. How did the president respond? “He expressed sympathy with our point of view,” this person said. “But then, this was Clinton, so it could have been meaningless.” The effects of such lobbying were probably nil. Podesta and others in the White House with Silicon Valley ties denied ever talking about Microsoft substantively with Klein; and Klein denied that any communication between the DOJ and the White House occurred prior to the filing of either the consent-decree case or the broader Sherman Act suit. As for Clinton and Gore, it was plainly in their interest to steer clear of the Microsoft matter. Although Silicon Valley was a rich vein of campaign cash, the politics of pursuing Microsoft were highly fraught. “It’s a no-winner,” said Greg Simon, a senior Gore campaign official who previously served as the vice president’s cyberpolicy guru. “People would say, ‘Why are you going after them? Do you want to kill the goose that laid the golden egg?’ ” Simon’s conclusion was unambiguous: “Politically, antitrust is a tar baby.” Even so, Microsoft wasn’t wrong to fret that its foes were playing the influence game more adroitly than the company was. For if mining the muddy Clintonite middle yielded few tangible 77

JOHN HEILEMANN

(or at least public) results, the Valley hit paydirt among those with more concrete ideologies. On the left there was Ralph Nader, whose anti-Microsoft summit in November 1997 featured Sun’s Scott McNealy, Netscape’s Roberta Katz, and Gary Reback as speakers. The event produced few surprises but a plethora of headlines. More unexpected, and more influential, was the support the Valley managed to stir up on the right, much of it due to the labors of Mike Pettit. Pettit was an old Washington hand, a former top Senate aide to Bob Dole who had lobbied for Netscape in 1996 and 1997. In February 1998, he took over as the head of ProComp, the anti-Microsoft outfit funded initially by Sun, Netscape, and Sabre (and later by Oracle and others). Pettit was tireless and unusually—startlingly—bereft of ego. In short order, he put Dole on the ProComp payroll. He made inroads among Republicans on the Hill and among the conservative think tanks around Washington. And he proposed a slightly nutty idea: why not try to enlist Robert Bork to the cause? Bork, the controversial conservative jurist whose nomination to the Supreme Court had caused such commotion in the summer of 1987, was one of the reigning lords of antitrust. His 1978 book, The Antitrust Paradox, was a sacred text for Chicago School economists and a generation of right-leaning judges who were named to the bench by Richard Nixon and Ronald Reagan, because of its potent arguments that antitrust enforcement was justified only in the rarest of cases. Microsoft would later dismiss Bork as having sold out his principles to become a hired gun for Netscape and ProComp. “I don’t know if he was bought or if he’s just tired, but he’s making crappy arguments,” said the Microsoft advisor Charles F. “Rick” Rule, who had held Klein’s job at the DOJ under Reagan and Bush. “It’s sad.” 78

Pride Before the FALL

Rule failed to mention that Microsoft had also attempted to purchase Bork’s services, and, at first, had seemed likely to get them. Bork was initially skeptical of Netscape’s complaint—until he took a gander at the first Netscape white paper. There he found that Susan Creighton had drawn a comparison between Microsoft’s actions against Netscape and those at issue in a 1951 Supreme Court case known as Lorain Journal. In the case, a local newspaper with a monopoly on advertising found itself facing a new technology—radio, a “partial substitute” that threatened the paper’s monopoly—and sought to “destroy and eliminate” it by refusing ads from any advertiser doing business with the radio station. When Creighton discovered Lorain Journal, she knew she’d hit the jackpot, and not just because the Court had ruled that the newspaper had violated the Sherman Act or because the case seemed so apt. What thrilled Creighton most was where she had found Lorain Journal: in The Antitrust Paradox, cited approvingly by Bork. “I thought the analogy was perfect, and if I was right, we had the god of the Chicago School on our side,” she said. “I dreamed about showing it to him someday and seeing if the light bulb went off.” It did. Presented with the white paper by Pettit and Netscape’s Christine Varney, Bork gazed from his book to Creighton’s and back again, then peered up over his half-glasses and said, “You’re right, I wrote this. It applies. Perfectly.” In March 1998, Bork officially joined the anti-Microsoft brigade. Microsoft was stung, knowing that Bork’s support would lend their enemies’ cause instant intellectual credibility. Naturally, the company would hire its own bevy of Washington heavies. But among the relatively few executives in Redmond with a background in politics, Silicon Valley’s success in nailing down support at both ends of the political spectrum was troubling. As one exec79

JOHN HEILEMANN

utive put it, “If Ralph Nader and Bob Bork agree about Microsoft, my God, there really is no political risk in going after us.” Enter Orrin Hatch. In February, Hatch announced that he was planning to hold a hearing on Microsoft—and to ask Bill Gates to attend. The idea belonged to Mike Hirshland, who was quickly becoming one of the capital’s most avid, effective, and stealthy Microsoft hawks. Back in November, Hirshland had orchestrated a hearing on competition in the software industry that had generated little heat but some interesting information. Since then, the young lawyer had been digging further into the company’s doings and had become convinced beyond doubt that there was a credible and winnable Sherman Act case waiting to be brought. Hirshland saw himself as a goad to the DOJ, and it was in that context that he went to Hatch and proposed inviting Gates to testify, along with several of Microsoft’s most outspoken rivals. To no small degree, Hirshland functioned as Hatch’s frontal lobe when it came to the question of Microsoft, but the Mormon senator happened to dislike the company for reasons of his own as well. For years Hatch had heard tales of Microsoft’s alleged dirty deeds against Utah-based tech firms like Novell and Caldera. If this wasn’t reason enough to favor Hirshland’s scheme, Hatch knew that, if Gates actually showed, the hearing was bound to win adulation from Silicon Valley and a copious quantity of TV time— and thus to feed Hatch’s twin joneses, for campaign cash and national publicity. But Hatch also knew that such a high-wattage showdown could easily backfire. “I only want to do this if we know we can win,” Hatch said to Hirshland, who assured him that it would be a slam dunk. As the hearing date approached, Hatch told Hirshland that he wanted to bend over backward to ensure that the hearing was free 80

Pride Before the FALL

of even the faintest hint of unfairness. So when Microsoft’s CEO told the senator that he refused to testify alongside only Barksdale and McNealy, as Hirshland had originally suggested, Hatch readily acceded to the condition Gates attached to his appearance: that two of his handpicked allies—Michael Dell of Dell Computer and Doug Burgum of Great Plains Software—be added to the witness list. Moreover, the senator set aside a full hour for a briefing with Gates the day before the hearing, despite Hatch’s normal practice of never—ever—allotting more than 20 minutes for any meeting. On the drizzly Monday afternoon of March 2, Gates arrived with an entourage of nearly a dozen at Hatch’s first-floor office in the Russell Senate Office Building, the decor of which was classic early-modern senatorial drab—blue carpet, dark wood, flag in the corner. Hatch was on the Senate floor, casting a vote, but soon he strode in and apologized for being tardy. Gates stared at the clock on the wall, turned to the chairman of the Senate Judiciary Committee, and said coolly, “Well, given that we’re starting 15 minutes late and I’m only going to have 45 minutes now, we should get right to it.” Hatch, thunderstruck, said nothing. Things went downhill from there. When Gates told Hatch that the DOJ was trying to force Microsoft to remove IE from Windows, Hirshland piped up and said that Microsoft’s CEO was mischaracterizing the government’s position. Whipping around, Gates snapped, “You’re wrong. You don’t know what you’re talking about.” When Gates demanded to see a summary of the questions he might be asked, Hirshland handed him a list of broad categories. Pointing to one topic, Gates wailed, “If you ask about that, this will be a kangaroo court!” Then Gates inquired about the seating arrangement for the hearing. When he was told he’d be seated between Barksdale and McNealy, Gates leapt to his feet and 81

JOHN HEILEMANN

exploded, “No! No! No! If you put me between them, I will not appear at this hearing!” Hatch, by now more amused than annoyed, leaned back and said, “OK, OK, we’ll put you on one end of the table and we’ll let you speak first. Happy?” Compared with that prelude, the hearing itself was a bit of a letdown. Hundreds of gawkers lined up outside to catch a glimpse of Gates, who was decked out like a kid for a wedding in a suit and tie and proper leather shoes, his hair freshly cut and plastered down. Gates’s handlers had studiously prepared him, putting him through mock hearings in which a Microsoft lawyer posed as Hatch and two Microsoft executives played McNealy and Barksdale. Even so, Gates’s performance ranged from passable to poor. He was often evasive and, worse, failed to conceal it. He repeatedly contended that Microsoft was not a monopoly, a statement that met with pervasive skepticism. Only in the hearing’s final minutes did an actual moment of drama arise, when a dogged (and wellbriefed) Hatch was able to extract from Gates an admission that Microsoft’s contracts with Internet content companies barred them from promoting Netscape’s browser. To many observers, especially those unacquainted with the inscrutable kabuki that passes for communication inside the Beltway, Hatch’s convocation seemed to have accomplished little or nothing. Long on spectacle, short on substance, the skeptics said. And, anyway, Microsoft’s legal fate rested not in the hands of Congress but in those of the DOJ and the courts. Yet Joel Klein was not a man to embark on a crusade against Microsoft without first holding one wet finger in the air to gauge the political winds. And he was enough of a Washington veteran to understand that waging a case of this magnitude would be infinitely easier with the blessing, however tacit, of Capitol Hill. For 82

Pride Before the FALL

that, Klein looked to Hatch, who had been his most valuable ally in his confirmation struggle. His gaze was well-directed. Hatch and Hirshland were indeed trying to send Klein a message about the mood on the Hill, and, in the process, to stiffen his spine. The message required no subtle deciphering: in a four-hour hearing, not a single member of the Senate Judiciary Committee had offered a serious defense of Microsoft—or launched any kind of preemptive attack on the DOJ. “I knew there was political support for taking on Microsoft,” Klein said a few weeks afterward. “That was not a shock to me. But the hearing provided a real sense of comfort. The politics of this thing are becoming clearer. Microsoft goes up to the Hill and says they don’t have a monopoly, and people just say, ‘That’s silly.’ ” To other politicos, silly was an understatement. Jeff Eisenach, the head of the Progress & Freedom Foundation, the think tank once known as Newt Gingrich’s braintrust, said at the time, “Gates’s performance didn’t reflect petty arrogance; it reflected gross arrogance. It’s the reason why Microsoft has no constituency in Washington right now, apart from a couple of extremists at the CATO Institute and some Austrian economists at some second-rate universities.” Eisenach shook his head. “When Gates walked out of that hearing, he was a lot closer to a broad Sherman Act case than when he walked in. When you’re the richest man in the world and not a single senator speaks up on your behalf, you know you’ve got problems.”

THE HATCH hearing may have been a day in purgatory for Gates, but for his critics on the panel it was a day at the circus: the media circus. Barksdale had a ball. Silver-haired and Southern-fried, with courtly manners and a hint of hambone, Netscape’s CEO seemed 83

JOHN HEILEMANN

distinctly senatorial himself. He began his opening remarks by turning to the gallery and asking, in his best Mississippi drawl, how many people in the room had a PC. Maybe three-quarters of them raised their hands. Barksdale asked, “How many of you use a PC without Microsoft’s operating system?” The hands all fell. “Gentlemen, that’s a monopoly.” McNealy, by contrast, seemed a touch nervous. He delivered his opening statement like a man with someplace else to be— which, it so happened, he was. Two-thirds of the way through the hearing, he committed a thumping faux pas by getting up abruptly and excusing himself so he could head up to New York for a business meeting. Before he left, however, McNealy snapped off a winner of his own, quipping that “the only thing I’d rather own than Windows is English . . . because then I could charge you $249 for the right to speak English, and I could charge you an upgrade fee when I add new letters—like N and T.” Even before the Senate shindig, Barksdale and McNealy had emerged as the public faces of the anti-Microsoft movement. (Larry Ellison was perhaps the Valley’s loudest Gates-basher, but his inconstancy and clownish self-absorption had rendered him a plausible public face for nothing except playboyhood.) Netscape and Sun were loosely but indisputably aligned, despite the feuds that flared sporadically between their employees. Sun was a hardware firm that dabbled in software, and it was considerably larger and more established than its ally, with $8.6 billion in sales in 1997 compared with Netscape’s $533 million. But when it came to the legal and political campaign against Microsoft, Netscape had always been the senior partner, both in front of the camera and backstage. It was Netscape’s bid to topple the ogre—bold, roman84

Pride Before the FALL

tic, inspiring, doomed—that had captured the public’s imagination in a way Sun, even with Java, never could. It was Netscape that was Microsoft’s main victim. And it was Netscape, with its white papers and the indefatigable lobbying efforts of Reback and Creighton, that had finally surmounted the DOJ’s inertia and got things cooking in the courts. Then, on the first working day of January 1998, Netscape announced it had badly missed its fourth-quarter earnings estimates; ultimately, it would report an $88 million loss and fire 400 of its 3,200 employees. At that moment, things changed. Nobody put out a press release saying so, but Netscape went up for sale that day. (The first suitor Barksdale entertained, later in January, was in fact McNealy, who craved Netscape’s enterprise software but had less than zero interest in its Web portal, thus making a deal impossible.) While Netscape would remain forever the poster child of the Microsoft case—imagine Marc Andreessen’s picture on the side of a milk carton—the pioneering start-up was no longer the brains or the heart of the anti-Microsoft coalition. Sun was. Although McNealy had a reputation as Gates’s most caustic and unrestrained critic—aside from Reback, that is—he assumed the mantle of leadership skittishly. Sun’s CEO was one of the four men who launched the company back in 1982, and he had been running the place since 1984. He was simultaneously one of the most straightforward and most enigmatic chief executives in America. In his mid-forties, McNealy had a public persona of a laid-back, wisecracking, superannuated frat boy—“Huck Finn goes to business school,” as one of Sun’s top executives put it. Yet in private he displayed a volcanic temper and competitive impulses that matched Gates’s in purity and extremity. He had formidable brainpower but didn’t read books, and enjoyed bragging about the extent of his illiteracy. He jealously guarded his privacy but rel85

JOHN HEILEMANN

ished the limelight. And despite having cultivated an image as a brash, high-sticking, trash-talking corporate rebel, inside Sun his management style had always been cautious and conflict-averse to the point of phobia. He was known to be incapable of firing anyone (for that deed he used surrogates) and rarely made decisions without first achieving consensus on his senior staff.“His demeanor is radical,” Mike Morris, Sun’s general counsel, remarked. “But his instincts are conservative.” Those instincts were forever at odds with McNealy’s antipathy for Microsoft, which was real and deep and unforgiving. As Sun had transformed itself from an obscure workstation maker into a leading manufacturer of high-end servers, competing with giants such as IBM and HP, some of McNealy’s lieutenants, and especially his number two, Ed Zander, had encouraged him to mute his Microsoft attacks. We need détente with Redmond, he was told; our customers are begging for it. In October, after agreeing to deliver the keynote address at the Nader conference in Washington, McNealy took so much flak from Zander and others that he backed out. Then he stepped back in. Then out again. At last, McNealy said he would go if Nader found another CEO to speak in addition to him. With the help of a sympathetic and plugged-in venture capitalist in the Valley, Nader persuaded Sybase’s thenCEO Mitchell Kertzman to appear via satellite, which proved to be sufficient to satisfy McNealy. Sun’s boss was also uncomfortable with lobbying the government, even on Microsoft, because he didn’t believe in it—the government, that is. “Washington, DC, is my least favorite town in the world,” he told me at one point. “I see all these unbelievable monuments to government, agencies that have no reason for being on the planet—the Department of Agriculture, Transportation, FEMA, Health, Education, Commerce—all these huge erections of 86

Pride Before the FALL

brick and mortar with their masses of people running around redistributing wealth. The whole thing drives me absolutely into a freaking funk.” I noted that McNealy hadn’t included the DOJ in his list of huge erections. He smiled. I asked what he thought the Feds should do about Microsoft. “Shut down some of the bullshit the government is spending money on and use it to buy all the Microsoft stock. Then put all their intellectual property in the public domain. Free Windows for everyone! Then we could just bronze Gates, turn him into a statue, and stick him in front of the Commerce Department.” Had McNealy’s legal theories been all that Sun brought to the anti-Microsoft movement, Redmond could have rested easy. But the company brought Mike Morris, too. A smallish man with a round belly, a brown beard, and pudding-bowl bangs across his forehead, Morris had been Sun’s chief lawyer since 1987. Like McNealy, he was a Michigan native, but they had grown up on decidedly different sides of the tracks—McNealy in posh Bloomfield Hills, as the son of a top-tier auto-industry executive, Morris in the sticks, as the son of a tool-and-die maker. And that was the least of the differences between them. Where McNealy was a blunderbuss when it came to politics, and a libertarian whose taste in presidential candidates ran to Steve Forbes, Morris was a capital-L liberal with the cagey instincts of a natural political consultant. Where McNealy was screamingly heterosexual, Morris was openly gay. And where McNealy shied away from conflict and confrontation, Morris gloried in it, especially when his adversary was Microsoft. It was Morris who had pushed McNealy to file the Java lawsuit in October 1997. After claiming a victory there, Morris persuaded his boss to file another Java suit, this one more radical, in that it asked the court to order Microsoft to make changes in 87

JOHN HEILEMANN

Windows. In the midst of a furious internal debate over filing the second suit, Ed Zander accused Morris of being a “fanatic.” “I’m not a fanatic, I’m just realistic,” Morris said angrily. “We’ve got our boots on their throats. The right thing to do is to press until they stop breathing. If you’re going to strike at the king, you better cut his head off.” Decapitating Microsoft was on Morris’s mind again when, a few days into 1998, he picked up the phone and called Joel Klein. For the past nine months, Morris had been in contact with Klein as part of a three-way effort to nudge the government toward a case against Microsoft. His partners in the triad were Netscape’s Roberta Katz and Sabre’s counsel, Andy Steinberg. Together they’d founded ProComp; lobbied the DOJ; assisted Mike Hirshland in his inquiries; told their tale in concert—from the multiple, harmonious viewpoints of a systems company, a software company, and a content company—to anyone who would listen; and urged wary Silicon Valley bigwigs to talk in confidence to the DOJ. Now Morris was plotting a solo mission: to put together a sort of private blue-ribbon commission of nationally renowned antitrust lawyers and economists, have them draw up an outline of the kind of Sherman Act case that would make sense for the DOJ to file, including a discussion of possible remedies, and then present the whole thing to Klein and his people. Might the DOJ find that helpful? Morris asked the assistant attorney general. Sure we would, Klein replied. So began a project that would span three months and consume $3 million of Sun’s money: “Project Sherman.” As Morris intended, Project Sherman drew together a superstar group of antitrust authorities, including the famed Houston litigator Harry Reasoner; University of Chicago economist Dennis Carlton and several of his 88

Pride Before the FALL

colleagues from the economic consulting firm Lexecon; Arnold & Porter chairman and prominent Washington attorney Michael Sohn; Stanford economist Garth Saloner; and former FTC general counsel Kevin Arquit, who handled Sun’s antitrust work in Washington. In choosing his experts, Morris took care to select people with impeccable credentials—mainstream credentials, establishment credentials—the kind of people who spoke Klein’s language, the kind who might come across as reasonably objective despite the fact that Sun was paying them $600 to $700 an hour. The political sensitivity of the project was, needless to say, extremely high, for here was one of Microsoft’s most ardent competitors bankrolling a costly endeavor to influence the DOJ—an endeavor undertaken with the department’s encouragement. And so it was conducted in utmost secrecy. Apart from McNealy, Morris informed almost no one at Sun, and everyone involved was sworn to strict confidentiality. When asked about his role in the project, one of the participants said furtively, “I haven’t even told my wife about this.” From mid-January to mid-April, the Project Sherman crew met every two weeks, usually at the O’Hare Hilton in Chicago. At first, the meetings were contentious. For one thing, “There was an awful lot of ego in that room,” one person said. “An awful lot of grandstanding.” For another, the group quickly divided into factions: lawyers and economists; tech-savvy and tech-challenged; Washington insiders and Washington outsiders. “We had these people who claimed to know Joel well,” recalled one participant. “They’d say all the time, ‘Let me tell you, I know Joel, and Joel will never go for that.’ ” The problem was especially nettlesome when it came to the question of remedies. One economist recalled, “The Washington people kept arguing for conduct remedies because they were so sure Joel would never agree to a structural remedy.” He laughed. “Boy, I guess they must be feeling pretty dumb now.” 89

JOHN HEILEMANN

There was another debilitating split within the group. Among those from the Valley, the idea that Microsoft’s monopoly and its predatory practices had chilled innovation and distorted investment was taken for granted; it was a given. But for people like Reasoner, Carlton, and Sohn—the big guns, whom Morris intended to wheel out in front of Klein—it was speculation garnished with hearsay. Reasoner kept asking, “Where the hell is the evidence?” Morris’s plan was to bring the Project Sherman gang to the Valley and expose them firsthand to Microsoft’s influence. He turned to Gary Reback, asking him to arrange a series of hushhush meetings with industry figures who could address the question with authority. Nothing gave Reback more kicks than a covert operation where he was pulling the strings. He told Morris, “I’ll call in all my chits.” (Morris: “If Gary called in all his chits every time he’s said he’s calling in all his chits, he’d running one huge chit deficit by now.”) Within days, Reback had assembled a Murderer’s Row of Valley executives, financiers, and technologists who would parade before Morris’s group during a single daylong session. Reback told his witnesses that the meeting was important and that it might help influence the DOJ, but he told them little else; not the names of the economists and lawyers they’d be addressing, or who their fellow witnesses would be, or the identity of the meeting’s sponsor. To keep them from running into one another at Wilson Sonsini’s offices, he instructed them to enter and exit through different lobbies. The tutorial the Project Shermanites received on the appointed late-March day was wide-ranging, and, according to several people who attended, they reacted to parts of it with shock and amazement. They heard from Eric Schmidt, the CEO of Novell, about the vulnerability of being a firm that both competes with, and is reliant on, Microsoft software. They heard from the 90

Pride Before the FALL

Apple software wizard Avie Tevanian about why conduct remedies like opening up Microsoft’s APIs wouldn’t accomplish anything. They heard from Sun’s Bill Joy (who, because of the secrecy surrounding the meeting, was totally unaware that his own company was paying for it) about why Tevanian was right, but why splitting Microsoft into three identical firms, the so-called Baby Bills solution, might be worse: “I keep thinking of ‘The Sorcerer’s Apprentice,’ ” Joy said. They heard from John Doerr about Microsoft’s recent habit of gathering together the Valley’s venture capitalists and offering “helpful” guidance and suggestions about which technologies were advisable to invest in and which might be best left to Redmond. “My firm’s policy is never to back a venture that competes directly with Microsoft,” Doerr said. “Only damned fools stand in the way of oncoming trains.” And they heard from Jim Clark. “When I left Silicon Graphics I had a net worth of $16 million and I invested $5 million to start Netscape,” Clark said. “Microsoft has practically killed Netscape. I’ll never invest in another thing to compete with them. I’ll never touch another market that has anything remotely to do with Microsoft’s path. And if I’d known four years ago what I know now—that Microsoft would destroy us and that the government wouldn’t do anything about it for three fucking years—I never would’ve started Netscape in the first place.” A few weeks later, after a mad scramble to reach their conclusions and complete a presentation, Morris and a select subset of his experts (big guns plus Saloner; no Reback) flew out to Washington for their audience with the DOJ. It was now the middle of April. Four months had passed since the consent-decree case had climaxed, and Morris knew little more about where the DOJ’s investigation stood than what he read in the papers. Certainly the trustbusters seemed eager to see him: Klein had called twice to try 91

JOHN HEILEMANN

to move up the date of the presentation. And when Morris arrived at the DOJ, he found his squad was playing to a packed house. Klein, Melamed, Rubinfeld, Malone, and David Boies were there, along with a swarm of junior antitrust-division staffers, all crowded into the conference room next to Klein’s office. Taking seats across the table from Klein and his deputies, Morris’s team proceeded to outline the case they believed the DOJ should file. Just as the Netscape white papers had argued, the core of that case was illegal monopoly maintenance and monopoly extension—a violation of Section 2 of the Sherman Act. For years, Microsoft had leveraged its power over the desktop to invade adjacent markets, from productivity applications to server operating systems. Sometimes those markets were tremendously valuable in their own right; Office alone raked in billions each year for Gates’s company, and Microsoft’s next target—the server space in which Sun was a leader—was even richer. Other times, the market itself was worth next to nothing in terms of dollars and cents, but controlling it was essential to preserving Microsoft’s dominance on the desktop. Browsers were one example of this. But Java was an equally compelling one. By letting programmers write software that would run on any OS, Java threatened to render Windows irrelevant, if not obsolete. Microsoft’s response had been to license Java from Sun and then, Sun claimed, to violate that license by creating a Windows-only variant of the technology in an attempt to subvert its cross-platform purpose. With both Java and the browser, as Saloner put it later, Microsoft’s philosophy was the same: “We will embrace it, we will make it ours, we will apply it to our operating system, and we will kill it. We will do what we must to protect the mothership—the OS.” The Sun presentation ran for nearly four hours. Deploying his experts to make most of the arguments—Reasoner and Sohn on 92

Pride Before the FALL

the law, Carlton on the economics—Morris tried to anticipate and shoot down Microsoft’s defenses. In particular, the team addressed the question of harm, of who’d been hurt by Microsoft’s actions. After all, the company would say, consumers are happy; prices are falling; high tech is thriving; so is Sun, by the way. What that picture left out, however, was the damage to innovation—the products left undeveloped, the areas of technology left unexplored. For example, there was almost no R&D on operating systems anymore. What did that imply for the future of technology? And how long could innovation continue to flourish in an industry suffused with fear? “I went out to Silicon Valley,” Mike Sohn told Klein and his team. “In all my years practicing antitrust law, I have never seen such powerful people so scared. It utterly amazed me.” At the end of the afternoon, the talk turned to remedies, and Dennis Carlton took the floor. In a way, Carlton was the least likely, and thus the most impressive, member of the Sun team. One of the best-regarded economists in the country, he was also a classic conservative straight out of the Chicago School: suspicious of plaintiffs, friendly to business, inherently skeptical of government intervention in general and of antitrust enforcement in particular. All of which was why Morris had worked doggedly to recruit him in the first place. Throughout the day, Carlton had spoken with calm conviction about the economics of the case, about monopoly maintenance, market power, and Microsoft’s predation. Now, with the DOJ officials hanging on every word, Carlton did what had once been nearly unthinkable. First, he laid out a range of conduct remedies (contract restrictions, technical requirements) and methodically described the pros and cons of each, in every case listing more cons than pros. Then, without the slightest hesita93

JOHN HEILEMANN

tion, he presented the case for a structural remedy—not a fullblown breakup of Microsoft, but a scheme that would force the firm to license all its intellectual property to some number of third parties, giving birth to a set of clone companies that would create competition in the markets for operating systems and applications. Garth Saloner knew it was coming, but even he found it a powerful moment. “This is not one of us Silicon Valley loonies saying this,” Saloner later observed. “This isn’t Gary Reback. This isn’t Roberta Katz. This isn’t Garth Saloner. This is Dennis Carlton. Things have moved. The world has changed. If you’re Joel Klein or Dan Rubinfeld, I would think you’d take comfort in that.” Mike Morris had no illusions that Klein and his colleagues would swallow the case his team put forward—let alone the remedy—whole. Instead he was trying, as he explained it, to accomplish something less ambitious but equally valuable: “to give them a sense that this wasn’t a wild-goose chase, that this was a good case, a real case.” As the meeting drew to a close, it was impossible to know if the effort had succeeded. For several hours, the DOJ officials had adopted what one participant described as a “highwaypatrol demeanor”: professional, poker-faced, pristinely neutral. They had asked countless questions but given nothing away. But many months later, Dan Rubinfeld reflected on the Sun presentation in a way that would have given Morris no small measure of satisfaction. “It was memorable. It was impressive. It told us some things that we did not know,” Rubinfeld said. “But mostly, and this can’t be underestimated, it reinforced in our minds that what we were doing wasn’t crazy.” 94

Pride Before the FALL

■ ■ ■

WHAT THE

DOJ was doing was girding for war. By mid-April, Klein had persuaded David Boies to sign on as the antitrust division’s “special trial counsel” for about one-fifteenth of his customary $600-an-hour fee. (“It didn’t take a lot of persuading,” Klein recalled. “About a half a second after I asked, he said, ‘When do I start?’ ”) Klein also brought another pivotal player into his inner circle: Jeffrey Blattner. A former chief counsel to Senator Edward Kennedy’s staff on the Senate Judiciary Committee, Blattner had made his reputation in Washington as a sharp operator during the battle to keep Robert Bork off the Supreme Court. His new title was Special Counsel for Information Technology, but his de facto role was chief of staff for the Microsoft case, with duties that would include stroking the Hill, spinning the press, and plugging any (unwanted) leaks from within the division. In short, all the smoke signals wafting out of the DOJ indicated that Klein was on the verge of filing a broad Sherman Act suit. The only questions were: How broad? And to what end? To find out, I arranged to meet Klein on the Saturday morning after the Sun presentation. It was a brilliant spring day, with Washington aswirl in cherry blossoms and dogwood. Over the next two years, Klein and I would have nearly a dozen of these discussions. The setting was always the same: Klein’s fourth-floor corner office, where he would sit in a high-backed leather chair, dressed usually in a dark suit and tie, and talk for an hour or two about the strategy, tactics, and legal principles at stake in a case he believed would help set the rules of competition for the digital age. He spoke quickly, quietly, candidly, and not without humor, in a voice still 95

JOHN HEILEMANN

tinged with the accents of Astoria and Bensonhurst, where he’d grown up. “I think we’re at decision-making time,” Klein began, pointing out that the introduction of Windows 98 was only a few weeks away. After months of concentrated investigation, Klein was satisfied that he had sufficient evidence to level a number of charges against Microsoft: that its exclusive contracts with ISPs and content providers were anticompetitive; that its contracts with OEMs placing “first-screen” restrictions on how they could modify the Windows desktop and boot-up sequence were illegal; and that its integration of IE with Windows constituted an unlawful tying together of two separate products. In all this, Klein said, the company’s motives were clear, and clearly predatory. “When you see document after document, from Gates on down, saying that Netscape could basically commoditize the operating system, that’s important stuff,” he said. “That’s what was going on in the minds of these people when they say, Well, what we ought to do in response is go right at ’em and cut off their oxygen.” Klein felt confident that each of these tactics was a violation of Section 1 of the Sherman Act, which states: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” The question was whether to go further and accuse Microsoft of monopoly maintenance under Section 2. Section 2 says: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce among the several States . . . shall be deemed guilty of a felony.” For all the exhortations of Netscape and Sun, monopoly maintenance was not a mainstream case to bring. And it wouldn’t be a 96

Pride Before the FALL

simple one to prove, especially given the products in question. To start with, explaining how the combination of Java and Netscape’s browser, neither of which was a direct rival to Windows, nonetheless posed a threat to the OS would require the DOJ not only to elucidate the intricacies of software APIs but to do so in a vocabulary that Judge Jackson (who, having presided over the consentdecree case, would handle any related Sherman Act suit) could readily comprehend. No mean feat, that. Inside the DOJ, a pitched debate was still being waged between those who preferred to keep it simple, to stick with a more traditional Section 1 case, and those angling hard for Section 2. Dan Rubinfeld was still among the most hawkish of the hawks, though now he was joined by the hard-line David Boies and Jeff Blattner. “Contrary to what a lot of other economists and lawyers in the division believed, I thought it would be perhaps easier to win a bigger case than a narrower one,” Rubinfeld recalled. “What we had with Microsoft was a pattern of practices where the whole was greater than the sum of the parts.” And although the majority of misdeeds the DOJ had nailed down so far—including the June 1995 meeting between Microsoft and Netscape—revolved around the browser, the investigation had begun to unearth evidence of Microsoft malfeasance involving other competitors. “We hadn’t had time to flesh out the pattern of bad acts completely,” Rubinfeld said. By filing a Section 2 claim, “we could put a legal placeholder in our complaint and try to fill it in later. If we could stand it up, the case would be broad. If we couldn’t, it would be a browser case.” Klein said he was leaning toward making a Section 2 claim. “The browser is a big part of the story, but I’m also interested in what other products can be implicated in the same kind of squeeze,” he told me. “If it weren’t for the timing of Windows 98, 97

JOHN HEILEMANN

we might be inclined to develop some of the other issues that are still being intensively investigated. Having said that, the fundamental structure of the case in terms of monopoly power, monopoly maintenance, monopoly expansion—if we file it that way—would be the kind of thing that would at least lend itself to extensions.” The scope of the case Klein was contemplating was sweeping, but the tone of his comments was in keeping with his character: cautious, temperate, carefully calibrated. For nine months, Klein had heard from every putative Microsoft victim in the known world. He’d heard tales of treachery, duplicity, and outright thuggery. He had watched as the mood in Washington turned decisively against Gates and his company. And yet, far from spoiling for a fight, he still seemed wary, ever so gun-shy. On the question of what sort of remedy he might seek, Klein expressed a preference for something “surgical.” Did that mean he wasn’t considering a breakup? “I think that’s accurate—at least for now,” he replied. “There are real costs that one has to be very cognizant of to breaking up a company like Microsoft.” When I asked if he felt any sense of moral outrage over Microsoft’s conduct, he blurted out, “No, no, no, no. This is not tobacco stuff, it really isn’t. I don’t think what they’re doing has that sense of dishonesty and deception. On the merits of the issues, they have arguments that are legitimate. We at the Department of Justice do not have a monopoly on wisdom.” I asked Klein if he’d ever met Gates, and he said that he hadn’t. Was he looking forward to that day? “I don’t know. People ask me this a lot. Maybe it reflects a blind spot. I mean, obviously there’s something about meeting Bill Gates—though, as my kids would tell me, it’s not as exciting as meeting some rock star. I feel weird, because I have the sense that everybody expects there’s gonna be this great day. But I don’t personalize this stuff. I really don’t.” 98

Pride Before the FALL

■ ■ ■

THE GREAT

day arrived just two weeks later, when Gates and Neukom traveled from Seattle to Washington for a summit with Klein and his lieutenants. The Justice Department had put Microsoft on notice that it intended to file suit sometime before May 15, the Windows 98 ship date; at least a dozen state attorneys general were prepared to do the same. Now it was time to offer the prospective defendant a final opportunity to reach an accord outside of court—a meeting known inside the antitrust division as “last rites.” On the evening of May 5, the two camps convened in the offices of Sullivan & Cromwell, in an eighth-floor conference room with windows looking out on the Old Executive Office Building. On Microsoft’s side of the table were Gates, Neukom, and a pair of S&C attorneys; on the DOJ’s side were Klein, Boies, Blattner, and Melamed. Typically, when a company and the government get together in an effort to avert a massive lawsuit, the tenor of the discussions is all about give and take, with each side laboring, however misguided it thinks the other is, to find common ground. But Gates’s approach “was more in the nature of a lecture—the world according to Gates—than a constructive dialogue,” Klein said later. For the next two hours, Microsoft’s CEO held forth—forcefully, passionately, often patronizingly—about the nature of the software business and the needs of his company. He asked no questions of the DOJ, and his answers to theirs took the form of prolonged soliloquies. In the world according to Gates, the notion that Microsoft had a monopoly was ludicrous. “Give me any seat at the table—Java, OS/2, Linux—and I’d end up where I am,” he proclaimed. “I could 99

JOHN HEILEMANN

blow Microsoft away! I’d have programmers in India clone our APIs. If you were smart enough, you could do it.” Asked if Netscape’s browser was designed to compete with Windows, Gates shot back, “Not compete. Eliminate.” When the DOJ team tried to get Gates to address the full range of their concerns—the exclusive contracts, the first-screen restrictions—he repeatedly brushed them off, returning again and again to a single issue: integration. Klein recalled, “He made the argument in myriad different ways that the future of technology was through product integration; that he’d put billions of things into the operating system and he needed to be able to keep putting whatever he wanted into Windows. And if the government blocked that, it would basically kill his business. That was the clear top line, bottom line, and every line in between.” What startled Klein was the personal terms in which Gates expressed these points. “It wasn’t just, You’re going to kill my business; it was, You’re going to kill me. And clearly we, the government, were the instrument of this great personal affliction.” As David Boies sat quietly watching Gates give no quarter, he couldn’t help thinking that the king of software was dangerously underestimating his adversary. From his decade-long stint in the trenches of the IBM case, Boies knew as well as anyone that the DOJ wasn’t just another opponent; that it had “the same resources, the same imperatives, the same commitment” as any corporation, no matter how resolute. It was a point worth making, he told himself. So as the meeting drew to an end, Boies looked across the table at Gates and Neukom and asked if he could offer a word of advice. “You know,” Boies said, “once the United States government files suit against you, everything changes. People you thought you could trust turn against you. People you thought were your allies 100

Pride Before the FALL

turn out to be enemies. Everyone is more willing to question you, to resist you. The whole world changes.” Gates and Neukom stared blankly back. “The government kept making these melodramatic statements,” one of the Microsoft lawyers recalled. “They just didn’t understand the fundamentals of our business. It was a bit like two ships passing in the night.” Initially, Klein felt the same way. But as he turned the meeting over in his mind afterward, he began to discern in the contours of Gates’s intransigence what he thought were the faint outlines of a settlement. Microsoft seemed to be signaling that the first-screen limitations and restrictive contracts meant little to it. Maybe, if the company was willing to give significant ground on those issues, and if the DOJ showed flexibility on product integration, a deal could be done that would satisfy both parties. For the next nine days, Klein and Neukom burned up the phone lines with proposals and counters. From the Microsoft side came a series of concessions to loosen the firm’s grip on the first screen and give OEMs greater freedom over the Windows desktop. The company also offered a variety of ideas—a “browser folder,” perhaps, or a “ballot screen” whereby users could choose between IE and Navigator—to create a more level playing field for Netscape. Indeed, at 1:30 A.M. on the Thursday that the DOJ was set to file suit, Gates himself phoned Klein at home to discuss whether Microsoft might agree to a “must-carry” provision wherein it would ship Netscape’s browser with every copy of Windows. A few hours later, after another conversation with Neukom, Klein decided to delay launching the suit until the following Monday, so Microsoft and the DOJ could devote the weekend to faceto-face negotiations. In Silicon Valley the sound that greeted the DOJ’s announcement was the gnashing of high-tech teeth; in Washington, it was 101

JOHN HEILEMANN

the low murmur of cynical assumptions being confirmed. What the Valley had long feared and the political class had long expected finally seemed to be coming to pass: at the eleventh hour, Joel Klein was caving. And although that judgment was rather too harsh, at its core there was a kernel of truth: Klein wanted a settlement and he wanted it badly. The reasons were almost too numerous to count. In suing Microsoft, Klein would be taking on a company with unlimited resources and the best legal talent that money could buy, not to mention a PR operation populated by literally hundreds of footsoldiers, strategists, and high-priced ad gurus. For all the tarnishing Gates’s image had recently suffered, Microsoft’s CEO remained an icon of the new economy. Even for a man more daring by nature than Klein, the political and legal risks of challenging Gates were daunting, the rewards uncertain. If Klein settled the case, he could declare victory and go home. The victory would be limited, but it would also be immediate—no small thing in an industry racing forward on Internet time. And it would avert a protracted lawsuit in which the government’s prospects were decidedly dodgy. A month earlier, the DOJ and Microsoft had argued the appeal of the consent-decree case before a three-judge panel on the US Court of Appeals for the District of Columbia, and the judges had seemed markedly hostile to the government’s position. As for the broader case the DOJ was about to unleash, the antitrust establishment (Mike Morris’s experts notwithstanding) regarded it as a shot in the dark. Even Boies had his doubts. “At that point, we didn’t have all the evidence that we would subsequently get,” he said later. “We had some evidence of Microsoft’s broader conduct, but they denied that conduct. We had a lot of things we believed, but whether we could ultimately prove them or not was very uncertain. We had a 102

Pride Before the FALL

judge who we thought was a good judge, but he was a careful judge, a very conservative judge. We knew he was going to make us prove every element of the offense. So we were in a situation where, if we could have achieved anything like a reasonable settlement, I think we would have jumped at it.” Dan Rubinfeld remembered thinking that Microsoft could have—should have—capitalized on the DOJ’s eagerness to settle. “If I had been free to give them advice, that was the moment I would have said, ‘Look, this is the time. Do a deal with us. You know me. You trust me. Really. Do it.’ ” Instead, Neukom flew back to Washington, sat down with the DOJ and the states on a Friday afternoon, and played a brand of hardball that quickly brought the negotiations to a grinding halt. Not long into the first session, it seemed clear to the government that certain compromises Microsoft had already offered—in particular, ceding power over the desktop to OEMs—were now being yanked off the table. If that was so, there was not much to talk about. For Microsoft’s part, one of its top attorneys said that the government’s “basic attitude throughout was arms-folded, we-need-more, we-need-more. They made no counteroffers. We were not difficult or nonchalant. We tried our darnedest.” Late on Saturday morning, Neukom drafted a memo laying out Microsoft’s stance (which included dropping its restrictive contracts, adopting the browser “ballot page,” and not much else) and handed it to Jeff Blattner, who was leading the DOJ’s negotiating team. Blattner could see that the talks were about to fall apart and suspected that Microsoft might leak the memo to the press. Pushing it back across the table, he said abruptly, “I don’t negotiate from a list.” Roughly translated, that meant sayonara. 103

JOHN HEILEMANN

■ ■ ■

IN RETROSPECT, Microsoft’s failure to settle seems a colossal and inexplicable blunder. The retreat from its first-screen concessions was mysterious enough. (Had Neukom gotten ahead of Gates? Had Gates himself had a change of heart? Had the DOJ misunderstood the company’s previous offers?) But even putting that aside, there were any number of other solutions at hand. In the consent-decree case, for example, Microsoft had agreed to offer OEMs two versions of Windows 95, one with IE visible, the other with it hidden; already it was clear that most of the OEMs were taking the version the company preferred. Had Gates proposed that the same arrangement be applied to Windows 98, the company would have sacrificed little in business terms and conceded nothing about its future right to integrate features into the operating system. Meanwhile, the government would have been hard-pressed to spurn the offer, as its officials would later acknowledge. Yet Gates, Neukom, and the rest of the Microsoft legal team all said that this entirely obvious idea was never entertained by the company; and that the question was irrelevant anyway because the DOJ would never have accepted anything less than forcing Microsoft to carry Netscape’s browser. There was, however, an alternative explanation: that despite the Sturm und Drang of those 10 days in May, Microsoft’s real aim in the settlement negotiations was something other than settlement. “It was a fishing expedition,” Christine Varney opined. “Microsoft wanted to find out what was in the case. When you’re a litigant, you want to know as much as possible about what you’re facing—if there’s some smoking gun that you don’t know about. So you find out, then you recalibrate and decide whether to settle or not.” 104

Pride Before the FALL

What Microsoft found out—or thought it found out—was that the suit the DOJ intended to bring wasn’t nearly as sweeping as the company had feared. To Microsoft’s lawyers, it sounded like a browser case, a tying case, and tying was the legal ground on which they believed that their standing was firmest.“They thought,‘This is going to be a narrow case, so let’s fight it,’ ” Boies said.“ ‘If we lose, we lose a narrow issue. We can afford to fight this case and lose.’ ” He went on, “Also, remember that Microsoft had been fighting with the government in one way or another for almost 10 years. And every time, they’d managed to come out really well. I think they thought they were smarter than we were. I think they thought they knew more than we did. And both of those things may very well have been true. But I think they underestimated our ability and willingness to learn.” Microsoft wasn’t alone in its view that the government’s case was a narrow one. When the DOJ and a grand total of 20 state attorneys general filed suit on May 18, the Monday after the settlement talks collapsed, the complaint charged Microsoft with four counts of violating the Sherman Act: exclusive dealing and unlawful tying under Section 1; monopoly maintenance in the OS market and attempted monopolization of the browser market under Section 2. Yet the narrative that Klein spun around the case painted Netscape as its hero and victim, and the short-term remedy the DOJ was seeking was glaringly Netscape-centric: a preliminary injunction forcing Microsoft either to offer a version of Windows 98 without IE or to bundle Navigator with the OS as well. Netscape was thrilled: it certainly looked like a browser case to Jim Barksdale. Sun was disconsolate: it looked like a browser case to Mike Morris, too. And the rest of the Valley rolled its eyes: didn’t the government realize that the browser war was over? “If they’d done two years ago what they did today, it might have been useful,” Reback groaned from a New York phone booth. “It’s been 105

JOHN HEILEMANN

a long haul to get this far. It’s going to be a long march to get where we need to be. And some of us are getting awfully tired.” Some of them were worse off than that. Since the early days of Reback’s efforts, no one in government had been a more steadfast ally than Mark Tobey. The assistant attorney general from Texas had started the ball rolling with his Netscape depositions and then lobbied furiously to create a groundswell among the states. But a few days before the Sherman Act case was filed, Texas had been forced to withdraw its support, under pressure from the state’s computermaking kingpins, Compaq and Dell. Because both companies were dependent on Microsoft, the widespread assumption was that they were acting on orders from Redmond. Tobey told Reback, “I never dreamed they’d be able to shut me down entirely.” Then came another blow to the anti-Microsoft movement, a development that plunged the DOJ into sudden despair. On June 23, the federal Appeals Court issued its ruling in the consent-decree case. Striking down Judge Jackson’s preliminary injunction, the Appeals Court found that he had “erred procedurally,” by not giving Microsoft a chance to contest the injunction, and “substantively,” by misreading the law on tying.“Antitrust scholars have long recognized the undesirability of having courts oversee product design, and any dampening of technological innovation would be at cross-purposes with antitrust law,” the Court’s opinion read. “We suggest here only that the limited competence of courts to evaluate high tech product designs and the high cost of error should make them wary of secondguessing the claimed benefits of a particular design decision.” In Microsoft’s eyes, it was an overwhelming victory. All along, Bill Neukom and his team had assured Gates that the law was solidly on Microsoft’s side—and now here was the proof in black and white. They had told him that the heart of the government’s case was tying—and now here was an opinion suggesting, in 106

Pride Before the FALL

essence, that the DOJ’s tying claims were doomed. On hearing the news, Neukom crowed to reporters, “We view this very much as a vindication of our business practices and legal strategy.” And for once, his optimism seemed in sync with reality. The next morning, Neukom’s boss picked up The New York Times and read that even Klein’s sympathizers shared Microsoft’s assessment of the Appeals Court’s ruling. “This cuts the legs out from under the Justice Department on their new case,” the former DOJ antitrust official Robert Litan, a Democratic appointee who had served under Anne Bingaman, was quoted as saying. “It’s potentially devastating.” For the first time in months, reading the Times made Bill Gates smile.

DAVID BOIES was smiling too, though it made his associates think him deranged. By common consensus, Boies was the most brilliant litigator of his generation. Graduating second in his class from Yale Law School, he had spent 30 years with the white-shoe New York firm Cravath, Swaine & Moore before setting up his own shop in 1997. Over the years, Boies had represented a vast assortment of splashy clients against an array of even splashier opponents. In addition to his antitrust work for IBM, he had defended CBS against a takeover bid by Ted Turner and a libel suit by General William Westmoreland. He had helped Texaco fight off the corporate raider Carl Icahn and helped Westinghouse take on Philippine president Corazon Aquino. On behalf of George Steinbrenner, he’d sued Major League Baseball; on behalf of the government, he’d sued Michael Milken. He rarely lost at trial and had never had a victory overturned on appeal. 107

JOHN HEILEMANN

In his mid-fifties, Boies had thinning brown hair, a flat Midwestern twang in his voice, and a downmarket demeanor (Lands’ End suits worn with blue knit ties he bought by the bagful) that belied an annual paycheck of more than $2 million. His courtroom manner was casual and conversational, which tended to lull his adversaries into a fatal haze of complacency. His memory was borderline photographic; his competitiveness, modestly terrifying. To a colleague at Cravath he once uttered the words that will surely be his epitaph: “Would you rather sleep or win?” Boies got hold of a copy of the Appeals Court decision just before boarding a flight from New York to San Francisco. By the time the plane landed, he was certain that, far from being a death knell, the opinion actually worked to the DOJ’s advantage. “It helped in three ways,” he later observed. First, although the court was plainly on Microsoft’s side, it made no bones about the fact that the company had a monopoly. Second, Boies said, when it came to tying, “the court said that if you can prove that they don’t need the tie to achieve the benefits, then that’s just bolting two products together, and that violates the tying laws.” Third, he went on, “the court said that if you can prove that they did it not for efficiency purposes but for anticompetitive purposes, that trumps everything. In other words, the court was adopting an intent standard, and, given the Microsoft documents we had in hand, that was a standard I thought we could meet.” The Appeals Court had effectively provided Boies with a kind of road map, a guide for framing his arguments on product integration. At the same time, what the court said didn’t touch the DOJ’s Section 2 claims—claims that Boies now believed it was essential for the government to beef up before the trail began. But more than all that, the ruling gave Boies an overarching sense of confidence about the case in general. “Even in a decision that was 108

Pride Before the FALL

really quite pro-Microsoft, there was no hint that the court was saying, ‘The antitrust laws don’t apply here; we’re going to give the software industry or Microsoft a free pass,’ ” he noted. “And once I knew they didn’t get a free pass, I knew we could prove an antitrust violation.” To do that, however, and especially to flesh out a powerful case of monopoly maintenance, Boies would need witnesses—strong and credible ones. And, unfortunately, the DOJ would have precious little time to round them up. When the government filed suit, both sides had assumed that Judge Jackson would hold a quick hearing on the DOJ’s request for a preliminary injunction and then schedule a full trial to start perhaps a year later. But apparently Jackson had other ideas. In a surprise maneuver, he decided to put aside any preliminary hearing and move directly to trial—and soon, setting a date to commence in early September. If Jackson had his way, US v. Microsoft would be short and sweet. To ensure that it was, he adopted an unusual procedure limiting each side to 12 witnesses, all of whom would deliver their direct testimony not on the stand but in writing, with courtroom hours being reserved strictly for cross-examination. The accelerated schedule set the DOJ a formidable task. In the course of their investigation, the government had accumulated a multitude of leads regarding instances of Microsoftian misconduct. Now Klein and his team had the summer months to chase down those allegations, establish their veracity, and then persuade a reasonable number of the aggrieved parties to step forward, under oath and in the glare of a high-profile trial, and testify. Shortly after the Appeals Court decision came down, Reback had breakfast with Klein in Washington and found the assistant attorney general in a nerve-addled state. “We’ve filed this thing,” Klein said, “but we have no witnesses.” 109

JOHN HEILEMANN

“If I were Joel, I would have been pissing my pants right then,” Reback recalled. “The judge said 12 witnesses. I kept looking at my fingers and thinking, how are we ever going to get there?” The only way, in Reback’s view, was for the DOJ to somehow cut through the toxic mixture of fear of Microsoft and cynicism about the government’s competence—the latter being at least as poisonous as the former—that hung like smog over Silicon Valley. In the tech world, the memory of the 1995 consent decree, seen universally as a dismal failure, remained fresh. And even with the Sherman Act case, the current crop of trustbusters hadn’t gone very far toward instilling confidence in the DOJ. “There was a lot of trepidation in the Valley about whether the government was capable of getting any of this right,” Reback remembered. “Nobody wanted to get anywhere near this thing. Nobody wanted to be subpoenaed. Nobody was sure they could pull it off.” Such was the climate of uncertainty and doubt when the hunt for witnesses began. Reback, naturally, joined in to help the DOJ; so did Orrin Hatch and Mike Hirshland. Playing every angle, pulling every string, Klein’s team of 20-odd lawyers talked with dozens of the companies in Microsoft’s crosshairs. Software companies and hardware companies. Internet infants and Fortune 500 stalwarts. They talked with Yahoo!, Excite, RealNetworks, Palm. And with most of the OEMs—Compaq, Acer, Gateway, Packard Bell, HP, Sony. Yet by the middle of July, the DOJ’s witness list was so barren that Klein was considering filling a quarter of his slots with Netscape executives, another slot with someone from Sun, and many of the rest with economists and technical experts. He didn’t have much choice. After several weeks of tree-shaking, the DOJ’s efforts had produced a meager harvest. And then, quite suddenly, some fruit began to fall. 110

Pride Before the FALL

■ ■ ■

IT BEGAN

with Intuit, whose CEO, Bill Campbell, was a former college football coach who had received his share of bruises from butting heads with Gates. In the early 1980s, Campbell worked at Apple and helped launch the Macintosh, which depended on Microsoft applications to find its place in the market. Later in the decade, he became CEO of the doomstruck pen-computing company GO, whose flagship product was a bulkier, clumsier, costlier precursor to the Palm Pilot. For years after GO went belly-up, its executives blamed Gates, accusing him of stealing their ideas in order to build a copycat product and of pressuring OEMs not to ally with the start-up. In particular, they believed Microsoft had nixed a deal with Compaq that might have pulled GO back from the brink of bankruptcy. “We heard Gates came in personally and made Eckhard Pfeiffer [Compaq’s then-CEO] an offer he couldn’t refuse on the operating system—a big price cut on Windows—if Eckhard would forget about our deal and go with Microsoft’s product instead,” Campbell recalled. “We heard it from good sources, but we could never prove it.” At Intuit, Campbell and board member John Doerr (who bankrolled Intuit and GO) were, in Campbell’s words, “the last holdouts” when the firm’s chairman, Scott Cook, wanted to sell the company to Microsoft back in 1995. After the DOJ scotched the deal, Microsoft waged a fierce campaign to topple Intuit in the financial-software market. Against the odds, Campbell prevailed, doing whatever was necessary—including abandoning an alliance with Netscape—to maintain Intuit’s place on the Windows desktop. 111

JOHN HEILEMANN

The DOJ had long suspected Intuit had a story to tell. In its court papers, the government cited a Microsoft email in which Gates wrote, “I was quite frank with [Cook] that if he had a favor we could do for him that would cost us something like $1M . . . in return for switching browsers in the next few months I would be open to doing that.” But Campbell wanted no part of the DOJ. He regarded its lawyers as woefully overmatched (“I told them, the Bill Neukoms of the world are going to cream you government pantywaists”) and the suit’s short-term remedy as worse than meaningless (“They’ve got to put both browsers in the OS? Great. Now I have to pay double ransom”). Then that summer Campbell got a call from Hirshland, who told him the DOJ had hard evidence that Microsoft had indeed killed the Compaq deal which might have saved GO. Campbell also received a call from Hirshland’s boss. “You know damn well there is some unethical behavior out there that’s possibly illegal,” Hatch said. “The only way we can expand the case is if people like you are willing to talk.” By late July, Campbell was seriously wavering, and he wanted to hear the opinions of Intuit’s board and senior staff. At a threehour meeting the debate was engaged. Speaking in favor of putting someone forward to testify was Doerr, who argued, “If we feel we’re getting screwed, we ought to say so.” Against the idea was Cook, who said helping the government would be an admission of defeat and a sign of weakness; it would put Intuit on a par with Silicon Valley’s congenital complainers. Finally, a vote was taken: all except Cook agreed that Intuit should testify. For Campbell, it basically came down to a matter of cojones. “I thought, goddammit, forget the marketplace reaction, forget Microsoft’s reaction. We ought to be strong enough to stand up and be counted.” Just around the time that Campbell was climbing on board, the DOJ caught another big break. The government investigators 112

Pride Before the FALL

had been trying for months, without much luck, to nail down rumors that several years earlier Microsoft had strong-armed its ally Intel over Intel’s plans regarding the Internet. Now, as the DOJ was taking depositions from various Netscape officials, Jim Clark recalled that an Intel executive named Steve McGeady had once told him about a meeting in which Gates had declared his intent to “take Netscape’s air.” Clark shot off an email to McGeady asking if he’d be willing to talk to the DOJ. McGeady wrote back almost instantly, correcting Clark’s memory (it was Maritz, not Gates, who’d alluded to Netscape’s impending lack of oxygen) but adding, “If the DOJ asks me to testify to that effect, I will, without hesitation.” In short order, the government arranged to depose McGeady. The DOJ should already have been aware of Steve McGeady. Three years earlier, on a tip from Reback, the antitrust division had sent McGeady a CID for documents concerning a clash between Intel and Microsoft over an Intel software technology called Native Signal Processing (NSP). But like the ark of the covenant at the end of the first Indiana Jones movie, the NSP documents had apparently been buried deep in the bowels of the DOJ, and the entire issue had faded from the department’s collective memory—and from Intel’s too. “Four days before my deposition, I say to my Intel lawyer, I assume you’ve reviewed the documents from 1995,” McGeady recalled. “He says, ‘What documents?’ He doesn’t know. So he calls the Justice Department. They don’t know either!” McGeady rolled his eyes. “It was like the Keystone Kops do antitrust.” McGeady’s deposition was dynamite stuff. Yet the DOJ’s dealings with Intel were wary and delicate. For nearly 20 years, Intel and Microsoft had collaborated so closely that they were often regarded as a unitary being: “Wintel.” The moniker was mislead113

JOHN HEILEMANN

ing, for the relationship was riven with fractures and fissures. Andy Grove liked to refer to the companies not as strategic partners (“I really hate that phrase,” he snarled) but as “fellow travelers”—not soulmates, but seatmates on the same train, whose journey together will eventually end. Yet because Intel was hugely dependent on Microsoft, and vice versa, keeping peace with Gates was one of Grove’s prime priorities. So when Intel finally acknowledged that McGeady would be testifying in the trial, the company took pains to assume a posture of perfect neutrality. McGeady was not being “sent” to testify; he was merely being “allowed” to testify. What choice do we have? Intel asked, in effect. The government wants him; we can hardly refuse. Behind the scenes, though, Intel’s neutrality was far from perfect. With the stealth and finesse of an accomplished Byzantine courtier, the company’s general counsel, Peter Detkin, was helping drive the stiletto into Microsoft’s back. Detkin was a former partner at Wilson Sonsini, where he had worked with Reback on a number of cases. There was no love lost between the two, but over the years Reback had conducted what he called “deep-throat meetings” with Detkin and other Intel lawyers in the bar at Hyatt Rickeys in Palo Alto. When the government started asking questions about McGeady, Detkin turned to Reback and Susan Creighton as a covert back-channel to the DOJ. “Peter used Wilson Sonsini as a safe conduit to pass information to the government,” a lawyer close to the situation said. “The nature of the information was: If you look here, or here, or here, you’ll find something interesting.” Indeed, in the final analysis, Detkin seemed to have been the source, in this roundabout way, of most of the Intel leads that would bear fruit for the DOJ. When a story that the DOJ had deposed various Intel executives splashed across the front page of The New York Times in late 114

Pride Before the FALL

August, the news hit Silicon Valley like a thunderbolt from a clear blue sky. If Intel was cooperating with the government (as everyone assumed it was, no matter what the company was saying publicly), then the DOJ’s case was undeniably gathering steam. “Part of the calculus on every witness’s part was, Who else is testifying?” Boies recalled. “Once you get a couple of witnesses in the box, you can tell other people you’ve got them, and your life becomes much easier.” With Intel and Intuit in the box, Boies was able to lock down witnesses from two companies with which he had tight connections: IBM, where the ancient Microsoft hatreds still burned, and AOL, whose head of government affairs, George Vradenburg, had previously been in-house counsel to CBS and had hired Boies to handle the Westmoreland libel case. The DOJ got another boost with Judge Jackson’s decision in mid-September to delay the trial’s start until mid-October. The extra month would buy the DOJ some breathing room. It would also provide a chance to go after the most glittering prize of all: Steve Jobs and Apple.

THE DOJ’S interest in Apple was twofold. The first element was the headline-grabbing deal between Cupertino and Redmond in August 1997, in which, the government believed, Microsoft had threatened to cancel Office for the Macintosh unless Apple replaced Navigator with IE as the Mac’s default browser. The second was multimedia. The DOJ had recently received from Reback another of his inimitable white papers, this one focused on the Apple multimedia technology QuickTime. The Apple white paper alleged that over the previous two years Microsoft had engaged in a passel of predatory tactics to stifle QuickTime—tactics that 115

JOHN HEILEMANN

loudly echoed its approach to Netscape’s browser. According to the Reback brief, Microsoft had proposed carving up the multimedia market with Apple; it had then pressured OEMs to drop QuickTime; it had inserted technical incompatibilities that disabled QuickTime in Windows; and it had struck exclusionary deals with content providers to develop only for Microsoft’s competing NetShow technology. At one point, a Microsoft business-development manager had made a suggestion about what Apple should do to its own newborn technology, which was so irresistibly colorful that Reback made it the white paper’s title: “Knife the Baby.” In the autumn of 1998, Apple’s recovery under Jobs was still tenuous and fragile, and the company’s relationship with Microsoft remained as precarious as ever. If the DOJ had a prayer of inducing Apple to throw caution aside and sign up for the trial, Reback was the man to see. In the fevered quest for fresh evidence and plausible witnesses, whatever lingering resentments Klein harbored toward the monomaniacal lawyer had receded. Reback was simply too useful, too plugged-in and switched-on, to be ignored. In a series of phone calls that September, Klein told Reback he desperately wanted the Apple story to be part of the trial—and he wanted Jobs to be the one to tell it. Though the DOJ’s witness list was shaping up nicely, Klein was concerned that it lacked star power, featuring as it did only one marquee-quality CEO: Jim Barksdale. Klein told Reback, “We have an übermenschen problem.” Jobs was certainly über, but no one had ever accused him of being a mensch. Visionary, volatile, volcanic, and vain, Apple’s founder minced no words regarding his skepticism about the DOJ’s capacity to prosecute Microsoft. “The government is bullshit! The government is bullshit!” he had barked when a government lawyer visited him that spring to ask for his help in building 116

Pride Before the FALL

the case. For the next twenty minutes, Jobs uncorked a vintage screed against Gates’s company, about how its monopoly was “chilling innovation” and “fundamentally poisoning” the software industry. Then he shifted his scorn back to the government. “You guys have done nothing, you haven’t figured it out, you’ve been too slow, you’ll never change anything. This is an incredibly sensitive time for Apple. Why should I jeopardize the future of my company when I have no faith that the government is going to do anything real?” To Jobs, “real” meant one thing: breaking Microsoft up. For all his doubts about the DOJ’s competence, he was now grudgingly impressed by the government’s progress. In late September, after several lengthy talks with Reback, his friend Bill Campbell, and a number of DOJ intermediaries in the Valley, Jobs agreed to have a conversation with Klein about the possibility of testifying. When the two men connected by phone, with Jobs on vacation in Hawaii, he wasted no time in getting to the point. He wanted to hear Klein’s thoughts on remedies. “Are you going to do something serious?” Jobs demanded. “Or is it going to be dickless?” At the other end of the line, Klein squirmed. Even if he had settled on a remedy, which he hadn’t, it would have been grossly inappropriate to discuss it with Jobs—or with any other Microsoft competitor. Klein told Jobs this. He told him he could offer him no commitments, no promises. Klein said, “It’s a chicken-and-egg problem; the power of the remedy will be determined by the quality of the case.” Jobs was singularly unimpressed, and he let Reback know it. Frustrated, Reback called Mike Hirshland to commiserate. “Joel blew it,” Reback sighed. Jobs hadn’t needed a firm commitment. What he needed was to be sold on the notion that the DOJ was, à la Microsoft, hard-core about the case. But Klein hadn’t been sell117

JOHN HEILEMANN

ing; he’d been legalistic, stilted, excessively circumspect. He’d been . . . Joel. As Hirshland listened to Reback moan, he had a brainstorm. Why not have Boies give Jobs a call? Not being a DOJ official, the litigator might have more freedom to deliver a proper pitch. After hanging up with Reback, Hirshland called Boies and ran the idea past him. Sure, Boies said, but he would need Klein’s blessing. “It might be delicate,” Boies went on. “Can you get Senator Hatch to call Joel and tell him this needs to happen?” Meanwhile, Reback had had a bright idea of his own. Realizing that part of Jobs’s reluctance to testify revolved around the fear (a rare one for him) of standing alone at center stage, of being by far the most significant person in computing to be opposing Gates in so public a forum, Reback suggested to Apple’s CEO that perhaps there was a way to give him some cover. What if another industry figure of Jobs’s stature were to testify alongside him? Jobs liked the idea, but to his mind there was only one person who belonged in that category: Andy Grove. Thus began a brief but frantic spell during which the DOJ and much of the anti-Microsoft movement was seized by the most hallucinatory of fantasies: the Grove-Jobs twofer—get one, get both. And a fantasy is precisely what it was. Not only was Grove the archetypal practitioner of corporate realpolitik, but at that moment Intel was engulfed in a substantial antitrust inquiry of its own, conducted by the FTC. In any sane universe, the proposition that Grove might be cajoled into taking the stand against Gates would have seemed only marginally more tenable than the proposition that Steve Ballmer might join him in the witness box. Yet with less than three weeks to go before the trial, the prevailing atmosphere at the DOJ was not exactly one of cold-eyed 118

Pride Before the FALL

rationality. Thus, during the last week of September, did Andy Grove discover how it feels to be the most sought-after man in Silicon Valley. At Yom Kippur services, Reback sat down beside Intel’s Peter Detkin and whispered, “We have to talk.” Soon Detkin found himself on the phone with Klein. At home, Grove was deluged with plaintive calls from the DOJ’s surrogates. He heard from various Valley figures, from Hatch, and even from Jobs. What none of these suitors knew was that Grove was at the same time fielding entreaties from Gates and Neukom, who were begging him to testify on Microsoft’s behalf. Grove’s reply to both sides was the same: Intel is neutral in this case and so am I. Besides, he said, any testimony he offered would be a double-edged sword. “I’ve been in the middle of all this shit for years,” Grove told me. “I don’t lie. I particularly don’t lie under oath. And I really particularly don’t lie under oath when there is no reason to. I would have said things that neither side would have been happy to hear.” With Grove’s irrevocable refusal, the DOJ lost its chance at Jobs. By the time Boies called Apple’s CEO, “He’d made up his mind,” the lawyer recalled. “He just didn’t want to testify.” Yet in failing to land Silicon Valley’s two reigning kingfish, the DOJ came away with two less spectacular but important victories. All along in its dealings with Intel, the government had feared being double-crossed; that, under pressure from Gates, the company would provide a witness, perhaps even Grove, for the defense. But now Grove had given his word that this wouldn’t happen. And while Jobs would not testify himself, he pledged to send Avie Tevanian in his stead. In Boies’s view, this was no small thing. “While not having the star power of Jobs, Tevanian had a fair amount of star power of his own, just a different kind. And he could speak to some of these issues in a way that was even stronger than Jobs could have,” Boies said. “Now, that was not a 119

JOHN HEILEMANN

universally held opinion in the Justice Department, but I felt quite satisfied.” By early October, with the inclusion of Tevanian and another software expert, James Gosling of Sun, the DOJ’s witness list was complete. In the end, it had only one gaping hole: the absence of an OEM official to testify about the ways Microsoft leveraged its Windows monopoly to exert coercive power over computer manufacturers. (The witness from IBM, John Soyring, would talk only about the development of OS/2.) The search for an OEM whistleblower had consumed more man-hours at the DOJ than securing any other witness, but no amount of suasion was enough to convince PC makers that they had more to gain than lose by airing their grievances. “Most of the major OEMs are simply afraid,” Klein said at the time. “A lot of them said to us, ‘What you’re doing is terrific, but we just can’t afford to stick out our necks.’ The power that Microsoft has over these people with the Windows license and the Office license is simply extraordinary.” The failure to land an OEM was frustrating for Klein, but it did nothing to diminish his sense of how far his team had come. Three months earlier, the government had been staring at the prospect of going up against Microsoft wielding nothing but Netscape and a handful of academics. Now it was armed with a roster of the industry’s heaviest heavyweights: Intel, IBM, Apple, AOL, Sun, and Intuit. Boies’s warning to Gates and Neukom back in May had proven eerily prophetic: the lawsuit really had changed everything, emboldening Microsoft’s enemies and turning one of its most steadfast allies against it. After months of anxiety and hand-wringing, Boies and Klein were happy warriors—happier, actually, than anyone realized. For the DOJ’s lawyers knew something few others did: they had a surprise witness up their sleeves. A witness of unimpeachable author120

Pride Before the FALL

ity. A witness with power beyond reckoning and cash beyond counting. A witness guaranteed to overshadow even the brightest lights on the list they’d announced. A witness—need it be said?— who would soon have Microsoft’s defenders paraphrasing Pogo: We have seen the enemy, and he is Gates.

IF THE

government’s trial preparations had the flavor of a blitzkrieg, Microsoft’s were carried out with the methodical discipline of a Prussian counteroffensive—and predictably so, given the fellow commanding the company’s legal battalions. Stylistically, Bill Neukom was an odd man out at Microsoft. He was in his fifties, with a wavy pompadour of silver hair, a handsome face, and a patrician air. He was tall and trim and impeccably dressed, his suits well-pressed and accented with braces and florid bow ties. Polite and formal, Neukom spoke in precise sentences that he strung together to form perfect paragraphs. He was occasionally turgid and always verbose. Once, after I’d finished a long interview with him, another Microsoft executive remarked, “I’m sure he crammed 20 minutes of substance into those two hours.” Neukom had grown up in northern California, where his father cofounded and oversaw the San Francisco office of McKinsey & Company. After graduating from Dartmouth and Stanford Law, he moved to Seattle in 1967, where he eventually landed at the law firm of Bill Gates’s father. The elder Gates handpicked Neukom to handle his son’s legal affairs, on the basis, Bill Sr. has said, that Neukom was “mentally agile” and “didn’t have an exceptional level of ego.” Before going to work in-house at Microsoft, Neukom, a liberal Democrat, had a brief flirtation with politics. In 1980, he sought his party’s nomination as Washington State’s 121

JOHN HEILEMANN

attorney general but finished second. Thereafter, his interest in public affairs was channeled into philanthropy; the Neukom Family Foundation has steered millions of dollars into education and health-care programs. Neukom became Microsoft’s general counsel in 1985. Three years later, the company was hit with the Apple copyright suit, which threatened, Gates said, to “absolutely put us out of business.” The case dragged on for five years, and the received wisdom in the press was that Microsoft was in the wrong, that it had plainly ripped off Apple’s graphical user interface to create Windows. But Neukom advised Gates to ignore the punditry and focus on the law, which the attorney was certain supported Microsoft’s position. The court’s vindication of that view, in 1993, was Neukom’s greatest triumph, and a source of Gates’s trust in his judgment. In combating the government, Neukom presided over a squadron of lawyers three times the size of the DOJ’s. Although attorneys from Sullivan & Cromwell would handle a fair amount of the heavy lifting, and especially the courtroom work, there was no question as to which of the lawyers was in charge. “Neukom is the guy who conducts the orchestra,” Klein said. “He doesn’t move the stick, but you can almost feel the energy shift when he’s ready to have X stop talking and Y start talking.” Just as he had in the Apple dispute, Neukom believed unequivocally that the law was on Microsoft’s side. To prove it, he and his team set out over the summer of 1998 to pull together evidence to show that, far from being a monopolist, Microsoft faced competition from all sides; that the company’s contracts with OEMs and ISPs were commonplace in the industry; that the infamous June 1995 meeting with Netscape was nothing more than a routine powwow between an operating-system vendor and an applications provider; that integrating IE into Windows wasn’t part of a 122

Pride Before the FALL

nefarious plot to wipe out Netscape but rather a natural extension of the OS, just as Microsoft’s past inclusion of features such as printer drivers and memory management had been; that, in fact, the company’s plans to incorporate browsing into Windows had begun before Netscape had even been born. In support of these claims, the team came up with hundreds of internal documents and email. They took dozens of depositions. And they assembled a witness list composed almost entirely of Microsoft executives, who would tell the company’s story in court. As the Microsoft lawyers readied their case, the most potent of all their potential witnesses dropped out of sight. In late July, Gates named Steve Ballmer Microsoft’s president, as his board of directors had been urging him to do for months. In an email to employees, Gates wrote that, from then on, Ballmer and Bob Herbold would be responsible for running the company day-to-day, while he would spend his time on product development and new technology. “In no way am I pulling back,” Gates wrote. “The hours I put in and my enjoyment of the work I do will be absolutely the same.” And with that, he took off on a weeks-long vacation. In every respect, it was a billionaire’s holiday. Accompanied by his wife, fellow plutocrats such as Warren Buffet and Will Hearst, Microsoft executives such as Jeff Raikes, and other chums, Gates chartered a train to ferry them around the American West on a sightseeing tour of its natural wonders. Fine food was consumed, slavish service provided. “Traveling with Bill is definitely a trip,” one guest said. “There are all these minions, these courtiers, who make sure he never gets bored or testy. Then there are these experts who just appear out of nowhere. It’s like,‘Who’s the best archaeologist to explain this canyon? Bring him to me!’ And the guy just magically appears!” Yet even when Gates was at play, business and the trial were never far from his mind. In the presence of his traveling compan123

JOHN HEILEMANN

ions, Gates mused that Ballmer’s elevation signaled the beginning of an orderly succession; within two or three years, Gates said, he might be ready to step down as CEO. And while Microsoft’s flacks had been whispering all summer long to reporters that Gates wasn’t intimately involved in preparing the company’s legal defense, some of his guests came away with the opposite impression. “He seemed totally in the loop,” a member of the group said. “He was aware of the issues, he’d read all the evidence and read up on the law, the procedures, the timing—everything.” In fact, Gates told at least one person on the train trip that, although no final decision had been made, he expected to appear in court as one of Microsoft’s witnesses. Whether or not Gates took the stand, he knew the government intended to depose him. In Washington, a row had broken out over the conditions under which his questioning would occur. On one front, Microsoft’s lawyers were seeking to limit the deposition to a single eight-hour day. On another, a clutch of media organizations, drawn like moths to the flames that a Gates-Boies face-off would inevitably spark, were demanding the right to attend the interrogation, citing an obscure 1913 statute which seemed to grant the public full access to any depositions in an antitrust case. After a flurry of briefs and an intercession by the Appeals Court, the government was ordered to conduct the Gates deposition (and all others) in private. But on the question of its duration, Judge Jackson had the final word: Boies could take as long as he needed. Ten days before Gates was scheduled to be deposed by the DOJ, he jetted down to Silicon Valley for a dinner hosted by his friend Heidi Roizen. An entrepreneur and a former Apple executive, Roizen had recently signed on as Microsoft’s informal ambassador to the Valley, her assignment being to improve the company’s standing on hostile turf. “I joked with Bill, ‘You know, 124

Pride Before the FALL

you’re going to hire me and the brilliant advice I’m going to have is that you should go to more parties down here, and you’re going to cringe,’ ” Roizen said. To ease Gates’s entrée, she had decided to throw him a party herself, inviting a handful of nonantagonistic Valley types such as Marimba CEO Kim Polese, the veteran software executive Gordon Eubanks, a young venture capitalist named Ted Schlein, and Gates’s old flame Ann Winblad. By all accounts, it was a bizarre soiree. Roizen and her husband, whose home in the ritzy Silicon Valley enclave of Atherton is a 7,000-square-foot spread with trompe l’oeil bookcases, buffalo heads on the walls, and a suit of medieval armor in the stairwell, had arranged for a “rooftop-golf ” tournament in which their guests hit balls from atop the house at makeshift pins set up around the backyard. (The hot tub had been lined with Astro Turf for the occasion.) At dinner, Gates “geeked out,” one participant said, regaling the table with tales of programs he’d written in Microsoft’s early days and speaking admiringly about a book that he’d been reading: Titan, Ron Chernow’s biography of J. D. Rockefeller. Later, the group made an excursion into Roizen’s torchlit wine cellar and played high-tech trivia games until after midnight. (At trivia, unlike at golf, Gates won.) The most surreal moment of all, however, took place early in the evening. The date of Roizen’s dinner party was August 17, which history will record was the day Bill Clinton came clean with Ken Starr—and with the nation—admitting for the first time his dalliance with Monica Lewinsky. When Roizen’s guests arrived at cocktail hour, they eagerly scurried upstairs to watch Clinton’s prime-time speech on the big screen in their hosts’ bedroom. Perched at the edge of the bed, Gates heckled the president mercilessly, with a degree of venom that took some of the others aback. Clinton was a loser, Gates said; his speech was “hot air,” a 125

JOHN HEILEMANN

“pile of crap.” To more than one person, it seemed obvious that Gates blamed Clinton for his antitrust woes. “If I did what he did in my office,” Gates squawked, “the shareholders would throw me out!” On August 27, in a windowless conference room in Microsoft’s Building 8, Gates sat down across from his own Ken Starr for an extended spell of exquisite torture. David Boies had prepared for the event in his own distinctive style. While Gates was swanning around the West via luxe rail, the lawyer was covering much the same ground in an open-topped Jeep on a road-trip vacation with one of his sons. The night before the deposition, Boies blew off an 80-page outline prepared by an associate and watched the movie Tombstone on television instead. Not that Boies was blasé about the task before him. “I expected the Bill Gates I’d be facing would be the same Bill Gates I’d been in a room with that spring,” he said. “The Bill Gates I’d met was smart, tough, and articulate, a very passionate and effective spokesman for his point of view.” Boies grinned. “Needless to say, that was not the Bill Gates who showed up for the deposition.” The Gates who showed up for the videotaped deposition was not only the polar opposite of his public persona, he was a caricature of the polar opposite. He was dour and cantankerous. He was petulant and passive-aggressive, obfuscatory and obscurantist. He was a quibbler, a pedant, an amnesiac, a baby. He was the sort of CEO who would profess not to recall countless emails he’d written and who would claim to be ignorant of his company’s strategies— strategies he himself had masterminded. Who would quarrel stubbornly over the meanings of words like “concern,” “compete,” “definition,” “ask,” and “very.” Who would take five minutes to concede that when another Microsoft executive talked about “pissing on” Java, it was not, as Boies put it, a “code word that means 126

Pride Before the FALL

saying nice things.” Who, when asked who had attended a Microsoft executive-staff meeting, would reply, “Probably members of the executive staff.” For his part, Boies stayed cool. He was patient and persistent, asking certain questions again and again and again, often using precisely the same phrasing, until Gates either coughed up a straight answer or provided Boies an equally valuable display of prevarication. Early on, the lawyer remarked placidly, “I’ve got as much time as I need to finish the examination, sir, and I’m prepared to spend as many days here as I have to.” In the end, that would be three, yielding 20 hours of Bill Gates unplugged. At the end of the first day, Boies phoned Klein. “They’re never going to call him as a witness now,” he said confidently. Klein was incredulous. “Well, that’s not what we’ve heard,” he replied. “We’ve heard they’re telling everybody they’re going to bring him.” “They’re not going to bring him. He’s already said too many things he could never explain on the stand.” At the end of the second day, although Boies hadn’t yet covered all the ground he intended to, he was so delighted with the material he’d already garnered that he seriously considered ending the deposition right there. Gates was headed off for a long weekend on an Alaskan cruise hosted by Paul Allen, and Boies, already perplexed that Gates’s lawyers hadn’t stepped in to curb his behavior, assumed his quarry would return in greater command of himself. But Boies decided to risk it. On the third day, his reward—among others—was one of the deposition’s genuinely priceless exchanges. Handing Gates an email he’d written, Boies offhandedly remarked that at the top of the message Gates had typed “Importance: High.” “No,” Gates said curtly. 127

JOHN HEILEMANN

“No?” “No, I didn’t type that.” Then who did? “A computer.” “A computer. Why did the computer type in ‘High’?” “It’s an attribute of the email.” “And who sets the attribute of the email?” “Usually the sender sets that attribute.” “Who is the sender here, Mr. Gates?” “In this case, it appears I’m the sender.” “Yes. And so you’re the one who set the high designation of importance, right, sir?” “It appears I did that.” Gates’s performance was an unmitigated disaster, and not only in terms of PR. As a piece of evidence, it handed Boies the largest, most gnarled club imaginable with which to bludgeon both Gates and Microsoft as a whole, for the deposition fairly screamed that the dissembling at the company started at the top. It was a point that would not be lost on Judge Jackson. “Here is the guy who is the head of the organization, and his testimony is inherently without credibility,” he said in an interview that appeared after the case was over. “At the start, it makes you skeptical about the rest of the trial. You are saying, if you can’t believe this guy, who else can you believe?” Many observers would blame Gates’s lawyers for the deposition fiasco, but Boies believed it wasn’t that simple. “I’ve said many times that if I had been his attorney I would have stopped the deposition,” Boies said. “But the thing I don’t know, and the thing nobody will know unless I get Bill Neukom more drunk than he should be, is how much of it was the lawyers’ unwillingness to act and how much of it was the client rejecting their absolutely unambiguous instructions.” Not surprisingly, Boies had his suspicions. “You have in Gates 128

Pride Before the FALL

someone who is very smart, very rich, very powerful, and very much in command. He’s a very hard client to say no to.” Very hard—perhaps impossible. Since Microsoft’s birth, Gates had seen himself as its chief legal strategist, Bill Neukom’s presence notwithstanding. Reared in a lawyerly household, schooled by his father in lawyerly thinking, Gates’s lawyerly proclivities shaped the company and the software business profoundly. It was Gates who, in 1976, published a kind of manifesto, “An Open Letter to Hobbyists,” in an early computer newsletter, which asserted for the first time that software, like hardware, was a valuable commodity—it was intellectual property, and as such its creators deserved to be compensated. It was Gates whose grasp of the fine points of contracts had allowed him to outmaneuver IBM in the MS-DOS deal that would be the foundation of Microsoft’s empire. And for all the accolades heaped on Neukom for the outcome of the Apple suit, the greater credit actually belonged to his boss. “Neukom did yeoman’s work, but make no mistake, it was Bill who won the Apple case,” a former Microsoft executive asserted. “He was deeply engaged in the case, he knew the issues, both technical and legal, and he played a huge role in framing them for the court. Hell, he practically wrote our briefs himself.” Among Microsoft executives a commonly repeated conceit was that Gates was not only smarter than his lawyers but had a greater mastery of the law than they did. It was a conceit Gates himself seemed to believe. As the Sherman Act trial drew near, he boned up on antitrust, studying the case law, poring over precedents. “Bill knows the courts to an amazing degree,” a senior Microsoft manager said. “He knows all about the judges—who they are, how they’ve decided in the past, district by district, all over the country. This is not a normal client who just sits across from his lawyers and takes their advice. No way.” 129

JOHN HEILEMANN

Even after the trial was long past, Gates continued to insist, and not unemotionally, that his deposition performance was badly and even maliciously mischaracterized. He answered honestly and precisely, he said. He seemed especially wounded by those who used the video to portray him as forgetful. Again and again, in Rain Man–like cadences, he declared, “I have an excellent memory, a most excellent memory.” He asked rhetorically, “Did I fence with Boies? I plead guilty. Whatever that penalty is should be levied against me: rudeness to Boies in the first degree.” He allowed that his tone of voice was regrettable, as were the camera angles. Yet, at bottom, all this was mere atmospherics, he said, and therefore irrelevant. Microsoft’s lawyers were a mite less sanguine. Compelled by reality (and a concern for their own reputations) to acknowledge the damage done by the Gates tapes, they blamed Judge Jackson, who had issued a pretrial order that led them to believe the tapes would not be shown in court. Had they thought otherwise, Neukom maintained, they would have prepared Gates differently—if only in terms of style. (They would also have made sure the lighting was more flattering.) Boies scoffed at Microsoft’s contention that the company didn’t realize the tapes would be aired: “What, they thought I was taking them for my memory book?” He offered his own theory, which revolved around Gates’s assumption going into the deposition that he would be called as a witness by one side or the other. “He must have thought that if he came as a witness, we wouldn’t be able to introduce the videotape,” Boies said. “And he was probably right about that. If he had been a witness, I don’t think the judge would have let us play it. As a result, he wasn’t really focused on how he looked in the deposition. He was prepared to stonewall. He was prepared to do all kinds of things that you might do if you believed nobody was going to see it.” 130

Pride Before the FALL

Instead, the degree of Gates’s stonewalling was so great, and his evasions were so egregious, that the deposition set in motion a cascade of unintended consequences. Suddenly, Microsoft had little alternative but to keep its most powerful witness off the stand, lest he be humiliated in the futile attempt to defend the indefensible and explain the inexplicable. The DOJ, meanwhile, now had no reason to call Gates, for whatever he said in the courtroom could hardly serve the government’s purposes more effectively than the testimony it already had in the can. The world’s richest man had no date to the dance. And the video was fair game. “It was like the Russian Revolution,” Boies concluded. “Everything had to fall into place just so for it to turn out as it did.”

LIKE THE czars in Petrograd in 1917, Microsoft in the late summer of 1998 could feel the ground shifting beneath its feet. Nearly a year had passed since the DOJ filed the consent-decree case, and in that time, almost everything that could possibly go wrong had. Surrounded by Bolsheviks and Mensheviks, populists and nihilists, the old regime began, for the first time, to betray a hint of what Gates, on a carefree day, would have called “concern,” but that others might properly have described as panic. With the government’s new evidence and witnesses from Apple, Intel, Intuit, and the rest, what had once looked to Microsoft like a simple tying case was taking on the countenance of something far bigger—and far uglier. “They converted a Sherman Act case into a business tort trial,” Neukom said later. “It was clear they were going to sell the judge and the public an image of a company that couldn’t be trusted and ought to be penalized.” 131

JOHN HEILEMANN

Trying to roll back the tide, Microsoft flooded Judge Jackson’s chambers with pretrial motions—nine of them in September and October. The motions’ themes cried out from their titles: “Motion to Limit Issues for Trial”; “Arguments for Excluding Extraneous Last-Minute Issues from Trial”; “Motion for a Continuance Needed to Address Testimony of Plaintiffs’ New Trial Witnesses”; and so on. The case the government had filed in May, Microsoft argued, was all about browsers and a tad about Java. Broadening it beyond those issues was illegitimate, unfair, and a sign that the DOJ realized the Appeals Court’s decision had “eviscerated” the core of its original complaint. At the very least, Microsoft said, the company needed more time to build a thorough defense. The DOJ’s response was swift, emphatic, and gently mocking. In one of its reply briefs, the government wrote: “To the limited extent that plaintiffs offer evidence adduced in discovery concerning events and transactions not strictly limited to browsers and Java, those events and transactions (a) directly evidence monopoly power and barriers to entry, which issues are (of course) part of plaintiffs’ complaints, and of every Sherman Act Section 2 case; (b) demonstrate Microsoft’s intent to monopolize, which issue is (of course) also part of plaintiffs’ complaints, and of every Sherman Act Section 2 attempt case: and/or (c) demonstrate a pattern that is relevant to understanding and establishing Microsoft’s conduct with respect to browsers and Java.” The DOJ’s Jeff Blattner put it more colorfully: “We haven’t broadened the case—we’ve broadened the evidence. In a murder case, you refer to the body in the filing. But at trial you bring out the bloody glove, the bloody shoes, the murder weapon.” Right up to the eve of the trial, the back-and-forth between the sides continued unabated. But with every volley, the referee remained consistent. Time and again, in written orders and pretrial hearings, Judge Jackson informed Microsoft that the trial 132

Pride Before the FALL

would be broad, and that it would focus on one large question: whether the company had “maintained its operating-system monopoly through exclusionary and predatory conduct.” As Jackson put it matter-of-factly to Neukom and his team, “My view of the case is not as narrow as yours.” And so it was that, on the morning of October 19, the courtroom phase of the Microsoft case began. For three solid hours, David Boies, slightly stoned on antihistamines and armed with only a few scribbled notes on one side of a manila folder, held the room pretty much in the palm of his hand. There was nothing soaring about his oratory, nothing ornate or mellifluous. Instead, the power of his opening lay in the narrative he unfurled and the evidence he unveiled in support of it. The story he told was straightforward: faced with the threat posed by the browser and Java, Microsoft had tried first to coerce Netscape into not competing with it; after being rebuffed, it had put the screws to the entire industry in an effort to destroy the start-up and keep its grip on the desktop. As he walked Judge Jackson through the government’s claims, Boies displayed on the courtroom monitors a sequence of documents that painted Gates and Microsoft as the most rapacious (and unsubtle) of monopolists. There was an AOL email describing an offer from Microsoft’s CEO: “Gates delivered a characteristically blunt query: how much do we need to pay you to screw Netscape? (‘This is your lucky day’).” There was a memo from a HewlettPackard manager complaining about Microsoft’s refusal to allow HP to change the first screen on its machines: “If we had a choice of another supplier, based on your actions, I assure you that you would not be our supplier of choice.” And, the pièce de résistance, there was Gates unplugged. On four different occasions, electrifying the courtroom, Boies played video excerpts from the deposition, each time juxtaposing 133

JOHN HEILEMANN

them with contemporaneous documents that revealed Gates, to put it gently, as less than totally candid. Here was Microsoft’s CEO on screen, denying knowledge of the June 1995 meeting—saying, indeed, “I had no sense of what Netscape was doing” at the time. And here was an email from Gates to Maritz and other Microsoft brass a few weeks before the meeting: “I think there is a very powerful deal of some kind we can do with Netscape. . . . We could even pay them money as part of the deal, buying some piece of them or something. I would really like to see something like this happen!!” When Boies was done and the court gaveled out of session, Neukom appeared before a gaggle of reporters on the courthouse steps. Calmly but adamantly, he denounced Boies’s tactics as hollow theatrics, accusing him of using “loose rhetoric and out-ofcontext snippets” to disguise the fact that he had no case and adding that “none of these snippets, none of this rhetoric, even approaches proof of anticompetitive conduct.” The next day, Klein jetted down to Scottsdale, Arizona. On the one-year anniversary of the filing of the consent-decree case, he was scheduled to give a keynote address at Agenda, the conference at which Gates first heard the news that his government was suing him. The speech Klein would deliver was a high-minded affair, a discussion of regulation, market failure, and “the case for government involvement in the computer industry.” He would offer few comments on the trial, and those he did offer were as dry and arid as the high-desert air. Klein knew better than anyone that the government had a long row to hoe. He expected Microsoft to mount an awesome defense. And he knew that one good day in court was no cause for chest-thumping. Still, that one good day had been a very good day. In the back of the hall, Klein whispered to me, “I am one happy camper. We really kicked their butts.” 134

Chapter Five

IN THE DOCK

THE E. BARRETT PRETTYMAN federal courthouse squatted at the northwest edge of Capitol Hill and bore all the hallmarks of the neo-brutalist architectural style that came into vogue in Washington in the 1950s. The six-story facade was gray and granite and imposingly free of inspiration. Inside, the walls were of marble— light gray streaked with darker gray. Down in the basement, a bare-bones cafeteria served food, also gray, to the several hundred maintenance people and clerks who worked in the building. (The judges tended to take their meals elsewhere—in Judge Jackson’s case, at his club, the Metropolitan.) And yet, however mundane its appearance, the courthouse had provided the setting for more historic legal confrontations than any place save the Supreme Court 135

JOHN HEILEMANN

itself. The Watergate trials, the arguments over the Pentagon Papers, the Whitewater/Lewinsky grand jury hearings—all were conducted here, at the corner of Constitution Avenue and Third Street, NW. The Microsoft trial took place on the second fl oor, in Courtroom No. 2, a small space with fi ve rows of hard wooden pews in the back providing seats for just 100 spectators. Given the level of interest among the press, Judge Jackson had been urged to hear the case in the large ceremonial courtroom upstairs. But Courtroom 2 was where Judge John J. Sirica had tried the Watergate defendants, and Jackson told his clerks, “This case ain’t any bigger than that one.”In addition to being relatively cramped, the courtroom was windowless, airless, and charmless, bathed in fl uorescent light and perfumed with the scent of stale arguments and fresh acrimony. In the absence of a jury, the jury box was occupied by sketch artists, who often surveyed the scene through special eyewear that resembled the night-vision goggles worn by Navy SEALs and Green Berets. The lawyers from each side huddled around tables at Jackson’s feet. Based strictly on appearances, it wasn’t hard to see why oddsmakers favored Microsoft’s team, which was composed of men in slick suits with hard eyes and harder hair. The government’s table, by contrast, had a slightly ragtag look to it, the clothes off-therack, the coiffures pure Supercuts. Even Boies, with his mail-order apparel and scuffed black sneakers, could easily have passed for a GS-11 from the Department of Agriculture. As much as the government’s case had widened, its sine qua non remained Netscape, so the fi rst witness Boies called was Jim Barksdale. Dressed in a gray suit, a white shirt, and a red tie, with a pair of reading glasses perched at the end of his nose, Barksdale displayed no shortage of gravitas. His resume included stints as a 136

Pride Before the FALL

salesman for IBM, chief operating offi cer of Federal Express, and president of McCaw Cellular Communications (and briefl y president of AT&T Wireless Services, as McCaw was called after AT&T acquired it in 1994). At 55, he had a ruddy complexion that reddened appreciably when he was annoyed or incensed—which he would be quite a lot in the days ahead. The job of questioning him fell to Microsoft’s lead litigator, John Warden, a Sullivan & Cromwell partner with great experience in antitrust. In 1979, Warden had won the Appeals Court decision in Berkey Photo v. Kodak, a seminal ruling which held that a“ny fi rm, even a monopolist, may generally bring its products to market whenever and however it chooses. ”A rotund man with dark-framed glasses, Warden, who had grown up in Evansville, Indiana, spoke in a deep Southern drawl that rose up from his thorax like a foghorn booming from the bottom of a well. (In private, Barksdale and Netscape’s attorneys nicknamed him “Boomer.”) Between the lawyer and the witness, a Mississippi native, there were times when, if you closed your eyes, you could imagine you were in a county courthouse far below the Mason-Dixon line. While Warden mangled the names of Netscape’s multiethnic employees, Barksdale peppered his answers with downhomeisms such as W “ e put a little Kentucky windage on it”and “That irritated the stew out of me.” Barksdale’s written testimony ran to 126 pages, and Warden appeared intent on refuting every one of its 251 paragraphs. No assertion was too trivial to contest, no detail too minute to challenge. Yet the matter that drew the most sustained re fi was Barksdale’s account of the June 1995 meeting. In his direct written testimony, Barksdale had stated, I“ have never been in a [business] meeting in my 33-year business career in which a competitor had so blatantly implied that we should either stop competing with it 137

JOHN HEILEMANN

or the competitor would kill us. In all my years in business, I have never heard nor experienced such an explicit proposal to divide markets.” Warden posited that, far from being a feared aggressor, Microsoft had been invited—no, begged—to do a deal by Netscape. In support of this assertion, the lawyer produced an email from Jim Clark to the senior Microsoft executive Brad Silverberg, sent at 3:01 a.m. on December 29, 1994. W “ e have never planned to compete with you,”Clark had written. W “ e want to make this company a success, but not at Microsoft’s expense. We’d like to work with you. Working together could be in your selfinterest as well as ours. Depending on the interest level, you might take an equity position in Netscape, with the ability to expand the position later.” Barksdale reeled. At the time the email was sent, he had been a few days away from taking over as Netscape’s CEO; he had had no idea what Clark was up to. In preparing for the trial, Barksdale had learned from Clark’s deposition that there had been some latenight missive, but Clark hadn’t mentioned, as Barksdale put it later, t“hat he was basically trying to sell the company.”Now Barksdale told the court that Clark had written the email in a m “ oment of weakness.”He said Clark had been freelancing, that his note never represented the company’s offi cial or unoffi cial strategy. But as Barksdale stared at the email on the courtroom monitor, all he could think to himself was, W “ ell, goddamn.” Warden asked Barksdale if Clark enjoyed a“ public reputation for veracity.” Long pause. I“ couldn’t comment on that,”Barksdale said. “I don’t know.” “Do you regard him as a truthful man?” Even longer pause. I“ regard him as a salesman.” 138

Pride Before the FALL

Throughout the Microsoft trial there would be moments that revealed what the journalist Joseph Nocera called t“he secret history of the software industry.”This was one of them. To a Silicon Valley outsider, Barksdale’s disavowals of Clark could only seem incredible—a prime example of Kentucky windage. Clark was Netscape’s chairman, after all, the only man above Barksdale on the company’s organizational chart. But the truth of it was, Barksdale had never taken orders from Clark. When Clark and John Doerr fi rst approached him about running Netscape, Barksdale was one of the most sought-after properties in the business world; ironically, another of his suitors was Gates, who was trying to recruit him to be Microsoft’s COO. Barksdale had heard rumors about Clark’s behavior as the chairman of SGI: that he was meddlesome, that he was mercurial, that he was a borderline maniac. Before agreeing to join Netscape, Barksdale received assurances from Doerr that he would have complete freedom to ignore Clark’s advice, and an explicit agreement that Clark would step down as chairman at any point if Barksdale asked him to. Clark’s email had a secret history of its own. In the fall of 1994, Netscape had been divided internally about its posture toward Microsoft, which was still fumbling around on the Internet and was known to be looking to license a browser. One camp was led by Andreessen, whose position, Mike Homer recalled, boiled down to: K “ eep away from the fuckers; they’re evil.”But others, the most infl uential of whom was Doerr, saw merit, however transitory, in doing business with Microsoft. “Doerr wanted us to license our technology to them because that would get their endorsement and then everyone would buy from us,”Clark said later. “His attitude was that he knew that Microsoft would be a terribly big enemy, so why not try to fool them into believing we were 139

JOHN HEILEMANN

friends?”Reluctantly, Clark sided with Doerr, calling Brad Silverberg more than once and even sending a team to Redmond in December to pitch Microsoft on adopting the Navigator code. W “ e were hoping to be disarming enough that we could get them to distribute our browser for a while, and then the genie would get out of the bottle,”said Ram Shriram, one of the Netscape executives who made the trip. “This wasn’t a m ‘ oment of weakness.’ It was a perfectly logical way to think.” Yet no matter how premeditated or purposeful Clark’s entreaties were, Microsoft’s suggestion that they set the stage for the June 1995 meeting ignored how much had changed in the intervening months. At the end of 1994, Netscape’s sales were zero, its capital was evaporating, and it was facing a potentially crushing intellectual-property lawsuit by the University of Illinois (where Andreessen had studied and led the browser-building team). Homer recalled, “The scary shit was upon us—that period where the burn rate’s high and the product’s coming out and the university’s suing and you just don’t know what’s next. It’s like the beach at Normandy—the moment things are worst.”But six months later, everything was different. In a heartbeat, Netscape had become the fastest-growing software company in history, Andreessen was on his way to stardom, and the company’s board had just voted, unbeknownst to Microsoft, to launch the IPO that would ignite the Internet boom. None of this nuance mattered to Warden. The next day, he returned again to the meeting and hammered away at Andreessen’s written account of what had transpired: “These notes of his aren’t verbatim, are they?”Warden asked Barksdale. The lawyer then took aim at a chronology of events supplied to the DOJ a month afterward by Reback, which failed to mention the s“tunning proposal to divide markets”that Barksdale was now alleging. I“f you 140

Pride Before the FALL

look at the whole record of events up to the June 21, 1995, meeting,”Warden bellowed, t“he only fair conclusion that can be reached is that Marc Andreessen invented or imagined a proposal to divide markets and that you and your company signed on to that invention or imaginary concoction in order to assist in the prosecution of this lawsuit!” I“ absolutely disagree,”Barksdale said sternly, his face turning crimson. “I was in the meeting. I know what I know. I was a witness to it, and you weren’t.” Out in the Valley, Reback heard about Warden’s argument and was stunned. Whatever the chronology said, Reback knew that he’d phoned Klein and requested a CID the day after the June 1995 meeting, that Klein had complied hours later, and that Reback had sent in Andreessen’s notes the following day. Digging through his records, Reback found a copy of the CID and faxed it off to Klein. (Apparently, the DOJ’s copy had been buried away with the paperwork from the fruitless Microsoft Network investigation that had been going on at the time.) Over the weekend, the DOJ turned the documents over to Microsoft. The next Monday morning, Warden resumed with a new line of attack: given the immediacy of Reback’s request and the rapidity of the DOJ’s response, didn’t it all smack of a conspiracy? “Isn’t it a fact, Mr. Barksdale,”Boomer boomed, t“hat the June 21, 1995, meeting was held for the purpose of creating something that could be called a record and delivered to the Department of Justice to spur them on to action against Microsoft?” Barksdale: “That’s absurd.” Afterward, on the courthouse steps, Microsoft’s foes gleefully mocked Warden’s gambit. Squinting into a warm October sun, Netscape’s Christine Varney quipped, W “ e’ve gone from Alice in Wonderland to Oliver Stone’s JFK.” 141

JOHN HEILEMANN

I“n my experience as a litigator,”Boies chimed in, t“here are few signs more encouraging than when the opposition starts saying, ‘They set us up.’ ”

BARKSDALE HAD expected to testify for two days; he spent a week on the stand. When it was over, Microsoft had scored on a number of fronts. It had got him to admit that he hadn’t actually heard anyone from Microsoft speak of cutting off Netscape’s air supply; in fact, Barksdale allowed that he’d fi rst come across the phrase in a biography of Larry Ellison—an admission that pointed up that much of the government’s evidence was hearsay and that Microsoft wasn’t the only software outfi t given to rough talk or hyperbolic metaphor. More signifi cant, Barksdale acknowledged that more than 26 million copies of Navigator had been downloaded over the Net in the fi rst eight months of the year, and that the company planned to distribute another 159 million copies in the next 12. If that was true, Warden asked, how could the DOJ claim that Microsoft had foreclosed Netscape’s distribution channels? If people could still f“reely choose at no cost Netscape’s Webbrowsing software,”as Warden put it, how could consumers possibly have been harmed? Yet the overarching impression conveyed by Microsoft’s defense was one of indiscriminate ailing. fl In the space of a few days, Warden had argued that Microsoft couldn’t be said to have destroyed Netscape because Netscape was alive and well—but if Netscape was on the ropes, it was the company’s own fault. He had argued that Microsoft hadn’t acted like a bully—but if it had, that was acceptable, because everyone else in the industry did it. He had argued that the June 1995 meeting was either an elaborate 142

Pride Before the FALL

frame-up, or an elaborate ction, fi or a cordial meeting between potential allies, or the wary circling of potential rivals. Lawyers call this a“rguing in the alternative.”Generally, it is not a compliment. The government’s next witness was David Colburn of AOL. In the industry, Colburn had a reputation as a legendary hard-ass. A stoop-shouldered tough guy with a runaway ve-o’clock fi shadow and an ineradicable smirk, he was AOL’s negotiator, its closer, the man sent into every big deal at nut-cutting time. In March 1996, Colburn had engineered the browser war’s most famous double cross, in which AOL agreed to license Navigator one day, only to announce the very next morning that it had chosen IE as its default browser, under terms that rendered the Netscape deal worthless. At great length, Warden attempted to induce Colburn to admit that AOL had done this because Microsoft’s browser was superior. At even greater length, Colburn insisted that it just wasn’t so; that, technically speaking, the products were a wash; and that the decisive factor was Microsoft’s ability to give AOL’s icon prime placement on the Windows desktop. When Warden tired of this colloquy, he turned his attention to a series of emails in late 1995 between AOL’s CEO, Steve Case, and Barksdale. In one of them, Barksdale compared their companies to the Allied powers that teamed up to defeat the Nazis. Addressing Case as “Franklin D”and referring to himself as “Joseph Stalin” (though he added, “I don’t like playing this part. He was not very PC. From now on I want to be Winston C”), Barksdale argued that AOL and Netscape should join forces to take on Microsoft. Case agreed, proposing a g“rand alliance”that might include Sun, suggesting that members of the alliance not invade one another’s primary markets, and endorsing an idea of Andreessen’s—that “we can use our unique respective strengths to go kick the shit out of the Beast from Redmond that wants to see us both dead.” 143

JOHN HEILEMANN

Warden asked Colburn,A “ market-division proposal, isn’t that correct?” I“ wouldn’t call it that,”Colburn deadpanned. W “ hat it seemed like to me was a strategic relationship.” Once again, Warden was saying that everyone does it. To which Boies, on the courthouse steps, responded, “The antitrust rules make a big distinction between what a monopolist can do and what everyone else can do.”The difference, Boies said, was that n “ either Netscape nor AOL had monopoly power.” Apple’s Avie Tevanian, by all accounts one of the best minds in software, proved a lethal witness. For three weeks, Judge Jackson had absorbed the assertions and evasions of a CEO, a dealmaker, and a parade of lawyers who, when it came down to it, knew next to nothing about the raw material at the heart of the case—code. Jackson was ready to hear Tevanian’s allegations that Microsoft had tried to divide the multimedia market with Apple; had pressured OEMs (and Compaq in particular) to drop QuickTime, even when Apple was letting them bundle it for free; and had wielded the threat of canceling Mac Offi ce to blackmail Apple into adopting IE as its default browser. But what the judge wanted most from the witness, it turned out, was a software tutorial. Tevanian was only too happy to oblige. The lawyer cross-examining him was S&C’s Ted Edelman, who, like a tag-team wrestler, had stepped into the ring to relieve a fatigued John Warden. Edelman, a clever young man with serrated edges, realized he was in trouble early in Tevanian’s second day on the stand, when, without warning, Jackson started questioning the witness himself. W “ hat is a codec?”the judge inquired tentatively. Soon the proceeding was spinning out of Edelman’s control. Every time he asked a question, Tevanian would turn and address his answer to the judge. When Edelman attempted to pin Tevanian 144

Pride Before the FALL

down on one point, Jackson slapped the lawyer around: M “ r. Edelman, you keep mischaracterizing what he’s told you. It’s misleading language, and it’s not acceptable to me.”Eventually, Edelman found himself cut out of the loop completely, as Jackson and Tevanian engaged in an extended—and, for Microsoft, damaging—dialogue on the question of tying. F “ rom a technological perspective,”Jackson asked, uttering a phrase that must have felt like Swahili as it left his lips, w “ hat benefi t, if any, is there, do you believe, in integrating a browser as distinguished from bundling it with an operating system?” Tevanian told the judge that his people at Apple had done an experiment a year earlier to test that very question. They wanted to see if it made sense to integrate a browser into the Macintosh OS. “In our evaluation, when we did that, we decided not to pursue the project and productize it,”Tevanian explained. “We determined that it caused confusion for some users in some cases. We determined it caused extra overhead when it wasn’t necessary. And there were often simpler ways to accomplish things.” W “ hat you’re telling me is you don’t think there is any benefi t, and there may be detriment, to the ultimate consumer, the user?” Jackson asked. “That’s right,”said Tevanian. W “ e elected to cancel the project because we didn’t think it was a benefi t.” O “ kay,”Jackson said. M “ y fi nal question: Is it possible for you to extricate your browser from the operating system without otherwise impairing the operation of the system?” Y “ es—other than that you can’t browse the Web,”replied Tevanian. At which point Jackson—memories of the consentdecree case surely galloping across his cerebrum—nodded gravely, jotted a note, and then shot a glare toward the defense table. 145

JOHN HEILEMANN

The Microsoft team wore masks of misery. By the time Tevanian exited stage left, the defense was showing its fi rst signs of disarray, with Neukom calling courtroom huddles during breaks and improvising tactics on the fl y. After the case was over, Microsoft’s lawyers and its PR people would agree on one thing, at least: Tevanian had been the government’s best witness, his turn on the stand, the moment when it rst fi really hit home with them that Microsoft might lose. The DOJ was well-pleased with Tevanian, and with Barksdale and Colburn too, but Boies had no time for self-congratulation. Next on the stand would be Steve McGeady. Intel had declined to let McGeady submit written testimony, and thus he would be the only government witness whom Boies would examine directly. He was, as Klein put it, t“he one wild card in our deck.”And while the spectacle of an Intel executive airing the Wintel alliance’s soiled laundry in public would have been wild enough on its own, the drama was heightened immeasurably by one stark reality: nobody—literally, nobody—knew what McGeady was going to say.

THERE WERE two salient facts about Steve McGeady. One was that he was exceedingly intelligent. The other was that he detested Microsoft. Whether these facts were connected was a moot point, but they had unquestionably defi ned his career at Intel. McGeady had been a Reed College Unix hacker who studied physics and philosophy, never graduated, and joined Intel in 1985, at age 27. Though few people are aware of it, Intel employs several thousand software engineers, most of whom write code which is embedded in its microchips. (As Andy Grove liked to say, S“ ilicon 146

Pride Before the FALL

is frozen software.”) It was from the Intel software crowd that McGeady emerged as a rising star. In 1991, he became one of the founders of the Intel Architecture Labs, an operation in Hillsboro, Oregon, that Grove hoped to turn into an R&D facility for the entire PC industry. Yet because many of its projects involved software, IAL was in constant confl ict with Microsoft; indeed, the lab was a hotbed of what McGeady called a“ whole subculture of Microsoft-haters,”of whom he was perhaps the most acerbic. Not long after IAL’s inception, he was asked to give a speech on t“he software environment”at a high-level strategy meeting at Intel headquarters in Santa Clara. After listening to Grove describe Intel and Microsoft as fellow travelers and another senior exective talk about being “hungry for a new relationship”with Redmond, McGeady opened his speech by saying, I“’ll tell you, when I think of hungry fellow travelers, I think of the Donner party.” In the early 1990s, McGeady was involved in a series of increasingly bitter run-ins with Microsoft. Matters came to a head in 1995, when a double-pronged rift pushed the two companies to the brink of open war. One prong was NSP, which was a layer of multimedia software developed by IAL that Microsoft opposed; the other was Intel’s support for Netscape and Java, of which McGeady, Intel’s chief Internet evangelist, was a primary champion. On both fronts, McGeady believed not only that Grove had buckled under pressure from Gates, but that IAL had been g“elded”in the process. At that point, McGeady retreated into selfimposed exile, heading off to spend a year at the MIT Media Lab. On returning, he was put in charge of Intel’s Internet health care initiative—a project championed by Grove, who had been diagnosed with prostate cancer. McGeady’s career prospects were fi ne, but the wounds of the past remained open and raw. He told me, “I really think Microsoft is a fucking evil corporation; they’re way 147

JOHN HEILEMANN

out of line in all this.”So when the chance to testify presented itself, McGeady jumped fi rst and asked questions later. From the moment his deposition took place in August, McGeady was q“uarantined,”as he put it, from the rest of Intel. He spoke to no one about the case except Intel lawyers. He had no idea what Grove was thinking, no idea what the company was saying to the DOJ. (“Nobody even told me I was on the witness list; I read about it in my underwear in The New York Times.”) McGeady assumed Intel was cooperating, at least tacitly, because it hadn’t fought the CIDs or tried to block his deposition. At the same time, however, he had been informed by Intel’s lawyers that he wouldn’t be submitting his direct testimony in writing. Also, the company attorneys were being squirrelly about whether they represented him personally or only in his capacity as an Intel executive. Then, in early October, McGeady learned that Microsoft was now planning to put him through a second deposition, and that the men from Sullivan & Cromwell were demanding his personnel le, fi including his performance reviews and salary records. Things, it seemed, were about to get nasty. The time had come to get his own lawyer. One of the rst fi pieces of information McGeady got from his new attorney was that the DOJ had asked repeatedly to interview him—requests that Intel’s lawyers had not seen fi t to convey. In the absence of written testimony from McGeady, the government wanted a clearer sense than could be divined from his deposition of what he’d be willing to say on the stand. Sure, McGeady said. A DOJ lawyer was coming to Oregon to attend the deposition that Microsoft had arranged, on October 7. McGeady would meet him the morning after, whether or not Intel approved. Disapproval would be too anemic a word for Intel’s reaction. With its own FTC investigation rumbling along, and the health of its relationship with Microsoft hanging in the balance, Intel was 148

Pride Before the FALL

pirouetting on a very thin tightrope. Grove had assured both sides in the case that the company was steadfastly neutral. He had assured Gates, especially, that Intel was doing nothing willingly to assist the government—a claim belied by the fact that Detkin was feeding information to the DOJ covertly through Creighton and Reback. In any event, keeping up appearances was essential here—and now McGeady was about to make a great big mess. At 7 A.M. on the day of his interview with the DOJ, McGeady’s phone rings, waking him, and the voice of his Intel lawyer, Jim Murray, pipes through the receiver. Don’t talk to the government today, Murray tells McGeady; we want to maintain neutrality. “Nobody ever asked me about that,”McGeady replies. W “ e don’t have to ask you. You’re an employee.” F “ uck that. I’m going.” A half hour later, while McGeady is in the shower, the phone rings again. This time it’s Detkin, in a state of barely controlled fury. Y “ ou’re violating Intel confi dences!”Detkin yells. I“f you do this, it’s a reable fi offense!” Detkin doesn’t know Steve McGeady very well; he doesn’t know that the best way to ensure that he’ll do something is to tell him not to; he doesn’t know that McGeady has, in his own words, a“ real severe authority problem.”So McGeady’s reaction is unexpected. P “ ound sand, Peter. This is the fucking US government, OK? Just because you think you want to be seen as neutral doesn’t mean I do. This is my reputation and my morality. So fuck you.” As McGeady arrives at his lawyer’s offi ce for the meeting with the DOJ, the phone rings yet again. Apparently, the situation has escalated to DefCon 3: Grove’s second-in-command, Craig Barrett, is on the line now. Barrett’s message is the same, and emphatically stated: don’t do this. 149

JOHN HEILEMANN

S“ orry, Craig,”McGeady says, I“f the government doesn’t want to talk to me, I won’t talk. But if they do, I will.” Hanging up the phone, McGeady walks into the conference room, shakes hands with the DOJ attorney, sits down, and starts to chat. One more time, a phone call arrives, but this time it’s not for McGeady. It’s for the government lawyer—Joel Klein is holding. Not three minutes later, the lawyer returns, apologizes, gathers his things, and leaves. There it was: Intel had phoned Klein and twisted the screws. Boies recalled, “They said very bluntly, If you insist on meeting with McGeady, then you’re going to make us hostile, you’re going to make us an enemy. We’ve been neutral up till now, but if you do this, we are not going to be neutral anymore.” The turn of events was profoundly unsettling for McGeady, who feared that his company was cutting him loose; he was ever more certain he was going to be red. fi But the situation was hardly more comfortable for the DOJ. “First we can’t get a written statement from the guy,”Boies said. “Then we can’t meet with him before we name him as a witness. Then we can’t meet him before or after his depositions. I put that son of a bitch on the stand without ever having talked to him!”

STEVE MCGEADY testified for three days in the middle of November, dressed in a dark suit and a patterned tie, wearing eyeglasses, a thick gray-brown beard, and an implacable expression. He sat motionless in the witness box and proceeded to pull back the curtain on the most lucrative partnership in the history of modern business. Before Boies began his questioning, he performed what was 150

Pride Before the FALL

fast becoming a kind of ritual: the screening of excerpts from the Gates deposition. On the courtroom monitors, Boies asked Microsoft’s CEO, D “ id you ever express any concern to anyone at Intel . . . concerning Intel’s Internet software work?”After an interminable pause, Gates replied, I“ don’t think Intel ever did any Internet software work.” Boies: And “ if they did, I take it that it’s your testimony that no one ever told you about it?” Gates: “That’s right.” Boies: D “ id you or others on behalf of Microsoft tell Intel that Microsoft would hold up support for Intel’s microprocessors if Intel did not cooperate with Microsoft?” Gates: “No.” Boies: “Did you, Mr. Gates, ever yourself try to get Intel to reduce its support of Netscape?” Gates: I“’m not aware of any work that Intel did in supporting Netscape.” It would take McGeady roughly two hours to make Gates out to be a liar on all this and more. In response to Boies’s questions, McGeady told the court that Gates had been briefed many times on Intel’s Internet software development—once, at least, by McGeady himself. Gates “became quite enraged,”McGeady said, about t“he software engineers in IAL who were, in his view, competing with Microsoft.”McGeady told the court that at one 1995 meeting, “Bill made it very clear that Microsoft would not support our next processor offerings if we did not get alignment”on platform software—a threat that McGeady called “both credible and fairly terrifying.”He told the court how Intel’s NSP had caused a c“onniption”at Microsoft, which saw the software as an invasion of its turf. He told how Intel’s support of Java had been, in the words of one email, a s“how stopper.”And he testifi ed that “it was 151

JOHN HEILEMANN

Microsoft’s desire that we essentially clear and get approval for our software programs from them before proceeding.” McGeady also told a story about Paul Maritz—a story that gave credence to one of the trial’s least consequential but most highly publicized claims. In the fall of 1995, McGeady said, he had attended a meeting where Maritz laid out for a handful of Intel executives Microsoft’s strategy for defeating their c“ommon enemy,”Netscape. The strategy had three elements: Microsoft would e“mbrace, extend, and extinguish”open Internet standards; it would fi ght Netscape “with both arms,”meaning both its OS and its applications; and, Maritz fatefully declared, it would c“ut off Netscape’s air supply”by giving away IE for free. McGeady’s testimony was buttressed by an assortment of astonishing documents, the most explosive of which was a memo he had written in the aftermath of an August 1995 meeting attended by both rms’ fi CEOs. Bearing the title S“ympathy for the Devil,”the memo said, B “ ill Gates told Intel CEO Andy Grove to shut down the Intel Architecture Labs. Gates didn’t want IAL’s 750 engineers interfering with his plans for dominating the PC industry.”More damning still were a slew of Gates’s own emails, which Boies entered into evidence in rapid-fi re succession. W “ e are trying to convince them to basically not ship NSP,”Gates wrote after a dinner with Grove in July 1995. W “ e are the software company here and we will not have any kind of equal relationship with Intel on software.”A few months later, after Microsoft had pressed computer makers aggressively to reject Intel’s multimedia software, Gates wrote, I“ntel feels we have all the OEMs on hold with our NSP chill . . . This is good news because it means OEMs are listening to us.” By the end of his rst fi day on the stand, McGeady had made so many incendiary allegations that Boies feared the Intel brass would intercede—either pressing him to clam up or pulling him off alto152

Pride Before the FALL

gether. By the end of the second day, his testimony had taken on the avor fl of a software-world Scenes from a Marriage. The IntelMicrosoft coupling had always seemed a union of equals. But in the picture McGeady painted, Microsoft clearly wore the pants in the family, while Intel played the part of the long-suffering spouse, sticking with the relationship because, as one Intel memo put it, d“ ivorce will be bad for the kids.”(“The kids,”McGeady explained, were the OEMs and other industry players.) The S&C lawyer charged with McGeady’s cross, Steve Holley, knew he faced an uphill slog. He started off well enough, using the depositions of McGeady’s immediate superior and other Intel executives, as well as a raft of emails, to sketch a coherent counterexplanation as to why Microsoft had torpedoed NSP: instead of being tailored for the forthcoming Windows 95, Intel had targeted the technology at Windows 3.1. I“n retrospect, a mistake,”McGeady admitted. But Holley ran into trouble with his next move, a venomous and voluminous attack on McGeady’s credibility. McGeady was arrogant. McGeady was biased. McGeady was, in the words of another Intel executive in an email Holley brandished, a p “ rima donna.”(“I’ve been called far worse,”McGeady said with a grin.) He was also a fabulist and a fabricator, argued Holley. Harking back to Barksdale’s testimony, the lawyer accused McGeady of cribbing the air-supply quote from a book on Larry Ellison. He accused McGeady of being in league with Jim Clark. He even accused him of being rude about his boss, citing an email in which McGeady referred to Intel’s chairman as m “ ad-dog Grove.” W “ hat is the point of this?”Judge Jackson interrupted. Are “ you just trying to embarrass him?”In an act of perjury as great as any ever committed in Courtroom No. 2, Holley said no. Still, Jackson was curious about Steve McGeady. He had a question of his own, a question that everyone in the courtroom was, in 153

JOHN HEILEMANN

fact, dying to ask. When the cross-examination ended, Jackson said, M “ r. McGeady, to what extent do you understand that you are a spokesman for Intel Corporation here as distinguished from speaking for yourself?”As ears pricked up and eyes widened at the lawyers’ tables and in the spectators’ pews, McGeady hemmed and hawed. Jackson tried again:Are “ you here with the blessing of your CEO?” “‘Blessing’ would be a strong word,”McGeady mumbled. I“’m not trying to be evasive, Your Honor. It’s a diffi cult question . . . . I believe that in certain circumstances Dr. Grove and other executives might share some of my opinions. In some cases they would share them privately. They may not agree with my expression of them.” Are “ you aware of any instances which are actually at variance with what you understand to be corporate policy?”Jackson asked. P “ erhaps only the most dramatic, Your Honor,”McGeady answered. “It’s important to Intel to maintain a positive working relationship with Microsoft. My appearance here, obviously, creates a problem there.” And with that, McGeady got up and went back to Oregon. Eight weeks later, the moment that fi lled him with more trepidation than any court appearance ever could nally fi arrived. At an annual black-tie dinner for Intel’s senior executives, McGeady came face-to-face, for the rst fi time since being quarantined the previous summer, with Andy Grove. Clutching a cocktail, surrounded by a boisterous crowd, McGeady made small talk for a few minutes and then gingerly tiptoed into the danger zone: “Hey, Andy, um, about that other thing, you know, no hard feelings, I hope . . .” Grove’s eyes twinkled. W “ ell,”he replied in his pronounced Hungarian accent, “I would have done it a different way. But I guess it worked out OK in the end.” 154

Pride Before the FALL

■ ■ ■

FOR SHEER drama, nothing in the rest of the government’s case approached the quality of its rst fi four witnesses; the next two months were up and down. John Soyring of IBM rehashed the controversies surrounding OS/2. James Gosling of Sun, a long-haired, pot-bellied, bushy-bearded Buddha gure fi with so many forms of repetitive stress injury he was offi cially handicapped in the state of California, testifi ed with such low-key candor that his testimony kicked up little dust. Edward Felten, a Princeton professor, contended that he’d devised a small software program that could remove IE from Windows 98—something Microsoft claimed was impossible. William Harris, the new CEO of Intuit, stumbled badly on the stand by wandering out of the land of fact and into the realm of speculation, and by offering half-cooked ideas about remedies, which allowed Microsoft’s lawyers to suggest, not without reason, that he was calling for a National Operating System Commission. Finally, an MIT professor named Franklin Fisher, who was a giant in the eld fi of antitrust economics and had worked with Boies on the IBM case, argued that Microsoft had created high barriers to entry in the operating-system and browser markets, and that the company had the ability, even if it didn’t use it, to raise prices almost at will—two key tests of monopoly power. Fisher, 64 years old and terminally rumpled, squared off against the slickest and savviest of S&C’s lawyers, an Armani-clad young shark named Michael Lacovara. Lacovara succeeded in rattling Fisher, as he poked and prodded the professor to concede that integrating a browser into Windows was good for consumers because it made computing easier. Maybe so, Fisher shot back, but 155

JOHN HEILEMANN

simplicity had costs. I“f Henry Ford had a monopoly, we’d all be driving black cars,”he said. “If Microsoft forced upon the world one browser, that would be really simple. That’s not what competition is about. That’s not what helping consumers is about.” Y “ ou seem agitated, sir,”Lacovara needled. I“ am agitated. I feel strongly on this point,”Fisher said, agitatedly. W “ e’re going to live in a Microsoft world. It may be a nice world. But it’s not a competitive world. And it’s not a world that’s ultimately consumer-driven.” As the rst fi half of the trial came to a close, an air of confi dence tinged with cockiness lled fi the hallways of the DOJ. Klein, Boies, and the rest of the government’s team believed the case they had laid out was a powerful one. They felt they had proved that Microsoft was a monopoly. They felt they’d established a broad, consistent pattern of what Klein called p“ redation, exclusion, and coercion”— repeated market-division proposals, anticompetitive contracts to limit the distribution of rival technologies, all-around brutishness toward friends and enemies alike—that sealed their claim of monopoly maintenance. They felt they had shown that Microsoft had a hammerlock on PC manufacturers; in particular, Klein liked to point to Gates’s O “ EM chill”email regarding Intel and NSP. And they felt that, through Boies’s liberal use of the Gates tapes, they had fatally undermined the credibility of the trial’s central gure. fi In public, at least, Microsoft’s lawyers displayed an almost commensurate degree of confi dence. The government was straining to turn the proceedings into a s“how trial,”Neukom said. The courtroom pyrotechnics were entertaining, but the facts and the law were on the company’s side—an assertion Neukom chanted like a mantra. As John Warden had argued in his opening statement, “The antitrust laws are not a code of civility in business,”and although Microsoft had played tough, its actions had only bene156

Pride Before the FALL

ted fi its customers. Indeed, even Professor Fisher, when he was asked by Lacovara if consumers had been harmed, had said, O “n balance, I would think the answer was no, up to this point.”And while it was undeniably true that Microsoft possessed an exorbitant share of the OS market, Neukom believed his team had demonstrated that the software business was savagely competitive, and that Microsoft’s position was forever under siege. That point had been underscored in late November, when AOL announced, in effect, that the g“rand alliance”that Steve Case had dreamed of back in 1995 was about to become a reality. In exchange for $4.2 billion in stock, AOL planned to acquire Netscape and then to team up with Sun Microsystems to create an Internet powerhouse aimed squarely at challenging Microsoft. On the courthouse steps, Neukom declared, “From a legal standpoint, this proposed deal pulls the rug out from under the government. It proves indisputably that no company can control the supply of technology. We are part of an industry that is remarkably dynamic and ever-changing.” Yet behind the scenes, the mood on the Microsoft side of the aisle was considerably more sober. As soon as Judge Jackson was assigned to the case, there were those in Redmond who had regarded the outcome as foreordained, and the judge had done little to undermine their pessimism. He had rejected almost all of the defendant’s motions. He had repeatedly upbraided the S&C attorneys. He had rolled his eyes, shaken his head, and giggled (along with the press) every time another piece of billionaire véritéhad fl ickered on the courtroom monitors. In November, at a conference in Jackson’s chambers with the lawyers from both sides, Warden had made one of numerous pleas to have the judge stop Boies from showing the Gates tapes in “bits and pieces”and instead to have the whole thing shown in toto. “I think the prob157

JOHN HEILEMANN

lem is with your witness, not with the way in which his testimony is being presented,”Judge Jackson replied. “I think it’s evident to every spectator that, for whatever reasons, in many respects Mr. Gates has not been particularly responsive to his deposition interrogation.” Within a few weeks of the trial’s opening bell, Neukom and S&C’s lawyers had started tailoring their approach, at fi rst subtly, then more obviously, for the appeal that seemed increasingly inevitable. Jackson had given them plenty of grounds for complaint, from the trial’s unconventional procedures (the 12-witness limit, say) and the broadening of the case to the decision to admit what Warden called m “ ultiple layers of hearsay”as evidence. But Jackson’s court wasn’t the only forum in which Microsoft was faring poorly. Every day, in a cramped room in S&C’s Washington offi ce, a clutch of Microsoft PR specialists gathered to review the media coverage of the trial. It was unremittingly depressing. To any reporter who was willing to listen, the fl acks ogged fl opinion polls which purported to show that Microsoft’s image remained in fi ne shape. Privately, though, as one member of the communications team acknowledged, “we knew we were losing the PR war, and badly.” In early December, a decision was made to roll out the big gun: Gates himself appeared, via satellite hookup, at a hastily arranged press conference at the National Press Club. Clad in a brown suit and a gold-striped tie, he delivered a 20-minute speech that hewed closely to the party line. “In the software industry, success today is no guarantee of success tomorrow,”Gates said. And, “The government is trying to increase the cost that consumers have to pay for browsers.”And, “Three of our biggest competitors band together to compete with Microsoft, yet, amazingly, the government is still trying to slow Microsoft down.”Then Gates did something unex158

Pride Before the FALL

pected: he turned to the topic of his deposition and vented his spleen at David Boies. “I had expected Mr. Boies to ask me about competition in the software industry, but he didn’t do that,”Gates said. Instead, “he put pieces of paper in front of me and asked about words from emails that were three years old.” When Gates fi nished his speech, he took just three questions from the assembled throng of reporters. Each one had to do with his deposition. Asked if he would handle it the same way if he had it to do over again, Gates conceded that he might have smiled more. Asked about Judge Jackson’s recent criticism of his performance, he snapped, I“ answered truthfully every single question.” The problem, Gates repeated, was not with him but with Boies. H “ e is really out to destroy Microsoft . . . and make us look very bad.” On television that night, and in the papers the next morning, d“ estroy Microsoft”would be the lead for every reporter covering the trial. With just two words, Gates had not only stepped on his own message but provided ringing confi rmation of what many in media and the high-tech industry already suspected: that he was paranoid, self-pitying, and quite possibly delusional. And maybe he was. Soon enough, I would fi nd out for myself.

159

Chapter Six

IN THE BUNKER

THE WEATHER when I touched down in Redmond was filthy: the sky soupy gray, the roads slick with rain, the landscape draped in a fog thick as porridge. It was January 1999, midway through the trial’s courtroom phase. After three treks to Microsoft’s campus in as many months, I had started to think of it as a mushroom colony—a damp, leafy mulchpile where spongy-beige coders multiplied in the dark. There were 45 buildings on campus, and a new one seemed to spring up every week. Many of these buildings were connected by a labyrinthine series of hallways and passages, so employees could shuffl e from their offi ces to the company food courts and back again without ever encountering even a dewdrop of moisture. On days like this, you could drive around campus for 161

JOHN HEILEMANN

hours without seeing a soul—and often, you had to. Even on a holiday (in this case, Martin Luther King Jr.’s birthday), the parking lots were jammed to capacity with Acuras, BMWs, and SUVs. The offi cial line at Microsoft was that the trial was mere background noise; that no one was distracted by it; that they were all too busy cranking out the next great chunk of software. Yet in truth the topic was inescapable. All over downtown Seattle, some renegade artist had plastered up posters featuring a macabre caricature of Gates under the headline “Trust Me”—the rst fi word overlaid with a blaring red Anti-.”One “ day, in one of the Microsoft cafeterias, as my designated PR handler went on about how surprised she was that nobody ever talked about the doings in Washington, DC, an Indian programmer seated to our left regaled his friends with a detailed critique of the government’s technical ineptitude, while a German to our right called Joel Klein a socialist. (My handler smiled wanly and picked at her stir-fry.) Even the hallways were papered with protest. BOYCOTT THE GOVERNMENT. BUY MICROSOFT read a bumper sticker on one offi ce door. On another, just down the hall from Steve Ballmer’s lair, was a letter of support from an unlikely backer: Dear Bill, I am happy that you are the Boss of Microsoft and Internet. I want to help you, Bill. Tell the law and the rest of the world. Jesus don’t want that Microsoft must pay millions of dollars to the law. Mr. President Bill Clinton has to accept that Jesus is on the side of Mr. Gates. And I think Mr. Clinton knows who is the boss. That’s me—Jesus. Love and Peace. Jesus of Nazareth 162

Pride Before the FALL

Among the Microsoft executives I spoke to, the reaction to the trial was a mixture of anger, bewilderment, and incredulousness— mostly the last. I“t’s totally surreal,”said Yusuf Mehdi, an executive in his early thirties who had directed the marketing of IE in the mid-1990s and now was doing the same for Windows. W “ hether this technology is benefi ting consumers—I just don’t think that’s a debate. Whether our technology is actually better than Netscape’s—I don’t think that’s a debate, either. Is the browser really part of the operating system? That’s sort of absurd; of course it is. Almost all the allegations I just fi nd absurd.” All across campus the sense of persecution was both pervasive and acute. The only question had to do with the DOJ’s motives: was it acting out of malice or stupidity? Brad Chase, a Gates consigliere, blamed the Alice “ in Wonderland”culture of Washington, DC, and suggested Klein was impelled by (unspecifi ed) political pressures. Charles Fitzgerald, Microsoft’s one-man t“ruth squad” on Java, saw the culprits in Silicon Valley, and postulated the existence of shadowy meetings between McNealy, Ellison, Barksdale, and Doerr (four men whose combined egos could barely fi t inside one state, let alone one room) to plot twin conspiracies against Microsoft in the courts and in the marketplace. Nathan Myhrvold preferred a psychoanalytical take, attributing the government’s crusade to the impulses of a collection of “very successful people whose deepest regret is that they’re not as rich as Bill.” Other executives, and especially those who had already been touched directly by the trial, were deeply embittered. In 1995, as Paul Maritz’s 26-year-old technical assistant, Chris Jones had been a member of the Microsoft contingent that attended the infamous June meeting at Netscape. Jones claimed that nothing untoward had happened there. Indeed, he told me that the very idea that he’d been a part of some “Microsoft mafi a”trying to intimidate 163

JOHN HEILEMANN

Netscape into dividing the browser market was “ludicrous”on its face. The Microsoft team was made up mostly of junior-level staffers like himself, while the Netscape side was led by Barksdale, an i“mpressive guy who had been doing business for a long time.” Jones said, I“ think the perspectives on who was being intimidated in that meeting differ.”Taken at face value, the comment was a telling refl ection of the insularity of the Microsoft culture. Regardless of Barksdale’s age and experience, Netscape was a moneylosing start-up, and Microsoft was—well, Microsoft. When Jones walked in the door, what the Netscape people saw wasn’t just a 26year-old kid; they saw a 26-year-old kid who spoke for Maritz, one of the most powerful executives in the software industry. And that was how the DOJ saw Chris Jones, too. In a deposition in April 1998, Jones had made statements that the government believed supported its case, a number of which had turned up in its court lings fi and in Boies’s arguments in court. The statements were damaging—and, in Jones’s opinion, taken fl agrantly out of context. From a 45,000-word deposition, Jones said, the DOJ had lifted a few isolated, ambiguous comments that served its purposes while ignoring numerous straightforward denials that didn’t. Microsoft had taken pains to point this out, but the press had basically accepted the DOJ’s interpretation anyway. For months, Jones’s friends and family had been asking him: Is it true? Did you really do this, say this? By the time I met him, Jones was shaken. “It’s been disillusioning, because it’s a case where being really honest and answering questions fully did not serve me well,” he said. I“’d be happy if there was a trial on the merits, but there’s so much other bullshit going on—the PR, the leaks, the Gates video—you can’t even tell what the merits are.” Listening to Jones describe his sense of being violated by the DOJ, it was impossible not to think of Microsoft’s leader. The 164

Pride Before the FALL

transformation of Gates’s deposition into a kind of televised water-torture—drip, drip, drip— had been one of the most severe and prolonged public humiliations infl icted on any CEO in recent memory. (Excluding those who’ve been thrown in jail.) Within Microsoft’s executive ranks, the traditional reverence toward Gates was now accented by a new emotion: protectiveness, even a touch of pity. “I feel sorry for Bill,”Greg Maffei, Microsoft’s then-CFO, told me over a late dinner the night before one of my meetings with Gates. “This poor guy. Look at all he’s accomplished, look at all he’s done. Now he’s being vilifi ed. Not exactly a happy resting place.”I mentioned Gates’s depression at the end of the consentdecree case. “That was bad, but the videotape thing has been worse,”Maffei said. “The fact that it goes on and on, that it feels like it’s never going away. Every day they play a new snippet and make him look bad, and there’s no way to punch back. It’s tough on him because it makes him second-guess himself, which is not”—Maffei chuckled—“what Bill generally does.” I asked Maffei if he thought the clash with the government had changed Gates. “How could it not?”he said. “He’s human. No human could go through what he’s gone through and come out the other side unchanged.”

ONCE UPON a time, not so very long ago, interviewing Bill Gates was one of the great pleasures in journalism—assuming you had a mild streak of masochism. Any reporter required to spend any amount of time with CEOs or national politicians knows what a soul-destroying experience talking to them on the record can be. They are polite and pleasant to the point of inanity. They ooze false sincerity and exude excess optimism. They avoid spontane165

JOHN HEILEMANN

ity and candor like sexually transmitted diseases, and opt instead to spew prefab answers that carefully sidestep whatever question you’ve asked. Their primary aim is to avoid genuine communication of any kind. Gates was never that way. From Microsoft’s earliest days, he dispensed with the standard CEO patter and established a rapport with the media that was decidedly more frank. Though Gates could charm and atter fl with surprising profi ciency, he would also badger, mock, and harangue. His favorite riposte to Microsoft subordinates—“That’s the stupidest fucking thing I’ve ever heard!”— was one he never hesitated to ing fl at a reporter who happened to ask him something silly or obvious. But the ip fl side was that, if you coughed up a question that Gates considered sharp, he tried hard to answer it with equivalent insight. “Right! Right!”he’d yelp, jumping to his feet, pacing around the room, engaging in an act most other public gures fi would regard as dangerously rash, perhaps even suicidal: thinking out loud. Despite the abuse, interviewing Gates was exhilarating. By the time we met up in January 1999, that Gates had vanished. With the release of Windows 95, a milestone in the history of techno-hype; with his ascension to the worldwide pinnacle of personal wealth; with the construction of the 37,000-squarefoot, $30-million lakeside compound he called home; with all this, Gates had transcended the software business and become a celebrity in the broadest sense imaginable. (Scott McNealy once said to me, W “ hat Lady Diana is to People, Bill is to Fortune.) Transcendence of this kind had taken its toll. It had sanded down his rough spots, leaving him smoother, more polished, but infi nitely blander. Now, under assault by the government, Gates seemed increasingly schizophrenic, vacillating in public between bursts of outrage—his attacks on Boies, say—and stomach-turning excre166

Pride Before the FALL

tions of saccharin. In the space of one month that winter, he managed to appear on both Rosie O’Donnell’s and Martha Stewart’s TV shows, where he avoided all topics of substance, let alone controversy, and rabbited on about the joys of parenthood. The Gates I encountered that cold misty morning was guarded, distant, and defensive. He wore brown slacks, brown loafers, and a white dress shirt with faint brown stripes and his initials monogrammed on the breast pocket. His hair was freshly washed and parted lazily on the side; an unabashed cowlick shot up from the back of his head. We sat at right angles from one another on Breuer chairs positioned next to a small maple coffee table. The tabletop had nothing on it but a jar lled fi with a dozen identical black ballpoint pens, which Gates would use every so often to draw diagrams for me on a yellow legal pad. We talked for a while about the mid-1990s, the time frame around which the trial revolved. That Gates had been late to grasp the signifi cance of the Internet, and had then turned Microsoft on a dime to embrace it, was a fact no one disputed— until the court case, when the company suddenly, and for obvious reasons, started peddling the revisionist history that its plans for the Web had taken shape before Netscape’s founding. I noted that the fi rst edition of Gates’s fi rst book, The Road Ahead, which was published in the fall of 1995, had barely mentioned the Net. “That’s not true! This is a boo k . . .”he started to say, then corralled his irritation and trailed off. C “ ertainly there were things we missed. We did our big mea culpa in December ’95 in terms of realizing the importance”of the Web. “But the Internet—you could still say, Do people get it? Did people know six months ago that Amazon was worth $20 billion? How many people got it? I didn’t happen to get it. I didn’t go out and buy it, so, darn, that’s another thing I missed.” 167

JOHN HEILEMANN

The night before, Maffei had observed that, before the consent-decree case was led, fi i“n the public eye and most infl uential circles, Bill sort of walked on water; he could do no wrong.”I wondered how it felt to have seen the tide turn so dramatically. “Eighteen months ago, you were universally admired,”I said to Gates. H “ ardly anything really bad had ever been written about you.” “That’s not true!”he protested again. “Let’s live in the real world for about half a second here.” I asked him if he felt like a victim of what Bill Clinton had memorably described as t“he politics of personal destruction.” I“t’s overwhelmingly true that the case is misguided,”Gates replied calmly. W “ as Netscape able to distribute their product? Is that tough to decide? Was Netscape able to thrive in terms of being able to get advertising revenues [from its Web portal]? Well, they were purchased for over $4 billion. Those are the two questions the complaint in this case raises. And that’s it. So, clearly, if they’ve got a tough time with those, they’re going to go try and throw as much mud as they can. And there’s going to be competitors who are going to show up and participate in that.” Not only competitors, I interjected. Had Intel’s participation in the case put a strain on its relationship with Microsoft? “That has no effect on the relationship whatsoever,”Gates replied. Y “ ou’re asking very Hollywood-type questions. These are companies that have to keep innovating in their products. We don’t make chips. We’re dependent on Intel.” Maybe so, but to see Intel on the witness stand was still rather striking. Gates’s face turned the color of claret. “No, it’s not Intel up there—it’s Steve McGeady! Don’t say Intel! Intel was not up there! Steve McGeady was up there. Was I surprised that Steve McGeady does not like Microsoft? No.” 168

Pride Before the FALL

Considering how things were going in court, I asked if Gates regretted having not settled the case in May 1998. “I would have been glad to do a settlement,”he said. But, “when it comes to giving up the ability to innovate in Windows, that was something that, whether it’s for Microsoft’s shareholders or consumers at large, was not something I felt was right to give up.” The distance between Microsoft and the DOJ seemed far too great to bridge, especially when the company refused even to concede that it had a monopoly in the market for PC operating systems. To many people, this position seemed absurd on its face—so absurd, I’d always suspected, that it had to be rooted in a kind of religious doctrine. I asked Gates if he believed it was possible to have a monopoly in the software industry. I“n operating systems, no,”he said. Impossible? “It’s not possible.” Why? “Because people’s expectations of what they want out of the operating system are constantly changing. They want something better. Why have I increased our R&D from a few hundred million a year to $3 billion? Because it’s a very competitive business. . . . A monopoly is where you don’t have competition. The notion that this is a market without competition is the most ludicrous thing I have ever heard in my life.”

MONOPOLY OR

no, Windows was unquestionably an enormous asset for Microsoft. (Gates corrected me: An “ asset of the shareholders of Microsoft.”) And it was one over which the company had claimed total freedom—the freedom to add a ham sandwich, 169

JOHN HEILEMANN

for instance. Was there any limit to how far Gates was willing to press the advantage of owning the dominant operating system? I“ don’t know what you mean by a‘ dvantage,’ ”he said, inspiring in me the brief fantasy that I was David Boies. I“t is one of the more proven things that just because we put something in the operating system doesn’t mean people will use it,”Gates went on, citing the early, failed versions of IE, as well as the MSN client software. “Putting new features in the OS is a very, very good thing. Some of those features will end up being used heavily and some won’t. All you have to do is look at the growth of the software industry to say this is an industry that’s delivering for consumers in a fantastic way. So, yes, innovation is OK.” Gates hadn’t answered the question, so I asked it again, this time more precisely: I“s there any limit to what you regard as appropriate to put into the operating system?” L “ et’s say a piece of software is free and it’s distributed on the Internet. Then it’s available to everyone, friction-free. Is that software part of every PC? Well, logically, it is. They can just click and download it and get it on the PC. So, if we decide essentially to have a piece of software that’s free, many, many companies can do that.” I repeated the question once more, since he still hadn’t answered it. U “ nderstand, anybody can give any piece of software away for free. That’s just a fact.” “They can’t integrate it into the operating system,”I said, “because they don’t own the operating system.” Anyone “ who owns a product, like AOL, integrates new capabilities all the time. Netscape integrated massive new capabilities into their browser—mail and conferencing and dozens of other things. The fact that companies innovate in these products and 170

Pride Before the FALL

put new features in, that’s a good thing. I can’t even think of a scenario where that would be negative.” B “ ut AOL doesn’t own the operating system,”I said. “They own their online service.” And so it went, round and round like that, for 15 minutes or so. Six times I asked Gates the question; six times he ducked and dodged. It was truly depressing. The idea that Microsoft had the unfettered right to add anything it wanted to Windows was an extreme principle—but it was a real principle, and it was one that was arguably worth defending. The old Bill Gates would have defended it forthrightly. The new Gates wouldn’t, or, at least, didn’t. After a year of withering treatment in the press and awful tribulations in the courts, Gates may still have retained the courage of his convictions. But he was accid, fl lifeless; all the piss and vinegar had been drained out of him. In more than an hour, he didn’t call me stupid even once. Yet for all his dismay about how the case had been going, Gates still seemed to hold out a sliver of hope. Are “ you going out to DC for the rest of the trial?”he asked as I got up to leave. I said that I was. I“’m really looking forward to our witnesses,”he said. N “ ow people will fi nally hear the other side of the story.”For the fi rst time all morning, Gates actually looked pleased. Y “ ou know, you’ve got to have faith that the facts will come out in the end. And the facts, in this case, are all on our side.”

171

Chapter Seven

SHOWTIME

ON THE other coast, in the other Washington, the Justice Department had just rested its case and was readying itself to prove Gates wrong. “The next two weeks are critical for us,”a government lawyer confi ded at the time. M “ icrosoft is putting their three most important witnesses on fi rst. After that, it’s all downhill for them—junior executives testifying on narrow, specifi c issues. The pressure’s on David to make some headway right off the bat. If he does, we’re in good shape. If he doesn’t, we could be in trouble.” The smart money wasn’t betting on trouble. David Boies was a great litigator in most dimensions, but his storied reputation rested mainly on his mastery of the black art of crossexamination. Though Boies’s boyhood hero was Perry Mason, he 173

JOHN HEILEMANN

had styled himself as more of a courtroom Columbo. As Gates had learned to his consternation, Boies’s patience and persistence were inexhaustible; in the IBM trial, he grilled the government’s lead economist for 38 straight days. His preferred technique was to turn the witnesses’ own words against them. Afi cionados of interrogatory virtuosity recalled with awe his performance in the CBSWestmoreland case, in which he not only ran rings around Vietnam stalwarts like Dean Rusk and Robert McNamara but repeatedly forced Westmoreland to disavow his own deposition. So carnivorous were Boies’s crosses that, after a while, the reporters in the gallery took to humming the theme from Jaws every time he would approach a fresh witness. In the rst fi half of the Microsoft trial, Boies’s opportunities to shine had been limited by Judge Jackson’s rules; the fact that the government’s witnesses had turned in their testimony on paper in advance deprived him of a chance to shape that testimony through his questions. Yet with his bravura opening statement, his recurring cameos as Gates’s disembodied tormentor in the deposition video, and his crisp spin sessions for the TV cameras on the courthouse steps, Boies had emerged as one of the trial’s dominant gfi ures anyway. Now, with Microsoft’s witnesses preparing to take the stand, Boies was about to step squarely into the spotlight. Finally, it was showtime. Microsoft’s rst fi witness was Richard Schmalensee, a professor from MIT with wavy gray hair and a well-tended mustache. Like his MIT colleague Franklin Fisher—who, by an irony, had been Schmalensee’s academic mentor many years before—he was one of the nation’s most formidable economists. He was the dean of the Sloan School of Management and a man Boies described as a“ dangerous expert when he’s on the other side: smart and polished, practiced and articulate.” 174

Pride Before the FALL

In antitrust cases, economists are crucial. While executives testify about discrete events and decisions, the economists, as Dan Rubinfeld put it, w “ eave the facts together and explain why a company’s business practices make sense and are legitimate.”Yet despite their regard for Schmalensee, Rubinfeld and Boies thought that putting him on rst fi was a risky move for Microsoft. W “ hen your economist goes rst, fi he lays out in advance a justifi cation for what the other witnesses are about to say,”Rubinfeld explained. I“f he does a good job, everybody else looks good. If he doesn’t, it casts a shadow over everything that follows.”It was this reasoning that led Boies, despite having unshakable faith in Fisher as a result of their work together on the IBM case, to put him dead last on the government’s witness list. The DOJ was doubly surprised that Schmalensee was the only economist in Microsoft’s quiver. (The government had employed two.) In any antitrust trial, there are two fundamental issues for an economist to address: Does the company in question have monopoly power? And has it abused that power? Both Boies and Rubinfeld said that, if they had been advising Microsoft, they would have counseled the company to concede the fi rst issue, as Boies did in the IBM suit, to strengthen its hand on the second. Both of them believed that Microsoft hadn’t done this because it feared that conceding the company had a monopoly would be used against it in future antitrust litigation—a reasonable concern. But if Microsoft intended to fi ght both points, Boies argued, it would have been wiser to employ two different economists. Why? Because asking Schmalensee to advance both claims put him in a terribly vulnerable position. If Boies was able to discredit him on the issue of monopoly power, Schmalensee might be so tainted that Jackson would dismiss out of hand his arguments on the other point. R “ emember, this judge, any judge, does not understand what the expert is saying,”Boies said. W “ hat he’s doing is 175

JOHN HEILEMANN

evaluating if the expert sounds like he knows what he’s talking about. Credibility is key.”And when it came to Schmalensee’s credibility, Boies knew he had some material to work with. He began with a string of questions designed to muster the impression that Schmalensee was, in Boies’s phrase, Microsoft’s “house economic expert”—a kept man of sorts. Schmalensee had testifi ed on behalf of the rm fi for many years and in a variety of lawsuits, had he not? Yes, he had. In his direct testimony, Schmalensee had argued that Windows’ sky-high market share didn’t necessarily mean Microsoft had a monopoly, because the r“elevant”market was not for operating systems but instead for p “ latforms.”Yet wasn’t it true, Boies asked, that in a private lawsuit involving Microsoft just a few weeks earlier, Schmalensee had said the OS market was perfectly relevant? Yes, he had. In another portion of his testimony, Schmalensee had claimed that Microsoft did not have monopoly power because of potential competition from platforms such as Linux, BeOS, and the Palm Pilot. But was Schmalensee seriously arguing that these posed a threat to windows today? No, he wasn’t. At this juncture, Jackson jumped in. Are “ they making any money?”he asked regarding the rival platforms. I“ would be stunned if they were making a lot of money, Your Honor,”Schmalensee replied sheepishly. If on day one Boies painted Schmalensee as perhaps a tad too fl exible in his views, on day two he simply made him look foolish—though the economist did more than his share to help Boies achieve this effect. In researching Schmalensee’s past writings in preparation for the cross, Rubinfeld and his team of economists had been startled to unearth a 1982 Harvard Law Review article in which Schmalensee had argued that p “ ersistent excess profi ts”were an indication of monopoly power, a posi176

Pride Before the FALL

tion that directly contradicted his current stance. The DOJ assumed Schmalensee would have a well-groomed explanation ready if Boies asked him about the discrepancy. How could he not? The article wasn’t at all obscure, and the argument was damaging to Microsoft, which enjoyed persistently higher profits than almost any company in existence. But when Boies confronted Schmalensee with the article, the economist had no ready riposte. In fact, he had no riposte at all. Dumbstruck, slackjawed, he stammered, “My immediate response is: What could I have been thinking?” Of all the sentences Schmalensee conceivably could have uttered on the witness stand, that may have been the least advisable. From that moment forward, Boies sensed that Judge Jackson had written him off. In the eyes of the court, Boies said, the economist was no longer seen as the dean of the Sloan School of Management at MIT, but rather as Microsoft’s “what-could-Ihave-been-thinking expert witness.” By the time Schmalensee’s testimony drew to a close, he was visibly rattled. In a fi nal line of questioning that Boies pursued almost as an afterthought, he asked if Schmalensee had attempted to determine how much of Microsoft’s profi t was derived from its sales of operating systems. Schmalensee said he had indeed tried to gure fi that out, but was told by the company that t“he data that’s separated in that fashion simply didn’t exist.” And “ did you accept that explanation at face value, sir?”Boies inquired incredulously. I“ was surprised,”Schmalensee said. “But, to be honest with you, Microsoft’s internal accounting systems do not always rise to the level of sophistication one might expect from a fi rm as successful as it is.” Meaning? 177

JOHN HEILEMANN

M “ r. Boies, they record operating-system sales by hand on sheets of paper.” Y “ our Honor,”Boies concluded, grinning madly, “I have no more questions.”

AT THE lunchtime recess on the afternoon that Paul Maritz was to take the stand, Boies sat alone in the empty courtroom, staring up at the ceiling for a while, then down at the documents spread out before him, like a surgeon contemplating his instrument tray. Boies was aware, like everyone else, that his cross of Maritz would probably be the trial’s most high-stakes operation. Absent Gates and Ballmer, Maritz, whose title was group vice president for platforms and applications, would be the seniormost Microsoft executive to testify. His fi ngerprints were all over virtually every strategic decision under scrutiny in the trial; indeed, it often seemed his name was on more of the email evidence than Gates’s was. Anticipating a showdown, Klein arrived and took his occasional seat in the front row, just behind the government lawyers’ table. Courtroom 2 was packed; the atmosphere, electric. For the next four days, Boies and Maritz tangled like a pair of scorpions in a sock. Maritz was a bearded, stout-bodied Rhodesian native who spoke in a clipped Afrikaner brogue. Having sat in on part of Boies’s interrogation of Schmalensee, he had a clue about what to expect. As Boies circled him, phrasing and rephrasing, repeating and narrowing his questions, punctuating his queries with the appellation s“ir,”as if it were an epithet, Maritz hunkered down, dug in, and attempted to hold his ground. When it was all over, Neukom would declare Maritz victorious, trumpeting the 178

Pride Before the FALL

fact that Boies had left untouched most of the claims in Maritz’s 160-page direct testimony. Boies measured victory by a different yardstick. In a trial thick with he-said she-said, where so much turned on confl icting accounts of private business meetings, Boies’s instincts told him that Judge Jackson would be swayed by whichever side, at bottom, he found more believable. For Boies, refuting every jot and tittle of Maritz’s testimony was unnecessary and maybe unwise. Better to drill down on a few crucial points and throw a haze of doubt on the witness’s trustworthiness. One of Boies’s prime targets was the 1997 Apple deal. In his testimony, Maritz denied that Microsoft had used the threat of canceling Offi ce for the Mac to get Apple to adopt IE. He claimed the browser was but a minor part of the negotiations, whose o“verriding concern”was settling a potential patent dispute between the two companies. The problem for Maritz was the email trail. Boies presented one message after another, many from Gates himself, in which the browser issue featured prominently while the patent issue was mentioned only in passing or not at all. Maritz stuck to his guns. The patent question was so obvious, Gates didn’t need to mention it, Maritz said; it was t“aken for granted.”Boies asked Maritz whether, after scouring Microsoft’s les, fi he had found a single document that described the patent dispute as the o“verriding concern” of the negotiations. Maritz had not. Nevertheless, he insisted that Greg Maffei, the CFO, who negotiated the deal with Steve Jobs, had assured him that the rst fi time Maffei brought up making IE the Mac’s default browser was during a long walk around Palo Alto with a barefoot Jobs in July 1997—well after the p“ rimary deal terms,” including the continuation of Offi ce, were settled. Having covered the Microsoft-Apple negotiations, I could only shake my head. The day after Jobs announced the agreement at the 179

JOHN HEILEMANN

August MacWorld trade show in Boston, I interviewed Apple’s top executives about how the deal had come together. The dickering had gone on until 2 A.M., just a few hours before Jobs’s keynote speech the fi rst morning of MacWorld. What was the hang-up? The default-browser issue, the Apple guys all said; if they hadn’t given in, the whole deal would have fallen apart, and Apple would have lost Microsoft’s commitment to Offi ce. A week later, I called the very same Greg Maffei whom Maritz was now citing and put the question to him. Yes, he said, the browser had been the latenight sticking point. I asked what leverage Microsoft had used to secure IE’s status as the fallback browser. “I don’t want to comment on that,”Maffei said. I pressed the point. Was it fair to assume that, at the eleventh hour, Apple had reason to fear the cancellation of Offi ce? Y “ eah, that’s fair,”he said. (Three years later, Maffei also admitted to me that although Microsoft had bought $150 million in Apple shares as part of the deal—“We invested in the company when people had lost faith,”Gates would boast— Maffei hedged Microsoft’s bet by simultaneously shorting the stock.) Boies then turned to Netscape’s air supply. In his direct testimony, Maritz had stated, “I never said in the presence of Intel personnel or otherwise that Microsoft would cut off Netscape’s air supply or words to that effect.”Boies noted that Maritz seemed more certain about this now than he had a few months earlier, during his deposition, when he had spoken about the subject in less categorical terms: I“ have no recollection of saying that”;I“t’s possible, but I just don’t recall it.”Maritz said his memory had been refreshed by reviewing accounts of the meeting in question by three Intel executives. In the course of examining Maritz over the next few days, Boies would draw blood on a wealth of topics; but when it came to the trial’s most celebrated sound bite, he was 180

Pride Before the FALL

stymied. Maritz never wavered in his denials, and Boies could produce no smoking email; Steve McGeady remained Maritz’s sole accuser. But McGeady was not, however, the sole witness to the disputed act. In fact, among the several Intel offi cials who attended the meeting with Maritz, at least one of them could have corroborated McGeady’s account—if only the DOJ had asked him to. Frank Gill, a former senior executive at the chip maker, now retired, was no Microsoft-basher, and he had about as much affection for McGeady as Gates did. Yet Gill’s memory of the meeting was identical to that of Intel’s chief rabble-rouser. When I asked him if Maritz had uttered the fateful phrase, Gill replied without hesitation: H “ e said it. Now, in business meetings, you often hear people say, ‘Let’s kill the bastards,’ when they don’t literally mean either ‘kill’ or ‘bastards.’ I really didn’t think it was a big deal.”But he was absolutely sure he had heard Maritz say that Microsoft planned to cut off Netscape’s air? Y “ es, I did, fi rsthand,”Gill said again. “I was there.”

THE THIRD member of Microsoft’s putative power troika of leadoff witnesses was Jim Allchin. A rangy man in his late forties with a soft voice and a shock of white hair, Allchin was a grade-A geek. He had a doctorate in computer science from the Georgia Institute of Technology, where his thesis had to do with distributed computing—in particular, with his dream of a global, seamless, transparent, networked operating system that he christened C “ louds.”His job at Microsoft consisted of nothing less than overall responsibility for the development of the company’s core products, its family of operating systems. Allchin proudly called himself t“he Windows guy.” 181

JOHN HEILEMANN

The aim of his testimony was unambiguous. He was there in court to convince Judge Jackson that the integration of IE into Windows 98 was real and deep and good for consumers—really good, deeply good. Among Microsoft’s witnesses, Allchin provoked the most anxiety inside the government. A DOJ attorney explained why: B “ ecause, to the extent this case is about economics, marketing, and licensing, Microsoft has no special claim to expertise. But technology is their turf. They’re the biggest, they’re the best, and he’s the top guy. We expected Allchin to come in and claim that software was an arcane science, show a slick demo, and run circles around us technically.” The DOJ’s expectations seemed right on track when Microsoft kicked off Allchin’s testimony with several hours of videotape. The video was designed to accomplish many things, but perhaps the most important portion of the tape purported to enumerate in detail the benefi ts—19, in all—of browser integration in Windows 98. When Allchin took the stand, one of the fi rst things Boies did was replay that segment of the video for the court. Pausing the tape at the rst fi benefi t, Boies asked Allchin: If a user took a PC running Windows 95 without an integrated browser and simply added a stand-alone retail copy of IE4, wouldn’t that user get exactly the same benefi t shown in the video? Grudgingly, Allchin replied, Y “ es, I believe that’s correct.” Boies moved on to the next benefi t: same question. Eighteen more times he did this. Eighteen queries that began, And “ again, sir . . .”And 18 times, Allchin, his tone shifting from frustration to despair, answered in the affi rmative. Repetitive and laborious though it was, this sequence of questions went r“ight to the heart of the Appeals Court decision”in the consent-decree case, Boies explained. The Appeals Court had declared that tying together two products was legal only if doing so 182

Pride Before the FALL

o“ffers advantages unavailable”from purchasing the products separately. With Allchin’s 19-fold admission, Boies believed he had proved that Windows 98 didn’t meet this test. It was, he said later, his most legally signifi cant victory in the course of Allchin’s testimony. The next morning, Boies turned his attention to another piece of the Microsoft video—the piece devoted to debunking government witness Edward Felten, the Princeton professor who’d written software that claimed to remove IE from Windows 98. The Microsoft tape showed that Felten’s program had actually only hidden IE, not removed it, and that running the Felten code caused notable p “ erformance degradation”of Windows. But in examining the tape, a team of young software wizards assembled by the professor—“the Felten truth squad,”the DOJ called them— noticed something odd. The t“itle bar”(the line at the top of the screen) of the PC in the video hadn’t changed the way it should have if their mentor’s code had run. The disputed portion of tape was only four and a half minutes long. Yet from those few minutes, Boies would extract an eternity of suffering—and glee. That eternity begins simply enough, on the cold Tuesday morning of February 2, with Allchin having been on the stand for less than a day. Isn’t it true, Boies asks, that if the PC’s title bar bears the phrase MICROSOFT WINDOWS UPDATE—MICROSOFT INTERNET EXPLORER, the Felten program has not been run? Allchin says Yes. And isn’t it true, Boies asks, that once the Felten program has been run, INTERNET EXPLORER is supposed to change to WINDOWS 98? Again Allchin agrees. Now Boies plays the video. As the narrator describes a PC taking an u “ nusually long time”to access a Web site and blames the sluggishness on p “ erformance degradation that has occurred because of running the Felten program,”Boies halts the tape and points to the title bar. It reads INTERNET EXPLORER. 183

JOHN HEILEMANN

The courtroom is startled and so is Allchin—also baffl ed, embarrassed, and knocked back on his heels. He can’t be sure what’s happened here; but he says that the point still stands, the p “ erformance problem”still exists. “You say the performance problem still exists, sir,”Boies responds indignantly. B “ ut this video—that you brought in here and vouched for and told the court how much you’d checked it—is a video that purports to show right here on screen a performance degradation . . . and how it’s due to the Felten program. And that’s just wrong, right?” “I did not think the Felten program had been run,”Allchin says dejectedly. “I’m going to have to go back and understand. We’ll pull all the videos.”When he leaves the court at the end of the day, Allchin raises his arm to shield his face from the cameras: the debunker has become the debunkee. If Microsoft had indeed pulled the videos permanently, Allchin’s ordeal would probably have been over. “I had decided not to pursue it further,”Boies recalled. W “ e knew something more was wrong with the tapes, but we couldn’t tell exactly what, and we felt we’d made our point.”But rather than let the matter drop, Microsoft proclaims its intention to rehabilitate the video, to show that whatever happened wasn’t a nefarious scheme but an innocent, if shameful, glitch. The next morning, Allchin tells the court that an explanation has been found. It seems the PC in the video had software on its hard drive that somehow tweaked the default settings on the title bar. The very defi nition of an innocent glitch. Boies conducts his re-cross; hours roll by without a mention of the video. The drama of the day before has lured a sellout crowd to the Prettyman building, and Courtroom 2 is packed and sweaty. (No matter how frigid the weather in Washington, Jackson’s habi184

Pride Before the FALL

tat is like Key West in July.) Joel Klein is in the house, sitting next to Jeff Blattner, but neither has any idea what might happen next. Boies has kept to himself all day long, and no one has wanted to risk breaking his concentration. The only tantalizing word Klein and Blattner have heard is that the Felten truth squad pulled an all-nighter. Just before 4:00 P.M., Jackson’s favored hour of adjournment, Boies nally fi returns to the Microsoft video. He starts by asking Allchin if a single PC was employed in the demo. Allchin isn’t certain. Multiple machines were used for the tests, he says, but all of them were “Feltenized.”Boies rolls the tape and then brings it to a stop. Noting a pair of icons on the screen, he asks the witness, “Do you see that?”Allchin does. When the camera zooms in from a wide shot to a close-up, Boies freezes the tape once more. N “ ow, clearly the impression that’s being given here is this is still the same machine, right?” Allchin squints at the monitor. I“ can’t—I don’t know.”Increasingly shaken, he adds, W “ e are just trying to show the demonstration. This wasn’t in our lab trying to be incredibly precise.” Allchin’s lack of concern for the precision of the evidence he’s presenting seems to be the straw that snaps Jackson’s back. “How can I rely on it if you can’t tell me whether it’s the same machine or whether any changes have been made to it?”the judge asks, mournfully shaking his great ursine head. “It’s very troubling, Mr. Allchin.” Boies pauses not a moment to revel in the rebuke. He says, L “ et’s continue with the tape”—and then suddenly, S“ top there, please.”Boies points directly to a spot on the screen: where once there were two icons, now there is only one. The gallery roils with murmurs and gasps. H “ oly shit!”someone blurts out from the vicinity of the press corps. Klein’s mouth 185

JOHN HEILEMANN

hangs open; so does Bill Neukom’s. Jackson’s eyes get as big as saucers. N “ ow,”Boies says calmly, turning to Allchin,“that indicates that something has happened to this in the last two minutes, right?”Pallid under the cheeriest of circumstances, Allchin now turns practically translucent. With no small effort, he musters a Y “es.” For the next ten minutes, Boies gives a performance that is devastating to the point of sadism. Freeze-framing the tape over and over, he shows icons vanishing and reappearing, title bars changing willy-nilly, Feltenized machines that seem to run perfectly and non-Feltenized machines that suffer from degraded performance. Each time Boies commands that the pause button be pushed, the video is rendered one degree more bogus. And each time, its sponsor sinks further into his chair. As Allchin’s torture fi nally and blessedly ends, the Windows guy hurls himself on the mercy of the court. I“ would be willing to bring in a machine here and demonstrate this to the court,” Allchin says to Judge Jackson in a tone approaching pleading. And then, more quietly, to no one in particular, he adds, “It certainly has not turned out as a good demonstration.”

THE EVISCERATION of Allchin—and the shredding of Schmalensee, and the mauling of Maritz—left the DOJ in a state of jubilation. Microsoft p “ ut their home-run hitters at the top of their lineup,”a government offi cial crowed.And “ they all struck out.” The defense, meanwhile, was offi cially in disarray. The Wall Street Journal said so on its front page, in a blistering analysis by the reporter John Wilke, who quoted a number of economists— and not just any economists, but avowedly pro-Microsoft economists, culled from a list provided by the company itself—who 186

Pride Before the FALL

ayed fl the fi rm for not conceding the obvious: that it did indeed try to eliminate competitors; that it was indeed a monopoly. In the Washington antitrust bar, Sullivan & Cromwell’s performance was roundly mocked; i“ncompetent”was among the more charitable assessments. Yet the question remained whether the fault really lay with S&C, or even with Neukom, or whether it actually belonged to Microsoft’s chairman. Some months after his testimony, Dick Schmalensee told a fellow economist privately, “The lawyers are not in charge. All the shots are being called by Gates.” After Allchin stepped down on February 4, it took Boies just three weeks to dispatch the nine remaining Microsoft witnesses. A few of them, notably the marketing executive Brad Chase, emerged relatively unscathed. For most, though, the trip to Courtroom 2 was like strolling through hell in a suit soaked with gasoline. Dan Rosen, the employee sent to testify about the June 1995 Netscape meeting, uttered such patent falsehoods that Boies felt no compunction about calling him a liar outright: Y “ ou don’t remember that, do you, sir?”he asked at one point. Y “ ou’re just making that up right now, aren’t you, sir?”As an email showed, Rosen didn’t, and he was. Robert Muglia, Microsoft’s designated Java witness, prattled on so incessantly and nonsensically that, with no help from Boies, he drove Judge Jackson into a blind rage. N “ o, no! Stop!”Jackson roared, covering his face and holding up one hand, as Muglia proferred his umpteenth tortured attempt to explain that a Gates email didn’t mean what it said. “There is no question pending!”the judge snorted and then stalked out of court for a 10-minute recess. Jackson’s disdain for Microsoft’s defense, never exactly a secret, became ever more obvious as the trial wore on. One February afternoon, before gaveling court into session, the judge offered some words of wisdom he claimed were directed at no one in par187

JOHN HEILEMANN

ticular, but whose target could hardly have been clearer. “The code of tribal wisdom says that when you discover you are riding a dead horse, the best strategy is to dismount,”Jackson intoned from the bench. But lawyers o“ ften try other strategies with dead horses, including the following: buying a stronger whip; changing riders; saying things like, ‘This is the way we’ve always ridden this horse’; appointing a committee to study the horse; . . . declaring the horse is better, faster, and cheaper dead; and, fi nally, harnessing several dead horses together for increased speed.”Smiling impishly, Jackson nodded toward Boies. “That said, the witness is yours.” On February 26, after Microsoft’s last witness, the judge recessed the trial, ostensibly for six weeks (in reality, it would turn out to be 13), before the rebuttals. “Use this time wisely,”he advised the lawyers for both sides, who were in no way confused about what that meant. For some time Jackson had been quietly encouraging the parties to reopen settlement talks. Now he took explicit steps to prod them in that direction. At a routine status conference on March 31, Jackson told Microsoft and the government that he was imposing another novel procedure: after the rebuttals were nished, fi he would divide the conclusion of the case into two phases. The rst fi would be devoted to ndings fi “ of fact” and the second to c“onclusions of law.”By separating the facts from the law, Jackson was, in effect, ratcheting up pressure on Microsoft to settle. Even a one-eyed tea-leaf reader could divine that the judge was going to hit the company hard where the facts were concerned. For a start, there seemed no doubt that he would declare it a monopoly—a fi nding which, by providing a solid foundation for private antitrust litigants to build upon, would infl ict by itself a fair degree of what Microsoft’s lawyers referred to as c“ollateral damage.”If Microsoft was going to cut a deal, the time to do it was ASAP, before Jackson had shown any of his cards. 188

Pride Before the FALL

Settlement talks occurred sporadically that spring. Their tenor was never very promising. Although Microsoft was willing to contemplate some of the behavioral modifi cations it had rejected in May 1998—granting OEMs a real measure of control over the fi rst screen, for instance—those measures were no longer enough to satisfy the DOJ or the states. Indeed, it was during these off-andon discussions that Klein rst fi informed Bill Neukom that the government was considering a structural remedy, perhaps even a breakup. Microsoft refused to address the topic, which seemed to Neukom nothing more than an empty negotiating stance. The very idea of a breakup, he said later, struck him as r“idiculous.” The last round of talks was conducted in Washington, in June, at the same time that the rebuttal phase was taking place. The rebuttals—highlights included another executive from IBM, who had a diary full of details of threats Microsoft had allegedly made against Big Blue, and a command performance by AOL’s David Colburn, who was as sublimely snarky as ever in responding to Microsoft’s questions about the AOL-Netscape-Sun alliance— were engrossing enough, but did little to alter the trial’s underlying dynamics. By the time the rebuttal phase concluded on June 24, Jackson was freely using the dreaded M-word, monopolist, in reference to the beleaguered defendant. Yet even with the writing on the wall so garish in hue and its message so unmistakable, Microsoft remained unyielding on the terms of any potential settlement. As the talks lurched inexorably toward an impasse, Klein put forth a proposal for a broad set of conduct remedies, which touched on everything from the pricing of Windows to opening up Microsoft’s APIs. In Microsoft’s opinion, the plan was too excessive, intrusive, and regulatory even to merit discussion. But the fact that the remedies the DOJ was laying on the table were still strictly behavioral reinforced in Neukom the 189

JOHN HEILEMANN

impression that Klein’s earlier threat of structural relief had been mere posturing. Even with his most trusted lieutenants, Klein played his cards so close to his chest they sometimes appeared to be stitched to his shirt. Yet each time we met, he seemed to inch a mite closer to dropping the Big One. His rst fi suggestion to me that a breakup was in the realm of practical possibility was in November 1998. By the following spring, the word d“ ivestiture”was popping up in our talks with increasing frequency. Klein had embarked on the path of suing Microsoft reluctantly, cautiously, yet here he was, entertaining a remedy so hawkish it would make Kissinger blush. At one of our Saturday morning sessions, I asked him to explain his conversion. There was no mystery to it, Klein replied. “The nature of the problem and the pervasiveness of the practices in their corporate culture are far worse than I thought,”he said. When the case began, all he could discern was t“he tip of the iceberg”; it was only after the evidence had piled up, fi rst in discovery and then during the trial, that the full dimensions of the thing were clear. “That’s what happens when you try a case,”Klein said. Y “ ou have instincts, you have views, then you go out and just rip it apart. And only then do you nally fi understand it.” Klein rose from his chair and walked over to his desk. Y “ ou wanna know how you try a case?”he asked, picking up a small pewter mug that was sitting beside a paperweight. He handed it to me and said, “This is how you try a case.” Fixed to the mug with worn Scotch tape was a shred of scuffed white paper, which bore four lines of laser-printed verse—a quote from T. S. Eliot’s “Little Gidding”: We shall not cease from exploration And the end of all our exploring 190

Pride Before the FALL

Will be to arrive where we started And know the place for the first time.

I handed the mug back to him. S“ o, if you win the cas e . . .”I started to say. I“f we win?”Klein laughed. G “ et outta here!”

THE FIRST OFFICIAL validation of Klein’s cocksureness would take several months to arrive and would be fashioned by an unlikely authority. His name was Tim Ehrlich, and he wasn’t yet thirty. A freshly minted graduate of Harvard Law School, Ehrlich was the newest clerk in Judge Jackson’s chambers. He was friendly and ingenuous, with a giddy laugh and a gift for mimickry. (His deadon imitations of the trial’s dramatis personae, from Warden and Boies to Gates and Ballmer, would provide Jackson with endless amusement.) At Harvard, Ehrlich had studied under the cyberlaw luminary Lawrence Lessig and had followed the twists and turns in the Microsoft case obsessively. Indeed, the only reason he’d applied for a clerkship with Jackson was his desire to play a part, however modest, in the business/technology/antitrust trial of the century. When Ehrlich reported for duty in August, he received an assignment that was anything but modest: to draft the fi ndings of fact on Jackson’s behalf, and, in so doing, to throw the book at Microsoft. Being fully aware of how the trial had gone, Ehrlich expected the judge to come down rmly fi and decisively on the DOJ’s side. But Jackson’s embrace of the government’s version of events wasn’t merely fi rm or decisive: it was absolute and total. On almost every key factual issue (and most of the secondary and tertiary ones as well), he endorsed the DOJ’s interpretation in toto 191

JOHN HEILEMANN

and summarily rejected Microsoft’s. In some instances, he was swayed by testimony that had been offered from the stand; in others, by the piles of irrefutably incriminating Microsoft email. And there was no question that Boies’s systematic assault on the credibility of Microsoft’s witnesses, not to mention its non-witness-inchief, had colored Jackson’s thinking. For the most part, he dismissed their testimony out of hand. The judge instructed his clerk to make the fi ndings of fact unremittingly harsh. In addition to refl ecting his assessment of the evidence, their severity had a tactical purpose: to create the most powerful incentive yet for Microsoft to settle. Jackson had always believed that the case should never have gone to trial, that the two sides should have cut a deal long ago. His frustration over their failure to do so was mounting, and it was aimed mainly at Microsoft, whose obstinacy he blamed for thwarting the previous efforts to achieve an accord. Jackson hoped that issuing a bareknuckled set of ndings, fi with ominous and unambiguous portents of what lay ahead, would bring Gates back to his senses—and the negotiating table. As Jackson saw it, a settlement made sense for everyone concerned, from the company and the government to the industry and consumers. The most likely alternative scenario would be in no one’s best interest: a verdict from him, followed by years of cost, delay, and uncertainty as the case slithered its way through the appeals process. Jackson craved a settlement for his own reasons as well. Though presiding over the Microsoft trial had in many ways been a pleasure—he found particular joy in the caliber of lawyering on display before him—he was singularly uneasy about fashioning a remedy. In particular, the possibility of having to rule on a proposal to split up Microsoft fi lled him with trepidation bordering on dread. “He’s not an economist, he doesn’t know fi nance, he 192

Pride Before the FALL

doesn’t even know much about business, really,”a lawyer and friend of his said. “I think he realized that if there wasn’t a settlement and he ruled against Microsoft, he was going to have to fi gure out what to do with this company that was incredibly important, this engine of the entire economy. Frankly, it scared him.” Jackson may have been spooked, but if the same was true of Ehrlich, he never let it show. Three months after being handed his daunting task, the young clerk put the fi nishing touches on the nal fi draft of the ndings fi of fact and gave them to Jackson for his approval and signature. Released to the public on November 5— and landing on every front page in America the next morning— the findings lived up to the judge’s primary dictate: that they be a bombshell. Of the 412 paragraphs in the 207-page document, no more than one or two could be construed as even remotely favorable to Microsoft, while the rest could have been written by the DOJ. The ndings fi began by declaring the company a monopolist. With its overwhelming and stable share of the market for PC operating systems, with high barriers to entry protecting its share, and with no commercially viable alternative to Windows, Ehrlich wrote, “Microsoft enjoys so much power . . . that if it wished to exercise this power solely in terms of price, it could charge a price for Windows substantially above that which could be charged in a competitive market. Moreover, it could do so for a signifi cant period of time without losing an unacceptable amount of business to competitors.” Then came the catalog of Microsoft’s misdeeds. In the view of the court, as a matter of fact, the company had offered to divide the browser market with Netscape in June 1995, and it had tried to dissuade the start-up from turning its browser into a platform. It had employed similar anticompetitive tactics toward 193

JOHN HEILEMANN

Intel over NSP, toward Apple over QuickTime, toward RealNetworks over media-streaming software, and toward IBM over OS/2 and its SmartSuite package of productivity applications. The fi ndings determined, as a matter of fact, that browsers and operating systems were separate products, and that there was n “o technical justifi cation for Microsoft’s refusal to meet consumer demand for a browserless version of Windows 98.”And they concluded, as a matter of fact, that Microsoft had decided to give away IE and tie it to Windows, exerted pressure both negative (by making threats) and positive (by offering “valuable considerations”) on OEMs and ISPs to favor IE and disfavor Navigator, and created a Windows-specifi c version of Java that was incompatible with Sun’s—all in order to preserve and protect its monopoly power. After detailing this litany of sins and more, the fi ndings addressed the issue of harm. All through the trial, the question of precisely who or what had suffered as a result of Microsoft’s actions—apart from Netscape—had been raised again and again by the company and its defenders. And all through the trial, the government’s answers had been sketchy, slippery, and frustratingly speculative. The same could not be said about the fi ndings of fact. By forcing PC makers to ignore the desire of some customers for a browser-free incarnation of Windows, by forcing them to snub the preferences of others for Navigator, and by constraining their freedom to modify the software to make PCs less confusing and more user-friendly, Microsoft had “harmed consumers in ways that are immediate and easily discernable.”By undermining the potential of the browser and Java to create a new model of network-centric computing, Microsoft had “harmed consumers indirectly by unjustifi ably distorting competition.”And then there was this— the nal fi passage in Ehrlich’s epistle: 194

Pride Before the FALL

M “ ost harmful of all is the message that Microsoft’s actions have conveyed to every enterprise with the potential to innovate in the computer industry. Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profi ts to harm any rm fi that insists on pursuing initiatives that could intensify competition against one of Microsoft’s core products. Microsoft’s past success in hurting such companies and stifl ing innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefi t consumers never occur for the sole reason that they do not coincide with Microsoft’s self-interest.” Point by point, none of the fi ndings qualifi ed as a shock. But their cumulative effect was staggering. For years, Microsoft’s malfeasance had been the stuff of rumor and legend in the hightech business; no one knew how much was true and how much the product of fevered or paranoid or Machiavellian imaginations. In the trial, the government had turned the stuff of rumor into the stuff of allegation, and then unearthed evidence to back the allegations up. Now Jackson had conferred on those claims the imprimatur of the federal judiciary: suddenly, legally, they’d been awarded the status of cold hard fact. “It’s kind of like the discovery that the Loch Ness monster is real,”said Mitchell Kertzman, the former CEO of Sybase who then became the head of the Valley software outfi t Liberate. W “ e’ve been saying for so long, I‘ swear! I swear! We’ve seen it!’ But nobody believed us. Now it’s like, O ‘ h my God, they were right. Nessie exists!’ ” On the Friday afternoon that the ndings fi of fact were released, Gates and his adjutants put on their bravest faces and stood before the cameras. Smiling stiffl y, his voice carefully modulated and 195

JOHN HEILEMANN

betraying only the slightest trace of strain, Gates said, W “ e respectfully disagree with the court’s ndings. fi Microsoft competes vigorously and fairly.”He added, Americans “ should wish that every business was as competitive as the personal computer business.” Once again, Gates reiterated his willingness to settle the case on fair and equitable terms. But he left no doubt that, contrary to Jackson’s hopes and designs, the ndings fi had done nothing to alter his bedrock convictions about what a fair and equitable settlement might look like. Over the weekend, Ballmer reinforced that message in an interview in The New York Times. Assuming a tone so upbeat that it bordered on fanciful, Ballmer described a conversation with his seven-year-old boy, Sam. I“ mentioned to my son there was going to be this ruling,”he told the paper. H “ e said, W ‘ ell, I hope it’s good for you, Dad. Dad, if they don’t agree with you, you guys will appeal, right? Because what you did is all right, right, Dad?’” Ballmer continued, And “ I said, ‘That’s right, Sam.’ I mean he’s not our legal strategist or anything, but he does understand our view.” But no matter how gamely Microsoft tried to brush them off, when the ndings fi of fact hit Redmond, they seemed cold and hard indeed. Of course, the men who ran the world’s greatest software company took pride in being cold and hard themselves. They were clear-eyed, rational, unsentimental. Yet despite everything that had transpired in Jackson’s court—the gaffes and the cock-ups, the hints from the judge both blatant and subtle—and despite everything that had been said and written in the press, the full grimness of the ndings fi took Microsoft aback. Having told themselves over and over that the worst was surely coming, the company’s leaders were still unprepared. Several months later, Ballmer admitted that, despite the cheery familial yarns he’d been spinning for the media, the days after the release of the ndings fi of fact were the only period during the trial when he genuinely felt u “ nder siege.” 196

Pride Before the FALL

The source of Redmond’s trauma was startling and touching. H “ ard as it is to believe,”a Microsoft offi cial said, u “ ntil the day the ndings fi of fact came out, a lot of us still thought, somewhere deep down, that we were going to win this thing.” Was Gates among those who thought that way? “I believe he was,”this offi cial said. “I believe he was.”

197

Chapter Eight

ROUGH JUSTICE

JOEL KLEIN regarded the ndings fi of fact as t“he most damning document in the entire case”—which, in a trial that had unearthed over two million internal emails, memos, and other shreds of evidence, was saying something. Before the fi ndings, Klein had been loath, despite his musings, to reach any fi rm conclusions about what sort of remedy the DOJ would propose. But now that Jackson had spoken, and spoken so unequivocally, it was time to start making decisions. It was also time to start marshaling the DOJ’s allies, especially those in Silicon Valley. Klein had known all along that when the fi ndings of fact were released, the trial’s thrust would shift from crime to punishment—and, as ever, he had an eye fi xed rmly fi on the court of 199

JOHN HEILEMANN

public opinion. If the DOJ was to pursue severe sanctions against Microsoft, Klein would need the backing of the high-tech industry’s leaders. Not subtle, clandestine, backstage support, but upfront, vocal, public support: the kind that shapes media coverage and editorial opinion; the kind that changes minds, and moves votes, in Congress. Klein expected the remedy phase to be intensely political, much more so than the trial had been. He needed the Valley to make some noise. What he got instead was a thundering silence. The silence of Silicon Valley had been a source of frustration at the DOJ from the very beginning of US v. Microsoft. It was undeniably true that Microsoft’s foes in the Valley—and some of its putative friends—had been an invaluable source of tips, leads, leaks, and the occasional confi dential white paper. Indeed, it was arguable that without this covert assistance the government’s case would never have gotten off the ground. Yet the reluctance of the Valley and the rest of the industry to talk out loud, on the record, about Redmond’s behavior had been a persistent hindrance. With a great deal of doggedness and even more luck, the government had managed to ll fi out its dance card of witnesses for the trial— but just barely. And for every executive induced to testify, there were innumerable others with potentially incriminating information to impart who refused to come forward. Too risky, they said; Microsoft could hurt them in too many ways. As the trial unfolded, some members of Klein’s team comforted themselves with the thought that the silence would prove temporary. Microsoft’s partners, customers, and competitors might be too timid to speak up while the ultimate result remained in doubt. But once the courtroom phase of the case was over and Jackson had issued his ruling, a wave of courage would sweep across the industry—at least that was the theory. Midway through 200

Pride Before the FALL

the trial, a senior government lawyer predicted, “If Jackson comes down big in our favor, all these guys who are too afraid to talk now are going to be beating down the doors and lining up in the hallways to testify in the remedy phase.” To lay the groundwork for the anticipated groundswell, Klein and Jeff Blattner fl ew out to the Bay Area at the end of October, less than two weeks before Jackson unveiled his fi ndings. Klein had made the rounds in the Valley on several occasions during the investigation and trial. Sometimes reports of his visits wound up in the newspapers; a breakfast at Barksdale’s house back in 1998 would be forever cited by Microsoft as evidence that he was nestled cozily in the pockets of its rivals. Other times he kept a lower profi le. But in every instance, Klein had maintained his customary demeanor—listening more than talking, saying little when he did speak. Now, however, with the release of the fi ndings apparently imminent, Klein slipped out of his lawyer’s garb and into that of a politician rousting his constituents as Election Day draws near. In a series of back-to-back meetings with a dozen of Silicon Valley’s ranking CEOs and venture capitalists, he laid out the short-term scenario he believed was likely to take place. If Judge Jackson declared Microsoft a monopoly, a gale of spin would come twisting down from Redmond. Klein predicted that the essence of the rm’s fi sub-rosa PR line would run something like this: Fine, maybe we are a monopoly, but we’re yesterday’s monopoly, with a stranglehold on yesterday’s technology; after all, in the age of the Internet, who really cares about the PC desktop, anyway? Klein beseeched the Valley guys to counter that spin. For years, they’d been telling him that market forces and new technologies were insuffi cient to restrain Microsoft’s predacious power; now he asked them to make that argument publicly. Klein studiously avoided encouraging the executives to support a particular remedy 201

JOHN HEILEMANN

or type of remedy—structural, behavioral, or a blend of the two. Instead, he repeatedly used a vaguer phrase: s“ignifi cant remedies.” As for what those remedies might be, Klein left it up to the executives to decide for themselves. The crucial thing, he stressed, was to please say something—anything. “Joel is very political,”one of the CEOs remarked at the time. “He knows that if he lets Microsoft defi ne the terms of the debate, he loses.” Another purpose of Klein’s visit was to solicit the industry’s opinions about the various remedies the DOJ was contemplating. Klein was intentionally oblique in these discussions, laboring not to tip his hand. But many of the executives came away with the distinct impression that he was leaning toward breaking Microsoft up, one way or another. H “ ow do I get that impression?”a software boss said. I“ get it because Joel only asks my opinions on structural remedies. Any time a behavioral remedy comes up, he looks bored.” That impression was not mistaken. Starting in the spring, intensifying in the summer when the courtroom action ended, and continuing now into the fall, Klein and his lieutenants had conferred in a systematic way with literally scores of academics, lawyers, technologists, and other experts about the best path to follow. The process was directed by Tim Bresnahan, a Stanford professor who had been appointed to replace Dan Rubinfeld as the antitrust division’s top economist. In the early 1990s, when the Federal Trade Commission rst fi began investigating Microsoft, Bresnahan had compared the FTC to a dog chasing a fi retruck; the pursuit might be invigorating, but what would it do if it caught its prey? Not long before the DOJ fi led its case, in 1998, Bresnahan took a stab at answering that question. In a paper widely read in antitrust circles, he laid out a lucid analysis of the dynamics that made Microsoft’s power so great and so enduring, and concluded that mere conduct remedies would be entirely ineffective in curb202

Pride Before the FALL

ing that power. On the other hand, structural remedies held t“he possibility of both larger costs and larger benefi ts,”he wrote. Breaking up the company, for example, carried substantial risks, but at least it had a chance of actually accomplishing something. What the DOJ discovered in talking to the experts was that Bresnahan’s assessment was, in rough outline, the consensus view. Behavioral remedies were broadly seen as well-intentioned but useless, even if Microsoft made no effort to evade them, which nobody regarded as a safe bet.“We talked to people across the spectrum, outside the industry and inside the industry,”Klein said later. And “ the industry people weren’t only Microsoft competitors. They were people upstream and downstream from Microsoft, partners of theirs, customers of theirs, allies of theirs, computer manufacturers, a lot of whom spoke to me in confi dence.”He went on, I“ was really struck by the amazing unanimity that developed among my core staff—Melamed, Bresnahan, Blattner, Malone, Boies—and our consultants and the industry people. There was a real coalescence. By the fall, my clear predisposition and strong predisposition was for structural relief.”

TWO DAYS AFTER the ndings fi of fact were released, on November 7, Klein appeared on the Sunday morning news show This Week and said for the rst fi time publicly that a breakup was i“n the range”of remedies the DOJ was considering. Two weeks later, Judge Jackson summoned the lawyers from both sides to his chambers and surprised them all with the news that he was initiating a formal mediation process in the case and appointing Judge Richard Posner as the mediator. At 60, Posner was a violently brilliant and staggeringly prolifi c scholar (he had authored more than 30 books, on everything from sexuality to literary criticism and the economics of 203

JOHN HEILEMANN

AIDS to, of course, antitrust) who had done more even than Robert Bork to embed Chicago School economic analysis in the mainstream of American jurisprudence. Like many members of the legal fraternity, Jackson was in awe of Posner. “‘Awe’ is too weak—Jackson considered Posner a god,”someone close to Jackson said. H “e was of the view that Posner was the only person who could sort out the Microsoft mess. Once Posner signed on, Jackson was convinced from then on that the case would settle.” Although Klein praised and welcomed Posner’s appointment, he was pessimistic that the mediation would bear fruit. The gap between the DOJ and Microsoft was growing wider all the time. On December 2, the DOJ announced that it had hired the longtime Wall Street dealmaker Robert Greenhill to help the antitrust division in a“nalyzing nancial fi aspects of the full range of potential remedies.”In fact, Greenhill, whose fi rm, Greenhill & Co., specialized in corporate restructurings, was retained to examine the nancial fi implications of various forms of divestiture. This became clear to Silicon Valley CEOs such as Scott McNealy and other prominent executives and venture capitalists when the fi nancier paid them a call soon after his hiring. Greenhill indicated that he favored splitting Microsoft into two or three separate operatingsystem companies, each with the same intellectual property, and then leaving its applications-software and Internet businesses to comprise either one or two additional fi rms. “By the time he got to me,”one wheeler-dealer said, “his mind seemed made up.” As Greenhill made his rounds in the Valley, Klein worked the phones from Washington. Wheedling and cajoling, he appealed to conscience, righteousness, and rational self-interest. J“oel is really born-again on this,”one CEO remarked. H “ e’s like Paul Revere trying to rally the troops.”Actually, Klein was trying to do something more specifi c, too. To a handful of executives, Klein suggested that 204

Pride Before the FALL

he was looking for a major industry gure fi to be the public face for s“ignifi cant remedies”—to make the case in the media that reining in Microsoft required more than a slap on the wrist. And Klein wasn’t interested in the usual suspects. “Joel is looking for a poster boy,”this CEO said.A “ poster boy who isn’t Larry or Scott.” Klein’s desire to steer clear of Larry Ellison was easy to grasp and unexpectedly prescient. Oracle’s multibillionaire CEO was too overthe-top, too unpredictable, to be compatible with even the most informal variety of government service. In June 1999, unbeknownst to almost anyone at the time, Ellison and Oracle had hired Terry Lenzner, the Washington-based private detective known for his work on behalf of Bill Clinton, to investigate the nancial fi links between Microsoft and several allegedly independent pro-Microsoft trade groups and think tanks. The investigation included rummaging through the groups’ trash cans and leaking what was found to The New York Times and The Wall Street Journal. When the skulduggery was uncovered a year later, Ellison proudly claimed full responsibility, calling it a c“ivic duty.”At a press conference, he said,All “ we did was to try to take information that was hidden and bring it into the light. I don’t think that’s arrogance. That’s a public service.” Klein’s avoidance of McNealy was more complicated. Though characters of more divergent worldviews or political persuasions would be hard to conjure even in fi ction, McNealy respected Klein and was amply impressed with his handling of the case. And Klein was grateful for McNealy’s famously big mouth. For years, Sun’s CEO had been one of a small handful of big-company chiefs who offered a consistent, coherent, and public critique of Microsoft’s business practices. Now he was one of an even smaller handful willing to talk (and talk) openly about what ought to be done. Many things could be said of McNealy, including that, as one of Gates’s leading competitors, his critique served Sun’s bottom-line 205

JOHN HEILEMANN

interests—though its president, Ed Zander, might disagree. What could not be said was that he was timid. The trouble was that McNealy’s position on remedies had been rather like Microsoft’s defense in the trial: vocal, energetic, internally inconsistent, and all over the map. After Project Sherman ended in the spring of 1998, Sun’s chief counsel, Mike Morris, became a primary advocate of creating instant competition in the operatingsystem market by dividing Microsoft into three identical companies. McNealy agreed, and what was known as the Baby Bills approach became Sun’s offi cial and public position on remedies. Then, at a Sun board meeting in December 1998, McNealy suddenly switched tack. He informed his board members that his preferred remedy was no longer the Baby Bills—or any other form of breakup—but placing a ban on Microsoft’s mergers and acquisitions: no takeovers, no minority investments, no joint ventures, for the foreseeable future. (It was one of McNealy’s constant refrains that Gates’s company was incapable of building innovative new products so it had to buy them instead. At Microsoft, he said, R “ &D is a synonym for M&A.”) Morris was livid at McNealy’s reversal. W “ hat the fuck are you talking about?”he screamed. W “ e’ve been over this a million times! Our position is public!” I“ changed my mind,”McNealy replied. W “ e have to do what’s best for our shareholders.” S“ cott had himself a little epiphany,”an attorney close to Sun explained. “Today, Microsoft is the number one operating-system company and Sun [with its Solaris OS] is the clear number two. But if Microsoft is broken into three OS companies, Sun immediately drops to number four. And if Microsoft is broken into six OS companies, Jesus, Sun falls to seventh. The more McNealy thought about it, the more keeping Microsoft in one piece seemed like a pretty good idea to him.” 206

Pride Before the FALL

Klein never had been a great fan of the Baby Bills, but it served his purposes to have Sun endorsing a remedy so dramatic it made almost any other look conservative. It was left to Morris to tell him what had happened. I“ just work here,”Sun’s lawyer said over the phone. I“t’s one of those things that happens when you work for a celebrity CEO. I can’t defend everything he says or does.” Klein chuckled. I“ know where you’re coming from. I work for Bill Clinton.” Had that been the end of it, McNealy’s reputation for constancy would have been bruised, not bloodied. But at a Sun board meeting in November 1999, just a few days after Jackson’s fi ndings and nearly a year after his fl ip away from the Baby Bills, McNealy told his stunned directors that he’d opped fl yet again. The sweeping scope and lopsidedness of the ndings—and fi the welter of press coverage suggesting that a breakup was not only possible but plausible—had convinced him that, despite its perils for Sun, splitting up Microsoft was the thing to do. He also fl oated a new conduct remedy he’d borrowed from Bill Joy: just as Michael Milken had been banished from Wall Street for his crimes, Gates and Ballmer should be d“ isbarred”from the software industry. S“ cott knows it’ll never happen, but he can’t help saying stuff like that,”a Sun executive said. “It’s just s o . . . Scott.” Ultimately, Scott being Scott was what made him an impossible choice as the DOJ’s frontman. “Joel would probably have kept his distance from us anyway, because we seem like we have an ax to grind,”the Sun offi cial said. B “ ut there’s no question Scott hurt his credibility with Klein.”A person with ties to both McNealy and Klein remarked dryly, “Joel thinks Scott doesn’t contribute positively to the quality of the conversation.” In his quest for a spokesman who wasn’t McNealy or Ellison, Klein found a small clutch of enlistees who did contribute posi207

JOHN HEILEMANN

tively—and publicly—to the quality of the conversation. One of them was Jim Barksdale, who by the end of 1999 had become a semiretired venture capitalist but remained actively engaged in the Microsoft debate. Another was Mitchell Kertzman, the CEO of Liberate and maybe the funniest of Gates’s verbal assailants in Silicon Valley. (He often compared Microsoft to a great white shark: All “ it knows is its appetite; when it gets hungry, it eats.”) Both Barksdale and Kertzman favored structural reform, and so did the third of Klein’s recruits: Bill Campbell, of Intuit. Campbell recalled how dubious he’d been about the DOJ’s prospects—about its competence, really—when he was fi rst approached about providing an Intuit witness for the trial. Now, with Klein and his team having proved him wrong, Campbell once again felt morally obliged to s“tand up and be counted.” The strength of his convictions was manifest in another way as well. Two weeks before Christmas, on one of those balmy, palegold afternoons that pass for winter in northern California, Campbell played host to a sort of anti-Microsoft summit—the topic of which was the matter of remedies. Assembled in a conference room in Intuit’s Mountain View headquarters was a collection of some of the Valley’s major players, including McNealy, Barksdale, Oracle president Ray Lane, Novell CEO Eric Schmidt (by phone), Intuit founder Scott Cook, and an assortment of highend venture capitalists. (Steve Jobs was supposed to have attended, but at the last minute he begged off with a bad case of fl u.) In the past few weeks, each of these men had heard Klein’s pleas that they pipe up about the remedies, and also his expressions of frustration at the industry’s silence so far. For two hours, they discussed what to do about it. Should they speak out? If so, how? Brashly or diplomatically? Collectively or individually? And what should they say? In the end, the meeting produced a fair 208

Pride Before the FALL

degree of consensus and a fairly ambitious agenda. The participants agreed that they were all in favor of structural reform. They agreed that, in support of such a remedy, they would launch a quasi-formal campaign with a quasi-offi cial leader—Kertzman— and, perhaps, a staff and a budget. Each of the companies would form a political action committee, to offset the millions of dollars that Microsoft was said to be pouring into Republican campaign coffers to sway opinion on Capitol Hill. They would focus on public persuasion, talking to editorial boards and reporters. There was even an idea bandied about that the campaign should hire an executive-search specialist to rifl e through the rosters of former employees of PC manufacturers on a hunt for potential antiRedmond whistleblowers. The meeting at Intuit would prove to be the pinnacle of the Valley’s efforts at collective action. None of the items on the agenda—not the PACs, not the headhunter, not the staff, not the budget—would ever come to pass; the group would never meet again. Shortly into the new year, a detailed account of the gathering and the nascent campaign appeared in Wired magazine. Rattled by the leaks and spooked by the unwanted publicity, the group canceled its second meeting and agreed to communicate by phone and fax only. But soon the phone calls stopped and the fax tray was empty. What had seemed like a breakthrough for Klein turned out to be a cruel tease. His pursuit of a poster boy was equally unsatisfying. During the rebuttal phase of the trial, Klein had come within a hairsbreadth of persuading Ted Waitt, the chairman of Gateway, to testify. Waitt was young, hip, ponytailed, iconoclastic, and blindingly wealthy. And as he told one of Klein’s intermediaries, G “ ates already hates my guts.”But at the last minute, Waitt had lost his nerve—and the ndings fi of fact hadn’t helped him relocate it. Nor 209

JOHN HEILEMANN

had they changed anything for Eric Schmidt, whom Klein regarded as not only clever but uent fl in a tongue rarely spoken in the Valley: English. While Schmidt was happy to talk privately to Klein, about remedies or anything else, experience had taught him that whenever he invoked Microsoft’s name in the press, one of Novell’s products would soon stop working smoothly with Windows. Then there was Steve Jobs. Back in the spring of 1998, at the end of the meeting where he reamed out a government lawyer, Jobs had made an extraordinary, however improbable, statement: if the DOJ took a serious shot at breaking up Microsoft, he would personally write a $10 million check for a legal-support fund to back the effort. Klein had no interest in calling in that pledge. He simply hoped, now that the remedy Jobs so ardently advocated— one that was anything but d“ ickless”—was a live possibility, Apple’s chairman might be persuaded, at this pivotal moment in this historic trial, to stride to the center of the public stage and speak his mind. Sure, Jobs told Klein. On the same condition we discussed before: that Andy Grove take the stage beside me. “It’s all completely predictable,”a leading Valley gure fi said. P “ eople hear all this talk about the post-PC world and they buy this line that Microsoft’s power is waning, and it’s just not true. People have no idea how much power they still exert.”He went on, “Ted Waitt needs access to Windows 2000 absolutely as soon as his competitors have it; he can’t afford to say anything that would jeopardize that. Eric Schmidt needs access to Microsoft APIs to make Novell’s stuff work with Windows; he isn’t going to mess with that. Without Microsoft Offi ce, Apple is dead. Dead. Is Steve Jobs going to risk losing Offi ce? C’mon.” After two years of total immersion in the computer business, Klein understood the mix of fear, neediness, and realpolitik that 210

Pride Before the FALL

was a by-product of Microsoft’s power. He also knew cowardice and hypocrisy when he saw it. The Valley’s silence had elements of all these things. It also had a message Klein could hardly miss: when it comes to remedies, you’re on your own.

THE STATES

begged to differ: when it came to remedies, they wanted their say—and it was by no means clear they were going to get it. All throughout the trial, the 19 attorneys general had wrestled with the disjuncture between their de jure status as equals to the DOJ and their de facto status as second-class citizens. It was the DOJ that determined trial strategy, took the lead in settlement talks, and got all the ink. Most of the time, for most of the AGs, this was tolerable. The mediation, however, wasn’t. The trouble was Posner. He had locked them out, conducting the talks exclusively between Microsoft and the DOJ. For the fi rst few months—when the only news to leak was that the DOJ had submitted a proposal to break up the rm fi that was rejected out of hand by Microsoft and Posner—the states saw no cause for concern. Then, in early March, around the time of Draft 14, word started fi ltering out of Chicago that Posner was making headway with a set of conduct remedies, and the states began to fret. The hard-line AGs feared the DOJ would wimp out; the moderate AGs feared it would get snookered. Either way, the states had no intention of sitting by while it happened. To dissect the proposals being swapped back and forth, they needed some high-grade technical expertise. For that they turned to Silicon Valley. They turned, in particular, to Eric Hahn. Hahn was a former Netscape executive in his forties with a beard and a mustache and a head full of black curls. Since Netscape, he had occupied himself 211

JOHN HEILEMANN

by sitting on the boards of several start-ups, including Marc Andreessen’s new company, Loudcloud. Hired by the California AG, William Lockyer, Hahn would serve in secret as the states’ unoffi cial technical adviser. It was Hahn who helped the states understand how provisions that looked solid on paper were actually unenforceable or riddled with loopholes. And as the mediation hurtled toward its denouement in the last week of March, it was Hahn who helped the states devise the hyperbolic set of demands they sent to Posner in the eleventh hour—demands that not only annoyed the judge beyond reason but provided Microsoft with a scapegoat for the mediation’s failure. The states believed they had no choice but to intercede, for they regarded the DOJ’s fi nal offer—Draft 18—as too weak for words. For one thing, Draft 18 would have let Microsoft continue folding new products into the operating system. For another, Draft 18 had an enforcement mechanism straight out of Groundhog Day; if a competitor thought Microsoft was violating the terms of the settlement, its only recourse was to complain to the government, which could then choose to take the company back to court. The states weren’t alone in fi nding this—and more— unacceptable. Within a day of Draft 18 being transmitted to Microsoft, its contents were leaking all over Silicon Valley. (Lockyer’s offi ce was rumored to be the faucet.) Portions of the document were read by phone to McNealy, Jobs, Ellison, and others; some Valleyites got their hands on complete copies. Soon Klein’s phone was ringing off the hook, an endless barrage of criticism blaring through its earpiece; the silence of the Valley was apparently over. Klein assured his callers that Draft 18 was tougher than it seemed—so much tougher, he expected Gates to reject it. “The DOJ thought there were poison pills in Draft 18,”one of the Belt212

Pride Before the FALL

way’s savviest lobbyists said later. “I mean, they really thought that. But we studied that draft, and there were no poison pills in there. Microsoft should’ve taken that deal and never looked back.” With the collapse of the mediation on April 1, everything started to happen in a rush. On April 3, Jackson delivered his ndfi ings of law, which ruled against Microsoft on three of the four charges—monopoly maintenance and attempted monopolization of the browser market under Section 2, and illegal tying under Section 1—and in its favor on exclusive dealing under Section 1. On April 5, the judge set a f“ast track”schedule for the remedy process, asking for a joint federal-state proposal by the end of April, and setting a date for a remedy hearing at the end of May. No one knew where the DOJ would end up. For several months in the fall and winter, Klein had appeared to be hellbent on structural relief. But given the positions he’d adopted and proposals he’d offered during the mediation, it was no longer clear what he wanted to do about Microsoft. Nor was it clear, if Klein still wanted a structural remedy, that he had the credibility to argue for one. H “ ow in God’s name do you go in and ask for a breakup when everyone knows that two weeks ago you would have accepted so much less?”Gary Reback asked. Y “ ou can’t. You’re screwed.” It was the week after the mediation fell apart and Reback was eating a chocolate-chip cookie in a conference room at Wilson Sonsini. Dressed casually, in an open-necked shirt, khakis, and a denim jacket, he didn’t look like a lawyer, and there was a reason for that: Reback was in the process of shedding his skin. No longer a practicing attorney—this was one of his last days in residence at the law rm—he’d fi recently become the founding CEO of an Internet start-up. This seemed as good a second career as any for a bone-deep zealot. Still, it was diffi cult to imagine Reback doing anything else for a living besides making Gates’s life miserable. (In 213

JOHN HEILEMANN

his offi ce he kept a framed front page of the San Jose Mercury News with the headline “Experts Say Netscape Complaints to Gather Dust.”) And while Microsoft was one of the things that he was trying to slough off—“I’ve checked out on that,”he kept saying—the outcome he foresaw for the case plainly caused him pain. “There won’t be a breakup now—I can’t see it,”he said quietly. N “ othing structural, nothing substantial is likely to come out of all of this. We’ll get some conduct remedies and they’ll accomplish nothing and we’ll be back where we started.”A number of factors led Reback to this conclusion. The political climate was terrible for a structural remedy: already Klein was being attacked by some congressmen for even considering a breakup. The economic climate was terrible, too: at that moment the Nasdaq was melting down. And Klein had done himself no favors with the mediation. O “f course your strategy in settlement talks is different,”Reback said. Y “ou would take something less than optimum to get it into effect immediately; you trade the strength of the remedy for speed and certainty. And you might argue that point in court. But the reality is, with all the leaks, everyone knows what you would have accepted, which makes it very hard to come back later and ask for more.” Finally, Reback laid a measure of blame on Silicon Valley. When Klein had come out to the Valley to test the waters on remedies, he’d found them tepid. When he’d asked for the Valley’s public support, he’d been given next to none. If Klein had decided not to go the extra mile for an industry that wouldn’t go an inch for the DOJ, who could blame him? P “ eople have made too much money here,” Reback said. “They say, W ‘ hat’s the upside for me to get involved in this?’ Which is a natural thing to ask if you’re worth $1 billion.” I mentioned that a group of Valley bigwigs, including some from the Intuit meeting, were talking about drafting a white paper on remedies. 214

Pride Before the FALL

Reback sighed a weary sigh. D “ on’t they get it?”he asked. I“t’s too late. They had their chance . . . and they blew it.”

GARY REBACK

rarely represented mainstream thinking on any subject, but here was an exception. In the early days of the remedy phase, the prevailing wisdom was that Klein would leave Microsoft structurally undisturbed. Dan Rubinfeld, who had left the DOJ’s payroll and returned to teaching at Berkeley, thought so, much to his regret. He cited two reasons why he believed a breakup had been taken off the table. The rst fi was Judge Jackson’s visible unease with the idea, and the second was the s“hocking”lack of public support for it in Silicon Valley and the industry more generally. W “ e won this great victory—they won this great victory— and then they refuse to speak up?”he asked. W “ hat’s with them?” The states were equally convinced that Klein had abandoned the concept. For some time, many of the AGs had been in favor of forcing Microsoft to auction off the Windows source code—a remedy they saw, in the words of the Iowa AG, Tom Miller, as s“omewhere between conduct and structural.”A year earlier, in March 1999, at their annual convention in Washington, they had presented a detailed and comprehensive plan in that vein. But when Eric Hahn began looking into the feasibility of the scheme, he quickly realized it was doomed from birth. The Windows code was constantly evolving; what precisely would the licensee get? Making sense of the code would require Microsoft’s assistance; how likely was that under these circumstances? Plus, whoever bought the code would be in competition with the company whose programmers wrote it in the fi rst place—not a tremen215

JOHN HEILEMANN

dously appealing commercial proposition. I“ spent a week calling around, trying to nd fi someone who’d want to bid in an auction of Windows,”Hahn recalled. “I couldn’t nd fi a single company.” Robbed by Hahn of their favorite remedy and by Klein (so they thought) of the toughest, the states came up with a package of three sanctions they called c“onduct plus”: severely limiting Microsoft’s ability to fold new products into Windows; forcing it to spin off IE into a separate company; and compelling it to create versions of Offi ce for other operating systems. During their respective deliberations, the states and the DOJ cut off contact with one another, but as soon as the AGs settled on c“onduct plus,”they sent the plan to the DOJ, unsolicited. The response they received was perfunctory. Up to the end, many AGs—and industry executives, lobbyists, and trial-watchers—believed the states were pursuing more far-reaching remedies than the DOJ was. They had no idea how wrong they were. On the Sunday afternoon 24 hours after Judge Posner pulled the plug on the mediation, Klein had summoned his inner circle— Melamed, Bresnahan, Blattner, Boies, and Malone—to the DOJ. W “ ell, boys, we’re going back to court,”Klein said. W “ hat remedy do you favor?” To a man, they answered: O “ ps-aps.” Ops-aps was a diminutive nickname for a large idea. Large, but simple: that Microsoft be sliced into two companies, one (ops) containing the various incarnations of Windows, the other (aps) containing everything else—above all Offi ce, with its nearmonopoly on productivity software. The idea of splitting up Microsoft “horizontally”had been kicking around the computer business for years. The objection had always been that, rather than creating competition, it created two monopolies; and according to classical economics, two medium-size monopolies are even worse 216

Pride Before the FALL

than a single giant one. Yet once Windows and Offi ce were separated, went the theory, neither would have a secure monopoly any longer. They would begin competing with one another directly and indirectly. Freed from the shackles of the OS, the aps company would have an incentive to work with rival operating systems such as Linux, which would in turn become stronger competition for Windows. And deprived of Offi ce, the ops company would have an incentive to work with rival applications companies. Maybe more signifi cant, both companies would have the incentive and the nancial muscle to compete directly against one another. The ops fi company might get into the applications business, while the aps company might turn itself into a middleware platform—Offi ce as the new Netscape! Klein and his deputies appreciated the simplicity of ops-aps, its lack of regulatory muddle (no restrictions on what markets each company could invade), and the competitive dynamics it promised to unleash. Yet for Klein, one of the chief virtues of opsaps was its relative lack of vices. Among the other breakup plans the DOJ studied, more often than not the potential benefi ts were offset by overwhelming risks. The Baby Bills option was a good example. Dividing Microsoft into three identical companies, each with the same intellectual property and nancial fi resources, might achieve a desirable goal: instant competition in the OS market among the three Windows children. Yet it might also fragment the Windows standard, since there was no guarantee that the children would continue to produce compatible software. “It’d just be Unix all over again,”Hahn said, referring to an OS forever hobbled by incompatibilities among its many fl avors. Or maybe it would be like nothing the industry had ever seen before. Carving Microsoft into three identical siblings along no established business lines and then setting them loose in the world would be the commercial 217

JOHN HEILEMANN

equivalent of introducing a mutant strain into the Amazon rainforest—thoroughly unpredictable, and possibly dangerous. The dangers of ops-aps, by contrast, were minimal. “The biggest risk is that it doesn’t achieve much of anything,”Stanford’s Garth Saloner explained. Y “ ou separate the operating system from the applications. These things are logically separable. The applications continue to be produced. The operating system continues to be produced. The OS standard remains intact—you don’t risk fragmenting it. There are lots of third-party application providers; they still work with the Microsoft OS company. You get some leveling of the playing eld, fi but life goes on pretty much as before. The question is, does it change anything? Is there real competition that comes about? Do you get any real upside? But on the downside, the worst-case scenario is that you have what you had before except you have it in two companies. I think, in that sense, this is actually a fairly conservative proposal.” Klein thought that was true in many senses. Compared with conduct remedies, which r“equire a lot of court time and ongoing supervision and playing catch-up,”he said, ops-aps was clean and crisp and market-minded. “That’s the value of a structural remedy: you take ’em apart and let ’em go back and play in the market; you don’t go to court every time and argue, I‘ t was a foot fault!’ N ‘ o, it wasn’t!’ Y ‘ es, it was!’ ”There was another value to breaking up Microsoft, Klein said: it was a punishment that tfi the crime. W “ hat we found in Microsoft was a serious pattern of practices and behavior that clearly by any stretch of the imagination was predatory, lawless, and indefensible,”he said. “The CEO of a major OEM said to me after the trial was over, ‘There’s only two people I would say this to, you and my wife: Guilty. As. Charged.’ ” Considering all this, Klein believed his breakup plan was not only conservative but m “ odest.”Yet it was about to raise an 218

Pride Before the FALL

awfully big ruckus—in no small part because so few expected it. That was the story of Klein’s pursuit of Microsoft: a four-year parade of confounded expectations. When he took over as the nation’s top trustbuster, nobody thought he would make a run at Redmond; and when he did, nobody thought he would win. At Microsoft, from Gates on down, they assumed he would overplay his hand; in the Valley, they suspected he would eventually fold. But none of the unanticipated turns of events had been more deeply surprising than this one. Was Klein surprised to fi nd himself here? “The case came in; it was based on the facts. You put your hand up, you take the oath, and you do the best you can,”Klein said. B “ ut did I think I would end up breaking up Microsoft? You’ve got to be kidding.”

ON APRIL 20, in a conference call with the state AGs, Klein revealed the DOJ’s plan. Shocked and pleased in equal measure, 17 of the states signed on. (Only Ohio and Illinois dissented, asking exclusively for conduct remedies.) A week later, the government presented the breakup proposal, together with a long list of conduct remedies to be implemented in the meantime, to Judge Jackson. Microsoft’s response was apoplectic. In recent days, the company’s honchos had adopted a defi ant stance. Speaking with the editorial board of The Washington Post, Ballmer said atly, fl “I do not think we broke the law in any way, shape, or form. I feel deeply that we behaved in every instance with super integrity.”On television, Gates declared, M “ icrosoft is very clear that it has done absolutely nothing wrong.”Now, with his company offi cially under the threat of divestiture, Gates heaped a thesaurusful of 219

JOHN HEILEMANN

scorn on the idea. It was u “ nprecedented,”“extreme,”“radical,” o“ ut of bounds.”And, fi nally, the crowning insult: “This was not developed by anyone who knows anything about the software business.” A month later, on May 24, the lawyers from Microsoft and the DOJ gathered once more in Courtroom 2. It was a brilliant spring day—bright, sunny, unseasonably hot. All along, Jackson had indicated that, if the government prevailed, there would be a separate process to deal with remedies. This was the hearing to begin that process. Everyone wondered what Jackson had in store. Microsoft asserted that, given the severity of the government’s proposal, somewhere between several and many months were required to depose more witnesses, gather more evidence, hold more hearings. The DOJ disagreed, though it assumed that the process would last at least a few weeks. But Jackson was determined to put this case on its path to appeal as quickly as possible. He’d decided that holding more hearings, in which eminent experts would offer confl icting predictions about the future of an industry that was inherently unpredictable, would be a waste of time. And he was fed up with Microsoft: with the disingenuousness of its witnesses; with its failure to settle the case; and with the recent public comments of Gates and Ballmer, whose lack of contrition was so bald, so galling, that it would play no small part in his decision, a few weeks later, to cast aside his qualms and affi rm the government’s call for a breakup. So when John Warden asked at the end of the day what the next step in the remedy process might be, the courtroom fairly gasped when Judge Jackson said, without missing a beat, “I’m not contemplating any further process, Mr. Warden.” Five minutes later, the Microsoft trial was over.

220

Chapter Nine

WHISTLING IN THE DARK

TWO MONTHS after Judge Jackson decreed that Microsoft be rent asunder, I headed back up to Redmond to see Bill Gates again. The spring and summer of 2000 had been a pair of mean seasons in the software heartland of the great Northwest, and not just due to the judge’s rulings. The long-awaited and much-delayed launch of Windows 2000 in February was lackluster. The company’s revenue growth was fl agging, especially in its core OS business. The Wall Street analysts who followed Microsoft as meticulously as Sovietologists once scrutinized the Kremlin had slashed their forecasts of its sales for the year ahead by $1 billion or more—another reason the stock was taking a drubbing. In late June, the fi rm unfurled its master plan for the networked age with 221

JOHN HEILEMANN

the blaring of trumpets and the rolling of drums. Dubbed .NET, the initiative encompassed both a strategy and an assortment of technologies that Gates described as nothing less than a p “ latform for the next-generation Internet.”But while everyone agreed that .NET was bold and ambitious, they also concurred that it was not fully baked. For the press, .NET was a one-day story; for much of the industry, a one-day shrug. On Microsoft’s campus, frustration had turned to a sense of defeat. At “ the club, in the steam room, people who used to talk about the great things we were doing, all they want to do now is give you opinions about the trial,”Craig Mundie remarked. “Even family members are like that. It’s discouraging.”After talking for an hour about the challenges of taking on AOL with Yusuf Mehdi, who’d switched over from Windows to work on the MSN portal, I asked him if the trial had affected morale. “There’s been disruption, for sure,”he said, “but there’s also been a circle-the-wagons mentality, which is good, in a way.”Mehdi paused. “My mom asks me, though, Y ‘ usuf, is Bill really that bad?’” Then there was the exodus: for the fi rst time in Microsoft’s history, the company was hemorrhaging talent. The bleeding went from top to bottom, from high-profi le pashas like Nathan Myhrvold, Greg Maffei, Brad Silverberg, and Tod Nielsen, to browser warriors like John Ludwig and Ben Slivka. In several cases, executives who had testifi ed in the trial—Eric Engstrom, say, or Nathan’s brother, Cameron Myhrvold—left the company almost the instant they stepped down from the stand. By Microsoft’s count, around 50 employees were peeling out every week, but other estimates put the number three times that high. Some left in search of dot-com riches, others for the thrill of running their own show. Some had grown weary of Microsoft’s size and proliferating bureaucracy. When Paul Maritz announced his resignation three 222

Pride Before the FALL

months after my visit, it drove home a brutal but irrevocable truth: Microsoft was no longer the place to be. Microsoft’s offi cial reaction to the departures was stunning. In an industry spurred by the sparking of synapses, Gates had long recognized that the most precious raw material was gray matter, and Microsoft prided itself on acquiring only the best. But now I kept being told that many if not all of the big names who had left—men who’d run large swathes of Microsoft when the company was at its zenith—were in fact dead wood; that Ballmer had merrily chucked them out the door. When I asked the new CEO if this was true, he shrugged and smiled. W “ e’ve lost senior people who I wish hadn’t left, and we’ve lost senior people where I’m ne, fi I’m happy, it’s OK,”Ballmer said. W “ e’ve got both categories, and we may have more of the latter than the former.”Microsoft’s marketing chief, Mich Mathews, remarked to me, W “ e could lose 40 percent of the IQ in this company and still be the smartest.”She said, All “ we really need are three smart guys.” When the smartest of the smart guys announced in January that he was handing the CEO reins to his best friend and taking up the title of c“hief software architect,”some observers wondered how meaningful it was; surely the buck would still stop with Bill. Yet Gates actually wound up relinquishing more control over the company than even many Redmondites anticipated. In short order, Ballmer began imposing new processes and disciplines on Microsoft’s operations. And he began systematically replacing Gates’s managers with his own team. “Bill and Steve have different attitudes about people,”an ex-Microsoft exec said. “Bill likes smart people—plain smart. Steve likes people who get shit done.” Offi cially, the rationale for Gates’s decision was twofold. First, Microsoft had simply become too large and unwieldy for one person to be both chairman and CEO. And second, Gates yearned to 223

JOHN HEILEMANN

get back to the role he had played in the company’s salad days, when he had been intimately involved in the design and development of its key products. Even so, many of Gates’s friends and colleagues believed the antitrust suit had played a part here, too; that it wore him out, beat him down, and induced him to seek a less strenuous role. “It’s all been very hard on Bill—I mean physically; it literally made him sick,”Greg Maffei said. I“ think the reason he’s no longer CEO is directly attributable to this experience with the courts and the government.”

GATES HAD GIVEN no published interviews since Jackson’s breakup order, so I had little idea what to expect when I came trundling into Building 8. Outside, the soft summer morning sun sent a stream of buttery light through Gates’s picture window. The fi rst thing I noticed was that he looked as if he’d been spending some time outdoors; his freckles were oranger than normal, almost the color of Tang, and his skin tone was closer to ecru than its customary eggshell. He seemed thinner. His greeting was warm and full of good humor. As we settled into our chairs for our hour together— which would wind up being closer to two—it became clear that whatever had drained the juice out of Gates before our last meeting, his tank had been refi lled during the 18 months since. Gates was obviously relishing his new role as chief software architect. In abundant detail and with avid enthusiasm, he described the genesis of .NET, its technical underpinnings, and his role in its concoction. He sang the praises of XML, of distributed computing; he lectured me with verve about p “ robabilistic input APIs”and “loosely coupled message-based programming.”Back in 1995, Microsoft had embraced the Internet, he said, but only as a 224

Pride Before the FALL

feature. I“t was the most important feature—but it was still a feature,”he explained. Now everything would be different. With .NET, the embrace was total; the Net was all. When I’d mentioned Sun in our previous interview, Gates’s response had been as banal as it was disingenuous: “Every comment I’ve made about Sun had been positive—Sun’s a good company.”Now I raised the subject again, pointing out that Sun’s software wizards, the inventors of Java and Jini, had been talking for years about many of the ideas Gates was discussing today; they contended that .NET was, at bottom, an endorsement of their corporate motto: “The network is the computer.” Gates, who’d been pitching back and forth in his chair like a hummingbird at a feeder, dug his heels into the carpet, propelled himself bolt upright, and apped fl his arms. “The most nonsense I’ve ever heard!”he exclaimed. “But it’s not unexpected. The business model of Sun is to sell overpriced hardware.”When it came to solving the complex software problems that .NET was addressing, he said, S“un’s not involved in that. Sun has never had anything to do with that.” At the launch event for .NET, Gates had called the initiative a “bet-the-company thing.”Didn’t it worry him to be undertaking such an ambitious project at precisely the moment when so many of his best and brightest were fl ying the coop? L “ ook at the top of this company,”Gates shot back. W “ e’ve had more continuity of management leadership than any technology company ever.” Maybe so, I said. But doesn’t it hurt to lose a Nathan Myhrvold? To lose a Brad Silverberg? I“t doesn’t diminish our ability to do .NET, absolutely not,”he said. W “ e have a team here that is the best software development team in the world. It just shows the embarrassment of riches Microsoft has had, that even without those two guys, we can go and do phenomenal things. But those are great 225

JOHN HEILEMANN

guys. If they want to come back and work here, I’ll take them in a second.” But not many of the others, apparently. Did Gates, like Ballmer, regard some of the senior people who’d left as dead wood? I“ won’t name their names, but certainly,”Gates said. C “ ome on, give me a break. This is not simple stuff.” I mentioned that Craig Mundie had told me, “The trial has signifi cantly diminished our ability to attract and retain people of the highest caliber.”Between the shadows cast by the DOJ and the siren’s song of Internet start-ups, did Gates think it would be increasingly diffi cult for Microsoft to replenish its pool of human capital? “It’s a very competitive environment for getting smart people,” he replied. P “ eople think, ‘I’ll go do an IPO and be rich tomorrow.’ I don’t promise them anything like that. I promise them more impact.”Gates went on: S“ o many start-ups are doing the same things and terribly short-term things. B2C? That fad is gone. B2B? That’s in the fad stage right now.”For those with limited interest in fads, Gates said, Microsoft retained a powerful allure. “The things we care about are long-term things, tough things. We can afford expensive things. We build 747s. We don’t build Cessnas.”

AFTER A WHILE, we turned to the trial. To many observers, the most inexplicable of all of Gates’s and Ballmer’s actions had been the unrepentant poses they’d struck in public in the period after Judge Jackson issued his verdict but before the DOJ and the states submitted their proposed remedies. In private, they had been even more strident, with Gates telling a gathering of Microsoft employees that the company was a victim of a t“ravesty of justice,”that w “ e are absolutely confi dent we will win on appeal,”and that they 226

Pride Before the FALL

would n “ ever allow”Microsoft to be broken up. In the aftermath, a number of state AGs had cited Gates’s and Ballmer’s public comments as a s“lap in the face”and said that Microsoft’s aggressive posture had factored in the decision to ask for a breakup. Judge Jackson himself told The New York Times that the remarks had a“stounded”him and helped make a breakup “inevitable.” With employee morale dismal and the stock price plummeting, Gates and Ballmer must have fi gured that anything less than an adamant stance would have sent a terrible message to the troops. Still, I asked Gates if, on refl ection, he thought those remarks were a tactical blunder. Y “ ou can accuse us of having put Internet support into Windows,”he answered. Y “ ou can fault us for contributing signifi cantly to the PC market and what that’s meant for the software industry and prices and all of those things. We believe that what we’ve done is absolutely pro-competitive, and it’s our right to stick up for that.” I understand you have the right, I said. What I’m asking here is a tactical question. It was a moment of great political sensitivity. Wouldn’t it have been better to keep your mouths shut? The look on Gates’s face fairly radiated contempt. W “ e are defending principles of great importance,”he huffed. O “ ur right of appeal. Our right to innovate. Our right to have an appeals court sit and judge that.”Even to mention tactics, he seemed to be suggesting, would sully those principles with the grubbiness of politics. Another thing Jackson had told reporters was that he didn’t think Microsoft had taken the case seriously enough. Had they? “Hey, you should see our legal bill—are you kidding?”Gates quipped. O “ f course we took this seriously.” The conventional wisdom was that Microsoft and its lawyers had made a hash of the case from start to nish. fi They had failed to 227

JOHN HEILEMANN

settle before the trial started and after it was over. In between, they had waltzed into a federal court and tried repeatedly to claim that day was night and night was day, that up was down and down was up, that words with clear meanings were somehow ambiguous— or even meant the opposite of what they plainly said. They had defended a position—that Microsoft was not a monopoly—that even pro-Microsoft economists regarded as untenable, if not downright loopy. With the benefi t of hindsight, are there things that you regret? I asked. Where you look back and think, We made a mistake? U “ nderstand,”Gates said, t“hat this is an attack on our ability to add new features to Windows, so it’s not the kind of thing where you can say, O ‘ h, oh, that? Oh, sure. We’ll give that up.’ ”In the end, he believed, the law was on their side. E “ very action we took that’s been attacked in this case is Microsoft working on behalf of consumers, working in exactly the way we should work.” There was not much more to say. In the face of overwhelming evidence to the contrary, this was Gates’s bottom line: They’d done nothing wrong. They’d made no mistakes. In the end, they’d be exonerated. And everything at Microsoft was A-OK. There was no hint of artifi ce in any of his statements. I believed he believed every word he was saying. It was one of those moments where you question yourself. Is this man hallucinating? Or does he glimpse a reality that I’m too blind to see? Either way, it raised another question: Given what you believe about yourself and Microsoft, how does it feel to have the US government calling your company crooked and calling you a lawbreaker? Gates stared out the window and thought about the question for a good long time. Still gazing at the trees, he began, “There’s a certain irony to being in a situation where we literally have to bet 228

Pride Before the FALL

the company on an unknown business framework and a new set of technologies just to stay in any type of position at all, that we have to do that, that this is the most competitive market the world has ever seen. The notion that somebody could come in and say (a) we’re a monopoly, (b) we shouldn’t be able to add features to our product, and (c) throw a little mud in the process—the irony is deep. Very, very deep.” Has the whole thing left you cynical about the legal process? N “ o,”Gates said simply. I said I found that hard to believe. “The law is interesting,”he mused. “The US judicial system, like, 98 percent of the time works extremely well.”For the fi rst time in a while, Gates looked me in the eye. “This case, in the fi nal analysis, will be part of that 98 percent.”

229

Chapter Ten

THE VERDICT

AS THE old economy gave way to the new, some of the most profound questions arising for public policy revolved around how a legal regime conceived and enacted in the industrial era applied to the information age—if, indeed, it applied at all. Whatever the ultimate outcome of US v. Microsoft, the case promised to yield a historic precedent, one that would shape fundamentally the terms of competition in the dynamic high-tech markets at the center of an emerging postindustrial order. “I cannot imagine a more important verdict for the future of antitrust,”Dan Rubinfeld said. “If our victory is upheld, it will set the rules of the road for years to come. If it gets overturned, almost anything goes.” 231

JOHN HEILEMANN

Before Judge Jackson handed down his remedies, the appeals process in the Microsoft case seemed likely to be prolonged, expensive, and unpredictable. With the breakup order, what had been likely was now virtually guaranteed. Jackson’s decision also guaranteed an assault by Microsoft on his reasoning and competence that would be more withering and systematic than ever. Nevertheless, the gruff old bear in the long black robes greeted the appeals process almost eagerly, and with no small sense of personal relief. By the summer of 2000, Jackson had spent nearly three years presiding over the government’s battle against Microsoft—a battle that was not only contentious, arcane, and subject to intense public scrutiny, but that took place on an uncharted patch of legal terrain where old doctrine and new technologies came crashing together. For Jackson, that terrain had always been a challenge and had sometimes been a struggle. He felt he’d done well at fi nding his way, but as the trial dragged on, some doubts crept in. “I have been in splendid isolation on this case long enough,”the judge told The New York Times in March, in an interview published after the trial was over. “I would welcome another mind studying my work product to see if I am correct or wrongheaded,”he said. I“ want to bring in other minds as quickly as possible.” In April, at a conference in his chambers with the lawyers for both sides, Jackson identifi ed precisely the minds he had in mind: those encased in the skulls of the nine Supreme Court Justices. Under the auspices of an obscure federal law called the Antitrust Expediting Act, antitrust cases o“ f general public importance in the administration of justice”could be appealed directly to the High Court for a ruling. In the 26 years since the Expediting Act was passed, the government had invoked it on only two occasions, both times in its litigation against AT&T. Jackson had no doubt 232

Pride Before the FALL

that the Microsoft case was a matter of great public import, with implications for the national (and perhaps global) economy, the stock market, the technology sector, and the business world at large. And he had no doubt that the questions surrounding a breakup of Gates’s company were every bit as urgent as those surrounding the dismantlement of Ma Bell had been in 1970s and 1980s. If ever there was a case for which the Expediting Act seemed to have been written, Jackson believed, US v. Microsoft was it. Of course, Jackson had another motive for wanting the appeal to go straight to the top: it would circumvent the Appeals Court, which had so rudely overturned his decision in the consent-decree case. On this issue, as had been the case so often during the trial, Jackson and the government were in perfect concurrence. And, once again, they were at odds with Redmond. Microsoft’s offi cial position was that, especially considering the gravity of the proposed remedies, it was entitled to pursue the appeals process through its full and normal course. But, in fact, Gates and his allies wanted to wind up in the Appeals Court for precisely the reason that Jackson, the DOJ, and the states did not: because they all regarded that venue, with good reason, as hospitable to Microsoft’s arguments. In the weeks after the breakup order, the parties engaged in a urry fl of feverish and sometimes inscrutable legal maneuvering. There were two matters at stake. The fi rst was Microsoft’s desire to have the remedies stayed. According to Judge Jackson’s order, the divestiture was automatically put on hold until all the appeals in the case were complete. The conduct remedies, however, would kick in a few weeks hence. Microsoft considered the behavioral provisions intolerable. Included were many items the DOJ had sought over the years in the settlement talks, such as a uniform price list for Windows, a ban on exclusive contracts, opening up 233

JOHN HEILEMANN

the Windows APIs, restrictions on bundling, and granting OEMs some freedom to alter Windows. As a formality, expecting nothing to come of it, the company petitioned Jackson to stay the conduct remedies, and then went over his head to ask the Appeals Court to do the same. But on June 20, without any warning, Jackson announced he was staying his own order—an order he’d signed only two weeks earlier. On the Microsoft campus, there was overjoyed befuddlement; at the DOJ, downcast confusion. In both places, people wondered if the judge was senile. As usual, Judge Jackson proved himself more cagey than crackpot. His handling of the remedy process, it was generally agreed, had been the most glaringly dubious of his actions in the trial. Microsoft complained that Jackson had denied the company due process. And even among antitrust experts who sided with the government, there was widespread incredulity that he had devoted a single half-day hearing to the monumentally complex issue of hacking Microsoft in two. “I have nothing good to say about it,” commented William Kovacic, a law professor and antitrust specialist at George Washington University. I“t was a tremendously glib way to handle a very serious process.”But now Judge Jackson confounded his critics. If no remedies of any kind would be imposed until after a higher court ruled, how could Microsoft or anyone else moan about a lack of due process? The second legal tussle was over the Supreme Court. In July and August, respectively, Microsoft and the DOJ led fi briefs with the Court on the question of a direct appeal. The government’s argument rested on the idea that, given the headsnapping pace of the software industry, time was of the essence; a drawn-out appeals process would allow an unconstrained Microsoft to grow only more dominant. Microsoft’s argument was based on the expectation that its appeal would be so sweeping and multifari234

Pride Before the FALL

ous—challenging Jackson’s ndings fi of fact, his interpretations of law, the procedures he used, and the evidence he accepted—that it would i“mpose an extraordinary burden on this Court.”Apparently, this Court agreed. In September, it turned down the DOJ’s request, and, in effect, handed the case over to the Appeals Court. According to the schedule the Appeals Court laid out, oral arguments would take place early in 2001; a ruling was likely sometime in the spring. After that, most antitrust afi cionados assumed that one of the two parties would send the case bouncing back up the Supreme Court’s steps. Others speculated that the new Department of Justice, appointed by the new Republican president, George W. Bush, would choose not to pursue the case further after the Appeals Court ruled, especially if its ruling favored Microsoft. But although such an action would not be unprecedented, it would be unusual—and probably irrelevant. All that would be needed to keep the case alive was the presence of one sufciently fi determined (or demented) state attorney general. Unless Gates could somehow orchestrate a unanimous anti-incumbent sweep through the nation’s statehouses, the appeals process was likely to continue to the point of its exhaustion. In the higher courts, Microsoft’s claims would be many and varied, but at the core of its appeals strategy would be its arguments on tying. Long after Jackson had found the company guilty of monopoly maintenance, and even longer after the DOJ had put that charge at the center of the lawsuit, Microsoft continued to insist that the complaint about the integration of IE into the operating system remained the true linchpin of the government’s case and Jackson’s ruling. In August, Gates informed me in no uncertain terms that, despite all the spin to the contrary, US v. Microsoft was still little more than a browser case, if you looked at it carefully. Of the three counts of violating the Sherman Act on which 235

JOHN HEILEMANN

Jackson had found Microsoft culpable, one was illegal tying itself; another was attempted monopolization of the browser market, which the rm fi was said to have carried out primarily by tying IE to Windows; and the third was monopoly maintenance—a broader count, Gates allowed, but one in which the company’s supposedly predatory product design decisions were a large factor. If Microsoft won the tying argument on appeal, Gates believed that it would severely undercut, if not completely obliterate, the rest of the ruling against the company in one fell swoop. Gates’s legal interpretation struck many antitrust experts as excessively hopeful in tone and as something of a stretch in substance. Yet most of those same experts agreed that tying was the area in which Jackson and the government were most vulnerable on appeal. (Even Joel Klein privately admitted as much.) They agreed as well that the tying and attempted monopolization claims were indeed bound up together legally, and that if the former fell, the latter would be in jeopardy. And they agreed that if Microsoft succeeded in chipping away at the ruling against it—if it could knock out even one of the counts against it, and certainly if it could knock out two—the justifi cation for breaking up the company would become increasingly tenuous. In legal circles anywhere outside Redmond, the notion that the appeals process would produce an acrossthe-board reversal was seen as highly implausible. But the possibility that Gates and his legal team would extract the company from the jaws of divestiture seemed not just plausible but reasonably likely. What if the efforts at extraction failed? What if the antitrust experts were wrong—as they often had been in analyzing the Microsoft case—and Judge Jackson’s ruling and remedies survived intact? The picture then was far more opaque. For all the scorn heaped upon it, Jackson’s refusal to engage in lengthy remedy proceedings was rooted in at least one home truth: nobody really had 236

Pride Before the FALL

a clue what a breakup would mean. In Silicon Valley, there was a plethora of sensible, intelligent executives who thought the government was right: that halving Microsoft would unleash competition and let innovation reign. But there were also plenty who believed the opposite: that the industry would simply be saddled with two Microsoft monopolies instead of one. There were many who argued that the applications company would fl ourish while the OS company withered; there were others who said that both would be doomed. Would consumers benefi t from a breakup or would they suffer? Would shareholders prosper or would they get hammered? For every two questions, there were at least fi ve theories. Putting aside prognostication, only one thing was certain: a breakup would mean the end of Microsoft as we knew it. Yet all the speculation about the effects of a breakup obscured a simple but staggering fact. We were already witnessing the end of Microsoft as we’d known it. For three years, Gates and his company had been caught in a pincers. Pressing in from one side was a technological shift more sweeping than any since the rise of the PC: the Internet. And pressing in from the other was a menace more threatening than anything Microsoft had ever encountered in the world of business: the United States government. For a lesser company, either of these forces alone would surely have spelled ruin. But it took both, working in devilish harmony, to put Microsoft on the path to a new identity. On Microsoft’s campus they could sense the transformation, but they struggled for the words to describe it with precision. When I visited in June 2000, the people I spoke to were more apprehensive about the future than I had ever seen them. With the company turning 25 years old that summer, middle age was encroaching; could Microsoft stay vital? “The question is: Do we recede or do we maintain our leadership?”asked Craig Mundie. 237

JOHN HEILEMANN

O “ r are we superseded by another company that rises up and takes leadership? People say .NET is a ‘bet the company’ thing. But companies don’t roll over and die. The question is whether we become just another company.” When Nathan Myhrvold still worked at Microsoft, he had an expression for just such occasions—“putting a name to the nameless dread.”After spending some time with Mundie, though, it began to become clear that the dread Microsoft was feeling had a name after all. “Either Microsoft will stay Microsoft or it will become IBM,”he said. “That’s just my opinion. But I think those are the stakes involved in this transition.” At the dawn of the PC era, when Big Blue’s power was as yet unchallenged, the personal-computing revolution had presented the company with a choice: Resist it, ignore it, or get with the program. IBM opted to get with it—or at least to make the effort—and for several years it dominated the market. But the forces of change unleashed by the PC were too swift, democratic, and decentralizing to contain. At the end of 2000, IBM was still the biggest manufacturer of mainframe computers in the world. It had a stock market value of more than $150 billion. It had happy shareholders, happy customers, happy employees. Yet few people feared it or followed it; nobody considered Big Blue a leader anymore. Microsoft at the beginning of the new century was on an eerily similar trajectory. Just as IBM had embraced the PC, so Redmond was laboring mightily to embrace the Net. Yet in the glow of the effl orescent Internet economy, Microsoft’s position seemed, if not fragile, then increasingly peripheral. The real estate it controlled, the PC desktop, remained the most valuable territory on the digital map. But, as everyone could see, the universe of computing was expanding and exploding, while the desktop seemed to be shrinking in strategic importance. 238

Pride Before the FALL

Andy Grove found the parallel compelling. “For a long time in the 1980s, IBM was everything to Intel,”he explained. W “ e thought about them constantly, lived and died by their whim. Then around 1990, I woke up one day and it wasn’t so anymore. It wasn’t some momentous event. And now it was Microsoft who we thought about all the time. Maybe this is happening again—only this time, instead of Microsoft being replaced by another company, it’s being replaced by the Internet, by a whole bunch of things happening all at once.” Creeping giantism had begun to take hold at Gates’s rm, fi too. Microsoft’s goal had long been to retain its agility even as it grew—to be t“he smallest big company around,”as Brad Chase put it. Yet by late 2000, Microsoft had become a very big company, with 40,000 employees worldwide. Though that 40,000 included the largest concentration of skilled coders anywhere on the planet, the culture of the company had begun to smell as much of marketing and sales as it did of technology—a distinctly IBM-ish aroma. At the same time, the sheer scale of the software endeavors into which Gates had plunged Microsoft’s programmers had a certain whiff of old IBM as well. The Gates who boasted to me about how Microsoft “builds 747s”was the same man who, in the 1980s, had mocked Big Blue’s programmers by saying that IBM’s motto was: “Building the world’s heaviest airplane.” Meanwhile, Microsoft’s well-known insularity had taken on a new dimension. In their heyday, Gates and Ballmer were relentlessly in touch with the industry they sought to rule. On the fl oors of trade shows, in the hotel ballrooms at high-tech conferences, they picked brains, probed for clues, and tested their assumptions against the prevailing wisdom. No longer. Hemmed in by his wealth and fame, Gates attended few industry events anymore, and when he did, his appearances were scripted; spontaneous 239

JOHN HEILEMANN

exchanges were strictly verboten. Even among his fellow infotycoons at Herb Allen’s annual schmoozefest in Sun Valley, Gates was known to keep largely to himself. (Kay Graham and Warren Buffett were the only guests with whom he routinely socialized.) As for Ballmer, when the new CEO was invited in the summer of 2000 to speak at one of the Internet industry’s preeminent conferences, the organizers were rebuffed with a messsage from his handlers: S“ teve says he doesn’t speak at conferences where he doesn’t have any customers.” There was one other parallel between Microsoft and IBM, and the irony here was thick. IBM’s entanglement with the government had paralyzed the company. By doing everything in his power to avoid such paralysis, Gates brought the government slamming down on Microsoft. The demoralized employees, the slumping stock price, the cloud of uncertainty hanging over Redmond—in a way, all of it was due to Gates’s IBM phobia. By trying to avoid Big Blue’s fate, Gates had instead done much to guarantee it. Not surprisingly, the suggestion that Microsoft might wind up as the new IBM was one that Gates and Ballmer were unwilling to countenance. When I asked Ballmer if it would be a bad fate to be perceived that way in fi ve or ten years—as successful and solid but no longer dominant—he nodded his head in violent agreement. Y “ es,”he said. “Terrible? No. Bad? Yes.”When I asked Gates the same question, he answered as emphatically: Absolutely.” “ Gates imagined for himself a rosier future. Though he told me he could envision a day—in his fi fties—when he would no longer be Microsoft’s chairman, he was e“xcited,”he said, that “in these next couple years, I’ll get to do some of my most interesting work.” To the extent he admitted his reputation had been muddied, he assumed, like John D. Rockefeller, the plutocrat with whom he was 240

Pride Before the FALL

so often compared, that he would be vindicated. But where Rockefeller had believed his vindication would be dispensed by history and in heaven, Gates expected to receive his very shortly—and here on earth. According to polls, he remained one of the most admired gures fi in the world of business. And his $21 billion charitable foundation had made him a hero in the world of philanthropy. The only thing missing was the higher court reversal he so manifestly considered his due. Yet no matter how favorable the courts’ nal fi verdict, it would never provide the kind of satisfaction for which Gates yearned. V “ indication will be bittersweet,”a Microsoft offi cial said ruefully one day, refl ecting on the tumultuous events of the past few years. “The company has suffered too much. Before, people thought the world of us. That we were great innovators. That we were this great engine of the new economy. Now, either the decision stands, in which case people think we’re criminals, or the decision is overturned, and people think we somehow got away with something. No vindication will erase that stain.” Truer words were never spoken. Before the Microsoft trial began, Gates was more than a high-tech hero; he was the pristine embodiment of the high-tech myth. At an impossibly young age, he’d come out of nowhere, consumed with ideas and a pure burning passion. He had launched a company that unleashed an industry, and then led that industry as it transformed an economy. For a long time, Gates represented everything that was inspiring about this protean phenomenon taking shape in our midst—its freshness and its ambition, its sense of possibility and its connection to the future. But like a fi gure lifted from classical tragedy, Gates sowed the seeds of his own undoing. He created a company that refl ected his image and fostered a culture that fed his sense of omnipotence. He mastered a business that rewarded farsighted241

JOHN HEILEMANN

ness, but he failed to develop his peripheral vision. In his arrogance he lost whatever perspective he once had, and in his monomania he was unwise to the ways of the world. He began his journey as an aspiring god, an illusion his universe nurtured and sustained. When his reckoning came, it was shocking and fi nal— and it seemed somehow ordained by the ages. For the wreckage of the trial revealed that Gates was mortal.

242

Go to Table of Contents

Trial Transcripts, Filings, and Documents Department of Justice Complaint Charging Microsoft with Violating the Sherman Antitrust Act (May 18, 1998) Microsoft's Reply to the Department of Justice's Complaint (July 28, 1998) Deposition of Bill Gates by David Boies August 27, August 28, and September 2, 1998 David Boies's Opening Statement on Behalf of the Department of Justice (October 19, 1998) John Warden's Opening Statement on Behalf of Microsoft (October 20, 1998) Judge Thomas Penfield Jackson's Findings of Fact (November 5, 1999) Judge Thomas Penfield Jackson's Conclusions of Law (April 3, 2000) Judge Thomas Penfield Jackson's Order to Break Up Microsoft (June 7, 2000) Microsoft's Appellate Brief to the United States Court of Appeals in Washington, D.C. (November 27, 2000)

Go to Trial Documents listing Go to initial reference

Department of Justice Complaint Charging Microsoft with Violating the Sherman Antitrust Act (May 18, 1998)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA, Plaintiff, v.

Civil Action No. 98-1232 (Antitrust) COMPLAINT

MICROSOFT CORPORATION, Defendant.

Joel I. Klein Assistant Attorney General A. Douglas Melamed Principal Deputy Assistant Attorney General Rebecca P. Dick Director of Civil Non-Merger Enforcement Jeffrey Blattner Special Counsel for Information Technology U.S. Department of Justice Antitrust Division 950 Pennsylvania Avenue, N.W. Washington, D.C. 20530-0001

Christopher S Crook Chief Phillip R. Malone Steven C. Holtzman Pauline T. Wan Karma M. Giulianelli Michael C. Wilson Sandy L. Roth John F. Cove, Jr. Jeane Hamilton Mark S. Popofsky Attorneys U.S. Department of Justice Antitrust Division 450 Golden Gate Ave., Room 10-0101 San Francisco, CA 94102 (415) 436-6660 David Boies

Special Trial Counsel

COMPLAINT -- Page 2

I. NATURE OF THIS ACTION 1.

This is an action under Sections 1 and 2 of the Sherman Act to restrain

anticompetitive conduct by defendant Microsoft Corporation (“Microsoft”), the world’s largest supplier of computer software for personal computers (“PCs”), and to remedy the effects of its past unlawful conduct. 2.

Microsoft possesses (and for several years has possessed) monopoly power in the

market for personal computer operating systems. Microsoft’s “Windows” operating systems are used on over 80% of Intel-based PCs, the dominant type of PC in the United States. More than 90% of new Intel-based PCs are shipped with a version of Windows pre-installed. PC manufacturers (often referred to as Original Equipment Manufacturers, or “OEMs”) have no commercially reasonable alternative to Microsoft operating systems for the PCs that they distribute. 3.

There are high barriers to entry in the market for PC operating systems. One of

the most important barriers to entry is the barrier created by the number of software applications that must run on an operating system in order to make the operating system attractive to end users. Because end users want a large number of applications available, because most applications today are written to run on Windows, and because it would be prohibitively difficult, time-consuming, and expensive to create an alternative operating system that would run the programs that run on Windows, a potential new operating system entrant faces a high barrier to successful entry. 4.

Accordingly, the most significant potential threat to Microsoft’s operating system

monopoly is not from a direct, frontal assault by existing or new operating systems, but from new software products that may support, or themselves become, alternative “platforms” to which

COMPLAINT -- Page 1

applications can be written, and which can be used in conjunction with multiple operating systems, including but not limited to Windows. 5.

To protect its valuable Windows monopoly against such potential competitive

threats, and to extend its operating system monopoly into other software markets, Microsoft has engaged in a series of anticompetitive activities. Microsoft’s conduct includes agreements tying other Microsoft software products to Microsoft’s Windows operating system; exclusionary agreements precluding companies from distributing, promoting, buying, or using products of Microsoft’s software competitors or potential competitors; and exclusionary agreements restricting the right of companies to provide services or resources to Microsoft’s software competitors or potential competitors. 6.

One important current source of potential competition for Microsoft’s Windows

operating system monopoly comes from the Internet, described by Microsoft’s CEO, Bill Gates, in May 1995 as “the most important single development to come along since the IBM PC was introduced in 1981.” As Mr. Gates recognized, the development of competing Internet browsers -- specialized software programs that allow PC users to locate, access, display, and manipulate content and applications located on the Internet’s World Wide Web (“the web”) -- posed a serious potential threat to Microsoft’s Windows operating system monopoly. Mr. Gates warned his executives: A new competitor “born” on the Internet is Netscape. Their browser is dominant, with a 70% usage share, allowing them to determine which network extensions will catch on. They are pursuing a multi-platform strategy where they move the key API [applications programming interface] into the client to commoditize the underlying operating system. 7.

Internet browsers pose a competitive threat to Microsoft’s operating system

monopoly in two basic ways. First, as discussed above, one of the most important barriers to the

COMPLAINT -- Page 2

entry and expansion of potential competitors to Microsoft in supplying PC operating systems is the large number of software applications that will run on the Windows operating system (and not on other operating systems). If application programs could be written to run on multiple operating systems, competition in the market for operating systems could be revitalized. The combination of browser technology and a new programming language known as "Java" hold out this promise. Java is designed in part to permit applications written in it to be run on different operating systems. As such, it threatens to reduce or eliminate one of the key barriers to entry protecting Microsoft's operating system monopoly. 8.

Non-Microsoft browsers are perhaps the most significant vehicle for

distribution of Java technology to end users. Microsoft has recognized that the widespread use of browsers other than its own threatens to increase the distribution and use of Java, and in so doing threatens Microsoft’s operating system monopoly. For this reason, a presentation to Microsoft CEO Bill Gates on January 5, 1997, on how to respond to the Java threat emphasized "Increase IE share" as a key strategy. (MS7 005529-44). 9.

Second, Microsoft recognized that Netscape's browser was itself a "platform" to

which many applications were being written -- and to which (if it thrived) more and more applications would be written. Since Netscape's browser could be run on any PC operating system, the success of this alternative platform also threatened to reduce or eliminate a key barrier protecting Microsoft's operating system monopoly. This is the threat that Microsoft's CEO Bill Gates referred to as the threat that Netscape would "commoditize" the operating system. 10.

To respond to the competitive threat posed by Netscape's browser, Microsoft

embarked on an extensive campaign to market and distribute Microsoft’s own Internet browser,

COMPLAINT -- Page 3

which it named “Internet Explorer” or “IE.” Microsoft executives have described this campaign as a “jihad” to win the “browser war.” 11.

Because of its resources and programming technology, Microsoft was well

positioned to develop and market a browser in competition with Netscape. Indeed, continued competition on the merits between Netscape’s Navigator and Microsoft’s Internet Explorer would have resulted in greater innovation and the development of better products at lower prices. Moreover, in the absence of Microsoft’s anticompetitive conduct, the offsetting advantages of Microsoft’s size and dominant position in desktop software and Netscape’s position as the browser innovator and the leading browser supplier, and the benefit to consumers of product differentiation, could have been expected to sustain competition on the merits between these companies, and perhaps others that have entered and might enter the browser market. 12.

Microsoft, however, has not been willing simply to compete on the merits. For

example, as Microsoft’s Christian Wildfeuer wrote in February 1997, Microsoft concluded that it would “be very hard to increase browser share on the merits of IE 4 alone. It will be more important to leverage the OS asset to make people use IE instead of Navigator." (MS7 004346). Thus, Microsoft began, and continues today, a pattern of anticompetitive practices designed to thwart browser competition on the merits, to deprive customers of a choice between alternative browsers, and to exclude Microsoft’s Internet browser competitors. 13.

Microsoft's conduct with respect to browsers is a prominent and immediate

example of the pattern of anticompetitive practices undertaken by Microsoft with the purpose and effect of maintaining its PC operating system monopoly and extending that monopoly to other related markets. 14.

Initially, Microsoft attempted to eliminate competition from Netscape by seeking

an express horizontal agreement not to compete. In May 1995, Microsoft executives met with

COMPLAINT -- Page 4

top Netscape personnel in an attempt to induce Netscape not to compete with Microsoft and to divide the browser market, with Microsoft becoming the sole supplier of browsers for use with Windows 95 and successor operating systems and with Netscape becoming the sole supplier of browsers for operating systems other than Windows 95 or its successors. Netscape refused to participate in Microsoft’s illegal scheme. 15.

Having failed simply to stop competition by agreement, Microsoft set about to

exclude Netscape and other browser rivals from access to the distribution, promotion, and resources they needed to offer their browser products to OEMs and PC users pervasively enough to facilitate the widespread distribution of Java or to facilitate their browsers becoming an attractive programming platform in their own right. 16.

First, Microsoft invested hundreds of millions of dollars to develop, test, and

promote Internet Explorer, a product which it distributes without separate charge. As Paul Maritz, Microsoft’s Group Vice President in charge of the Platforms Group, was quoted in the New York Times as telling industry executives: “We are going to cut off their air supply. Everything they’re selling, we’re going to give away for free.” As reported in the Financial Times, Microsoft CEO Bill Gates likewise warned Netscape (and other potential Microsoft challengers) in June 1996: “Our business model works even if all Internet software is free. . . . We are still selling operating systems. What does Netscape’s business model look like? Not very good.” 17.

But Mr. Gates did not stop at free distribution. Rather, Microsoft purposefully set

out to do whatever it took to make sure significant market participants distributed and used Internet Explorer instead of Netscape’s browser -- including paying some customers to take IE and using its unique control over Windows to induce others to do so. For example, in seeking

COMPLAINT -- Page 5

the support of Intuit, a significant application software developer, Mr. Gates was blunt, as he reported in a July 1996 internal e-mail: I was quite frank with him [Scott Cook, CEO of Intuit] that if he had a favor we could do for him that would cost us something like $1M to do that in return for switching browsers in the next few months I would be open to doing that. (MS6 6007642). 18.

Second, Microsoft unlawfully required PC manufacturers, as a condition of

obtaining licenses for the Windows 95 operating system, to agree to license, preinstall, and distribute Internet Explorer on every Windows PC such manufacturers shipped. By virtue of the monopoly position Windows enjoys, it was a commercial necessity for OEMs to preinstall Windows 95 -- and, as a result of Microsoft’s illegal tie-in, Internet Explorer -- on virtually all of the PCs they sold. Microsoft thereby unlawfully tied its Internet Explorer software to the Windows 95 version of its monopoly operating system and unlawfully leveraged its operating system monopoly to require PC manufacturers to license and distribute Internet Explorer on every PC those OEMs shipped with Windows. 19.

Third, Microsoft intends now unlawfully to tie its Internet browser software to its

new Windows 98 operating system, the successor to Windows 95. Microsoft has made clear that, unless restrained, it will continue to misuse its operating system monopoly to artificially exclude browser competition and deprive customers of a free choice between browsers. 20.

Microsoft designed Windows 98 so that removal of Internet Explorer by OEMs or

end users is operationally more difficult than it was in Windows 95. Although it is nevertheless technically feasible and practicable to remove Microsoft’s Internet browser software from Windows 98 and to substitute other Internet browser software, OEMs are prevented from doing so by Microsoft’s contractual tie-in.

COMPLAINT -- Page 6

21.

Internet browsers are separate products competing in a separate product market

from PC operating systems, and it is efficient to supply the two products separately. Indeed, Microsoft itself has consistently offered, promoted, and distributed its Internet browser as a stand-alone product separate from, and not as a component of, Windows, and intends to continue to do so after the release of Windows 98. For example, Microsoft will make available separately the same Internet browser that is bundled with Windows 98, through an upgraded version of Internet Explorer 4 that will be distributed and installed wholly apart from Windows 98, including for non-Windows, non-Microsoft operating systems. In addition Microsoft already plans to introduce a subsequent version of IE (Internet Explorer 5) that also will be distributed and installed separately from Windows 98, including for non-Windows, non-Microsoft operating systems. 22.

Microsoft’s tying of its Internet browser to its monopoly operating system reduces

the ability of customers to choose among competing browser products because it forces OEMs and other purchasers to license or acquire the tied combination whether they want Microsoft’s Internet browser or not. Microsoft’s tying -- which it can accomplish because of its monopoly power in Windows -- impairs the ability of its browser rivals to compete to have their browsers preinstalled by OEMs on new PCs and thus substantially forecloses those rivals from an important channel of browser distribution. 23.

Microsoft executives have repeatedly recognized the significant advantage that

Microsoft (and only Microsoft) receives by tying its Internet browser to its operating system, rather than having to compete on the merits. As Microsoft Senior Vice President James Allchin wrote to Microsoft Group Vice-President Paul Maritz on January 2, 1997: You see browser share as job 1 . . . . I do not feel we are going to win on our current path. We are not leveraging Windows from a marketing perspective. . . . We do not use our strength -which is that we have an installed base of Windows and we COMPLAINT -- Page 7

have a strong OEM shipment channel for Windows. Pitting browser against browser is hard since Netscape has 80% marketshare and we have < 20% . . . . I am convinced we have to use Windows — this is the one thing they don’t have . . . . (emphasis added) (MS7 005526). 24.

Fourth, Microsoft has misused, and continues to misuse, its Windows operating

system monopoly by requiring PC OEMs to agree, as a condition of acquiring a license to the Windows operating system, to adopt the uniform “boot-up” sequence and "desktop" screen specified by Microsoft. This sequence determines the screens that every user sees upon turning on a Windows PC. Microsoft’s exclusionary restrictions forbid, among other things, any changes by an OEM that would remove from the PC any part of Microsoft’s Internet Explorer software (or any other Microsoft-dictated software) or that would add to the PC a competing browser (or other competing software) in any more prominent or visible way (including by highlighting as part of the startup sequence or by more prominent placement on the desktop screen) than the way Microsoft requires Internet Explorer to be presented. 25.

Virtually every new PC that comes with Windows, no matter which OEM has

built it, presents users with the same screens and software specified by Microsoft. As a result of Microsoft’s restrictive boot-up and desktop screen agreements, OEMs are deprived of the freedom to make competitive choices about which browser or other software product should be offered to their customers, the ability to determine for themselves the design and configuration of the initial screens displayed on the computers they sell, and the ability to differentiate their products to serve their perceptions of consumers' needs. 26.

These restrictive agreements also maintain, and enhance the importance of,

Microsoft’s ability to provide preferential placement on the desktop (or in the boot-up sequence) to various Internet Service Providers (“ISPs”) and Internet Content Providers (“ICPs”), in return

COMPLAINT -- Page 8

for those firms’ commitments to give preferential distribution and promotion to Internet Explorer and to restrict their distribution and promotion of competing browsers. 27.

As a result, these restrictions further exclude competing Internet browsers from

the most important channels of distribution, substantially reduce OEMs’ incentives and abilities to innovate and differentiate their products in ways that could facilitate competition between Microsoft products and competing software products, and enhance Microsoft’s ability to use the near-ubiquity of its Windows operating system monopoly to gain dominance in both the Internet browser market and other software markets. 28.

Fifth, Microsoft has entered into anticompetitive agreements with virtually all of

the nation’s largest and most popular ISPs, including particularly Online Service Providers (“OLSs”), firms which provide the communications link between a subscriber’s PC and the Internet and sometimes related services and content as well. Windows 95 (and soon Windows 98) presents PC users with “folders” or lists including the names of certain of these ISPs that have entered into agreements with Microsoft and enable users readily to subscribe to their services. Because Windows is preinstalled on nearly all PCs in the United States, inclusion in these folders and lists is of substantial value to ISPs. As a result, almost all of the largest and most significant ISPs in the United States have sought placement on the Windows desktop. 29.

Microsoft’s agreements with ISPs allow Microsoft to leverage its operating

system monopoly by conditioning these ISPs’ inclusion in Windows' lists on such ISPs’ agreement to offer Microsoft’s Internet Explorer browser primarily or exclusively as the browser they distribute; not to promote or even mention to any of their subscribers the existence, availability, or compatibility of a competing Internet browser; and to use on their own Internet sites Microsoft-specific programming extensions and tools that make those sites look better when viewed through Internet Explorer than when viewed through competing Internet browsers.

COMPLAINT -- Page 9

30.

Microsoft’s anticompetitive agreements with ISPs have substantially foreclosed

competing browsers from this major channel of browser distribution. Over thirty percent of Internet browser users have obtained their browsers from ISPs. 31.

Microsoft has recently modified certain of its ISP agreements to reduce some of

these restrictions. However, a.

the modifications do not affect Microsoft’s illegal agreements with On-

Line Service Providers (e.g., America Online, CompuServe), which serve the majority of Internet users in the United States; b.

even the modified agreements remain unlawful in other respects;

c.

the modifications do not address the anticompetitive effects such

agreements have already caused; and d.

there is no assurance that Microsoft will not reimpose the restrictions in

the future. 32.

Sixth, Microsoft has entered into anticompetitive agreements with Internet

Content Providers (“ICPs”). Prominent “channel buttons” advertising and providing direct Internet access to select ICPs appear on the “Active Desktop” feature that is shipped with the Windows operating system. 33.

Microsoft’s agreements condition an ICP’s placement on one of these buttons on

the ICP’s agreement to not pay or otherwise compensate Microsoft’s primary Internet browser competitors (including by distributing their browsers) for the distribution, marketing, or promotion of the ICP’s content; to not promote any browser produced by any of Microsoft’s primary browser competitors; to not allow any of Microsoft’s primary browser competitors to promote and highlight the ICP’s “channel” content on or for their browsers; and to design its web sites using Microsoft-specific, proprietary programming extensions so that those sites look better

COMPLAINT -- Page 10

when viewed with Internet Explorer than when viewed through a competing browser. These illegal agreements further inhibit competition on the merits between Internet Explorer and other Internet browsers. 34.

As with some of its restrictive ISP agreements, Microsoft has recently announced

certain modifications of its anticompetitive ICP agreements. However, these modifications do not remedy the anticompetitive effects such agreements have had and do not prevent Microsoft from entering into the same or similar agreements in the future. 35.

Collectively, Microsoft’s contracts with OEMs, ISPs, and ICPs have unreasonably

restrained, and, unless enjoined, will continue to unreasonably restrain competition in the market for Internet browsers. They artificially increase the share of the market held by Microsoft’s Internet Explorer, and they threaten to “tip” the market permanently to Internet Explorer, not because OEMs or PC customers have freely chosen Microsoft’s product in a competitive marketplace, but because of the illegal exercise of monopoly power by Microsoft. 36.

Neither the antitrust laws nor this action seeks to inhibit Microsoft from

competing on the merits by innovation or otherwise. Rather, the Complaint challenges only Microsoft’s concerted attempts to maintain its monopoly in operating systems and to achieve dominance in other markets, not by innovation and other competition on the merits, but by tieins, exclusive dealing contracts, and other anticompetitive agreements that deter innovation, exclude competition, and rob customers of their right to choose among competing alternatives. 37.

Microsoft’s conduct adversely affects innovation, including by: a.

impairing the incentive of Microsoft’s competitors and potential

competitors to undertake research and development, because they know that Microsoft will be able to limit the rewards from any resulting innovation;

COMPLAINT -- Page 11

b.

impairing the ability of Microsoft’s competitors and potential competitors

to obtain financing for research and development; c.

inhibiting Microsoft’s competitors that nevertheless succeed in developing

promising innovations from effectively marketing their improved products to customers; d.

reducing the incentive and ability of OEMs to innovate and differentiate

their products in ways that would appeal to customers; and e.

reducing competition and the spur to innovation by Microsoft and others

that only competition can provide. 38.

The purpose and effect of Microsoft’s conduct with respect to Internet browsers

have been and, if not restrained, will be: a.

to preclude competition on the merits between Microsoft’s browser and

other browsers; b.

to preclude potential competition with Microsoft’s operating system from

competing browsers and from other companies and software whose use is facilitated by these browsers; c.

to extend Microsoft’s Windows operating system monopoly to the Internet

browser market; and d.

to maintain Microsoft’s Windows operating system monopoly.

II. JURISDICTION, VENUE, AND COMMERCE 39.

This Court has jurisdiction over this matter pursuant to Section 4 of the Sherman

Act, 15 U.S.C. § 4, and 28 U.S.C. §§ 1331, 1337.

COMPLAINT -- Page 12

40.

Venue is proper in this District under Section 12 of the Clayton Act, 15 U.S.C.

§ 22, and under 28 U.S.C. § 1391, because defendant Microsoft transacts business and is found within this District. 41.

Microsoft is a corporation organized and existing under the laws of the State of

Washington, with its principal place of business located at One Microsoft Way, Redmond, Washington. Microsoft sells and licenses PC operating systems throughout the United States and the world and delivers copies of its operating systems to OEMs and retail customers across state lines and international borders. Microsoft is engaged in, and its activities substantially affect, interstate and foreign commerce.

III. PRIOR RELATED PROCEEDINGS .

The July 1994 Monopolization Case 42.

On July 15, 1994, the United States commenced an action against Microsoft under

Section 2 of the Sherman Act for unlawfully maintaining its monopoly in the market for PC operating systems. The complaint alleged, among other things, that Microsoft had engaged in anticompetitive agreements and marketing practices directed at OEMs. These agreements included agreements that required OEMs to pay Microsoft for each non-Microsoft operating system that they distributed and long-term agreements that required unreasonably large minimum commitments from OEMs. The effect of Microsoft’s practices and agreements was unlawfully to maintain its monopoly in the PC operating system market. 43.

Microsoft consented to the entry of a final judgment, and the Court entered the

Final Judgment on August 21, 1995. The Final Judgment prohibited Microsoft from continuing the challenged practices and agreements and prohibited Microsoft from engaging in certain other conduct that could have similar anticompetitive results, including (in Final Judgment § IV(E))

COMPLAINT -- Page 13

enjoining Microsoft from conditioning licenses to its operating system on an OEM’s either licensing another Microsoft product or agreeing not to license or distribute a non-Microsoft product. 44.

The purpose of § IV(E) of the Final Judgment was to prevent Microsoft from

conditioning access to its monopoly operating system in order to protect or extend that monopoly. See Competitive Impact Statement, 50 Fed. Reg. 42845, 42852 (1994). .

The October 1997 Contempt Proceeding 45.

On October 20, 1997, the United States petitioned the Court for an order to show

cause why Microsoft should not be found in civil contempt for violating the 1995 Final Judgment by requiring OEMs to license and distribute Microsoft’s Internet browser as a condition of obtaining a license for Microsoft’s Windows 95 operating system. 46.

On December 11, 1997, the Court entered a preliminary injunction enjoining

Microsoft “from the practice of licensing the use of any Microsoft personal computer operating system software (including Windows 95 or any successor version thereof) on the condition, express or implied, that the licensee also license and preinstall any Microsoft Internet browser software (including Internet Explorer 3.0, 4.0, or any successor versions thereof) pending further order of Court.” .

The December 1997 Contempt Proceeding 47.

On December 15, 1997, Microsoft -- without seeking any modification or

clarification of the Court’s order and without consulting the United States -- publicly announced that any OEM that did not agree to license and distribute Microsoft’s Internet Explorer could not obtain a license to a working, current version of Microsoft’s Windows operating system. Microsoft announced that the only versions of Windows 95 available to OEMs that declined to license and distribute Microsoft’s Internet browser would be (1) a version of Windows 95 that

COMPLAINT -- Page 14

Microsoft itself admitted would not work and (2) a two-and-a-half-year-old version of Windows 95 that Microsoft admitted was not commercially viable. 48.

On December 17, 1997, the United States moved to have Microsoft held in

contempt for this clear violation of the Court’s December 11, 1997 Order. On January 21, 1998, the United States and Microsoft submitted a stipulated proposed order, which was entered by the Court. The Order required Microsoft to provide OEMs with two options in addition to those previously provided by Microsoft: a.

the option of installing on their PCs a version of Windows 95 that was the

same as the current December 1997 version of Windows 95 (OEM Service Release 2.5) “with the sole exception of Internet Explorer 4.0 functionality” not included; and b.

the option of shipping their PCs after removing the Internet Explorer

“icon” from the desktop and from the “Start menu” within Windows 95. .

The Appeal of the Court’s December 1997 Order 49.

Microsoft appealed the Court’s December 1997 order, arguing that since the

United States had there brought an action for contempt and for permanent injunctive relief and not explicitly for a preliminary injunction, it was improper for the Court to have entered a preliminary injunction (even though the restraint of a preliminary injunction was less than the restraint that would have been imposed by a finding of contempt); that since the United States was there seeking to enforce the Final Judgment and had not commenced a new action under the antitrust laws, the alleged “integration” of Windows 95 and Microsoft’s IE browser was a complete defense; and that antitrust tie-in principles and precedents could not be used to construe the Final Judgment. 50.

Microsoft believed the Court’s December Order “prima facie applied to Windows

98.” Nevertheless, Microsoft did not seek a “further order” of the Court regarding Windows 98,

COMPLAINT -- Page 15

nor did it plan to offer an unbundled version of Windows 98. When the United States was informed of Microsoft’s Windows 98 plans, it offered to join Microsoft in a motion to the Court seeking clarification of the December Order. Instead, Microsoft moved on May 5, 1998, in the Court of Appeals for a stay of the December Order as it applied to Windows 98. 51.

On May 12, 1998, the Court of Appeals granted Microsoft’s application for a stay,

holding: “To the extent that the preliminary injunction awards the United States relief to which it has made no effort to show an entitlement under the consent decree, we must grant the stay.” The Court also held: “The United States presented no evidence suggesting that Windows 98 was not an ‘Integrated Product’ and thus exempt from the prohibitions of Section IV(E)(I).” 52.

The United States now brings this action explicitly for preliminary and permanent

injunctive relief, and demonstrates that Microsoft’s conduct constitutes clear violations of Sections 1 and 2 of the Sherman Act and will cause irreparable injury in the absence of preliminary relief.

IV. THE RELEVANT MARKETS 53.

There are two relevant product markets: The market for personal computer

operating systems, and the market for Internet browsers. A.

The PC Operating System Market 54.

The market for personal computer operating systems consists of operating

systems written for the Intel x86/Pentium (or “PC”) class of microprocessors. These microprocessors perform central processing unit (“CPU”) functions for the vast majority of personal computers, and their operating systems manage the interaction between the CPU and the various pieces of hardware, such as a monitor or printer, attached to such computers. Operating systems also control and direct the interaction between applications, such as word

COMPLAINT -- Page 16

processing or spreadsheet programs, and the CPU. No other product duplicates or fully substitutes for the operating system. The geographic market for PC operating systems is worldwide. 55.

Because of the complex interactions among operating system software,

applications software, and the hardware attached to the PC, an operating system written for one class of microprocessors typically will not work on another class of microprocessors without significant modification. Thus, OEMs and PC users do not consider an operating system that runs a non-Intel-based personal computer to be an effective substitute for an operating system that runs an Intel-based personal computer. .

The Internet Browser Market 56.

Internet browsers are specialized software programs that allow PC users

conveniently to locate, access, display, and manipulate content and applications located on the web. Internet browsers are essential for quick, easy, and efficient use of the web and have been instrumental in building the Internet’s popularity. No other product duplicates or fully substitutes for the functionality of Internet browsers. The geographic market for Internet browsers is worldwide. C.

Microsoft's Windows Operating System Monopoly 57.

Microsoft markets a variety of PC operating systems, including MS-DOS,

Windows 3.11, Windows For Workgroups, Windows NT Workstation, and Windows 95. Beginning in or around June 1998, Microsoft will introduce to the market the latest version of its operating system for Intel-based PCs, Windows 98. 58.

Microsoft has maintained a monopoly share (in excess of 80%) of the PC

operating system market over an extended period of time. The durability of Microsoft’s market power in part reflects the fact that the PC operating system market is characterized by certain

COMPLAINT -- Page 17

economies of scale in production and by significant “network effects." In other words, the PC operating system for which there are the greatest number, variety, and quality of applications will be selected by the large majority of PC users, and in turn writers of applications will write their programs to work with the most commonly used operating system, in order to appeal to as many potential customers as possible. Economies of scale and network effects, which reinforce one another, result in high barriers to entry. 59.

The primary channel through which Microsoft distributes its operating systems is

preinstallation on new PCs by OEMs. Because a PC can perform virtually no useful tasks without an operating system, OEMs consider it a commercial necessity to preinstall an operating system on nearly all of the PCs they sell. And because there is no viable competitive alternative to the Windows operating system for Intel-based computers, OEMs consider it a commercial necessity to preinstall Windows on nearly all of their PCs. Both OEMs and Microsoft recognize that OEMs have no commercially viable substitute for Windows, and that they cannot preinstall Windows on their PCs without a license from Microsoft. For example: a.

Packard Bell executive Mal Ransom testified that there were no

commercially feasible alternative operating systems to Windows 98 (M. Ransom 3/19/98 Tr. 19-20); b.

Micron executive Eric Browning asserted: “I am not aware of any other

non-Microsoft operating system product to which Micron could or would turn as a substitute for Windows 95 at this time.” (E. Browning Declaration, para.11); c.

Hewlett Packard executive John Romano testified that “absolutely there’s

no choice” except to install Windows on HP’s PCs (J. Romano Tr. 49-50); and d.

Gateway executive James Von Holle testified that Gateway had to install

Windows because “We don’t have a choice.” (J. Von Holle Tr. 37-41; GW 26521-27).

COMPLAINT -- Page 18

Mr. Von Holle has testified that if there were competition to Windows he believed such competition “would drive prices lower” and promote innovation (Ibid.). 60.

When Windows 98 is released, it will quickly succeed to Windows 95's monopoly

position because, among other things, applications written for Windows 95 will run on Windows 98 and most consumers who purchase PCs want and expect their PCs to have the latest Microsoft operating system. OEMs will begin shipping most PCs, particularly for non-corporate users, with the Windows 98 operating system as soon as it is released. For example, Hewlett Packard executive Webb McKinney testified that even Windows 95 would be a commercially feasible alternative to Windows 98 “[o]nly for a short period of time.” (W. McKinney 3/13/98 Tr. 11-12). D.

Microsoft’s Position in the Internet Browser Market 61.

The first Internet browser widely used by the general public was Netscape

Navigator, which was introduced to the market in 1994. 62.

Microsoft responded by introducing its own Internet browser, which it called the

Internet Explorer. Microsoft released the initial version of Internet Explorer (version 1.0) in or around July 1995. Microsoft has since released three subsequent versions (2.0, 3.0, 4.0), in each case adding features and functionality to the product. 63.

Internet Explorer is, and always has been, viewed by Microsoft and by the market

as an Internet “browser” — a separate software program that allows computer users to efficiently locate, access, display, and manipulate content displayed on the World Wide Web. Microsoft and other industry participants carefully track Internet browser market share, and Microsoft has frequently and unequivocally stated that increasing its Internet browser share is its “number one” corporate goal. Internet browsers have product requirements, market usage, demand, distributors, and suppliers distinct from other products, including PC operating systems. These separate attributes, and Microsoft’s separate commercial treatment of its Internet browser, all

COMPLAINT -- Page 19

will continue after Microsoft releases Windows 98. Microsoft plans to continue to distribute and upgrade a stand-alone version of its Internet Explorer browser, and it has distributed (and plans to continue to distribute) versions of Internet Explorer for use on the Apple Macintosh, Sun Solaris, and other non-Windows operating systems. 64.

Microsoft’s share of the Internet browser market has grown steadily from less

than 5% in early 1996 to approximately 50% or more today. 65.

With the growth of the Internet and the World Wide Web, consumer demand for

Internet browsers has increased dramatically. Indeed, because of the extraordinary growth and importance of the Internet, the Internet browser market is itself a substantial source of potential profits to any company that might achieve a durable dominant position and be able to charge monopoly prices for the efficient use of the Internet or the web. The importance of the Internet and the significant public benefits resulting from its use, make the potential benefit to a monopolist and the potential economic and social cost of monopolization in this market very high. V. THE COMPETITIVE THREAT THAT BROWSERS POSE TO THE WINDOWS OPERATING SYSTEM 66.

Much of Microsoft’s present monopoly power reflects the fact that Windows is

the “platform” on which most popular applications software must run. Internet browsers, however, offer the potential to become alternative platforms on which software applications and programs could run instead. In addition, browsers can be an “interface” -- the primary visual environment in which a user performs most computing tasks -- to which both the operating system and application programs can be connected. The browser thus can be a software “layer” between the operating system and application programs. Application programs can be and are written to the browser instead of the operating system interface. COMPLAINT -- Page 20

67.

Because competing browsers operate not only on Windows but also on a variety

of other operating systems, their widespread adoption and use would create significant potential to reduce the dependence of most PC users on any particular operating system, such as Windows. The development of numerous software applications not specific to Windows that could ultimately result from the widespread use of non-Microsoft Internet browsers would therefore greatly reduce or eliminate a key barrier that maintains Microsoft’s Windows operating system monopoly (because application programs written to interface to a competing browser could run on any operating system). 68.

Competing Internet browsers also threaten Microsoft’s Windows monopoly

because such browsers are a primary distribution vehicle for Java virtual machines (“JVMs”), the software programs necessary to run programs written in the Java programming language. JVMs that use Java enable any application written in the Java language to run regardless of the operating system on top of which the JVM and application are installed. The widespread distribution of Java virtual machines along with non-Microsoft Internet browsers could provide another avenue by which applications developers could write programs that are not dependent on Windows, thereby weakening the network effects that help entrench Windows’ monopoly position in the operating system market.

VI. MICROSOFT’S ANTICOMPETITIVE CONDUCT 69.

Faced with the threat browsers posed to its operating system monopoly, and

desiring to monopolize the browser market itself, Microsoft undertook steps designed to ensure that it would win what it considers a “browser war.” For example: a.

Microsoft CEO Bill Gates declared on January 5, 1996: "Winning

Internet browser share is a very, very important goal for us." (MSV 0009445). On

COMPLAINT -- Page 21

August 20, 1996, Mr. Gates directed: “Internet Explorer will be distributed every way we can. . . . Bundled with Windows 95 upgrade and included by OEMs.” (MS6 50045964669); and b. A.

In September 1996, Microsoft’s General Manager for the Windows PC

Platform, Carl Stork, noted: “Browser share is job 1 at this company.” (MSV 009363A). Microsoft’s Attempt to Divide the Browser Market And Induce Netscape Not to Compete 70.

In May 1995, not long before Microsoft released the first version of Internet

Explorer, Microsoft executives visited Netscape and met with its top executives. During this meeting, Microsoft offered Netscape a deal: For Windows 95, Microsoft proposed to draw a hypothetical line between the operating system and the browser. If Netscape agreed not to compete below the line (i.e., in operating systems) or alternatively, in the production of browsers in the Windows 95 “space,” Microsoft would agree not to compete above the line (i.e., in browser applications) or, alternatively, in the production of browsers for platforms other than Windows 95. As one participating Microsoft executive has subsequently admitted, Microsoft “absolutely” hoped to persuade Netscape not to compete with Microsoft. 71.

Microsoft’s proposal would have divided the browser market between Netscape,

the early leader, and Microsoft, which was then on the verge of entering, and would have eliminated the competitive threat potentially posed by Netscape’s competing browser to Microsoft’s operating system monopoly. Microsoft’s proposal was not intended to advance, and would not have advanced, any legitimate procompetitive interest. Rather, it was a blatant and illegal attempt to monopolize the Internet browser market. Indeed, if accepted, it would readily have enabled Microsoft to monopolize that market.

COMPLAINT -- Page 22

72.

Netscape’s executives refused Microsoft’s proposal. They chose instead to

continue to compete to serve all computer users, with successive versions of Navigator that work on Windows 95 as well as other PC operating systems. 73.

Netscape’s refusal of Microsoft’s proposed scheme meant that its competing

browser would continue to have the potential to become an alternative platform to Windows; would continue to facilitate the development and distribution of other software with the potential to support applications regardless of the identity of the underlying operating system; and would, thus, continue to threaten to “commoditize” the operating system and ultimately reduce or eliminate Microsoft's monopoly power. 74.

Microsoft thereafter embarked on a coordinated course of conduct aimed at

eliminating this threat by leveraging its monopoly power to drive competing Internet browsers from the market and to extend its monopoly to the browser market. B. Exclusionary Agreements With Internet Service Providers and On-Line Services 75.

Microsoft unlawfully leverages its Windows operating system to require Online

Service Providers (such as America Online and CompuServe) and other major Internet Service Providers (such as AT&T Worldnet, MCI, and Earthlink) to enter into agreements to distribute Internet Explorer to their subscribers, either exclusively or nearly exclusively. ISPs, including OLSs, are sometimes referred to as Internet Access Providers (“IAPs”). 76.

Starting in early 1996, Microsoft began to condition the granting to an ISP of

placement in the “Internet Connection Wizard” screens or the Online Services folder in Windows 95 on the service provider’s agreement to deny most or all of its subscribers a choice of Internet browser. 77.

Because nearly all PCs in the United States are shipped with a copy of Windows

preinstalled, and because Microsoft prohibits OEMs from replacing or materially modifying the COMPLAINT -- Page 23

default “desktop” screen on Windows PCs, nearly all U.S. computer users are guaranteed to see the Windows desktop when they turn on their PCs. Accordingly, placement on the Windows desktop is unique among the numerous ways that software firms, including ISPs and ICPs, promote and distribute their products and services because only this placement offers near ubiquitous distribution and advantageous promotion in exactly the place and context in which users are deciding which software to use. Promotion or distribution of a software product or service through a Windows desktop icon is perhaps unrivaled in its ability to reach the vast majority of PC users in a manner that ensures their attention. No other distribution channel matches the level of convenience, the number of users reached, or the premium placement that Microsoft’s Windows desktop offers. 78.

In return for attractive placement by Microsoft in its Internet Connection Wizard

or Online Services Folder, ISPs agreed: a.

to distribute and promote to their subscribers Internet Explorer exclusively

or nearly exclusively; b.

to eliminate links on their web sites from which their subscribers could

download a competing browser over the Internet; c.

to abstain from expressing or implying to their subscribers that a

competing browser is available (and from displaying a logo for a non-Microsoft browser on the service provider’s home page or elsewhere); d.

to include Internet Explorer as the only browser they shipped with their

access software (i.e., the software that enables a PC user to subscribe to the service) most or all of the time; and e.

to limit the percentage of competing browsers they distributed, even in

response to specific requests from customers.

COMPLAINT -- Page 24

79.

Microsoft’s agreements with ISPs also require the ISPs to use Microsoft-specific

programming extensions and tools in connection with the ISPs’ own web sites. Web sites developed with these Microsoft-specific programming extensions and tools will look better when they are viewed with IE than with a non-Microsoft browser. 80.

Under Microsoft’s ISP contracts, the penalty for promoting a competing browser,

distributing a competing browser more than the maximum permitted percentage, or otherwise failing to provide preferential treatment for Microsoft’s Internet browser, is deletion from the Windows desktop -- a penalty even the largest ISPs are unwilling to risk. 81.

Microsoft recognizes the importance to ISPs of favorable placement on Windows

screens. For example: a.

Brad Silverberg (Microsoft's former Senior Vice-President of its

Applications and Internet Client Group) described such placement as "a distribution facility" for service providers that was "a tremendous value to them." (Silverberg Tr. 15152); and b.

In order to induce AOL to prefer IE and disadvantage Netscape's browser,

Microsoft agreed to give AOL preferential placement in Windows at the expense of Microsoft's own online service (Microsoft Network, or "MSN") that competed with AOL -- thereby effectively, according to Microsoft's CEO Bill Gates, "putting a bullet through MSN's head." (Silverberg Tr. 186-87). The "browser war" was so critical to Microsoft that it was prepared to retreat in other markets in order to win it. 82.

In late April 1998, on the eve of hearings before a committee of the United States

Senate and immediately following news reports that the United States had issued civil subpoenas to various ISPs about their agreements with Microsoft, Microsoft announced that it was modifying its contracts with certain ISPs.

COMPLAINT -- Page 25

83.

Significantly, Microsoft has not changed its exclusionary contract requirements

with the largest and most important ISPs -- the Online Service Providers, including AOL and CompuServe. Microsoft’s exclusionary agreements continue in full force and effect for these firms. 84.

Even as to the ISPs whose contracts Microsoft has chosen to change, Microsoft’s

belated announcements, made on the eve of Congressional scrutiny and under the threat of litigation, do not correct the anticompetitive effects of the provisions which have been in place for almost two years; nor do the announcements provide any assurance that Microsoft will not reinstitute the exclusionary restrictions in the future. Moreover, they do not eradicate all of the unlawfully restrictive aspects of even the ISP agreements they modify because they leave intact (according to Microsoft’s Cameron Myhrvold, the executive responsible for dealing with ISPs) requirements that ISPs distribute and promote Internet Explorer at least at parity with any other browser. Finally, and perhaps most significantly, Microsoft’s modifications, by its own admission, do not apply at all to OLSs, which as a group provide Internet access to more than fifty percent of Internet users in the United States. Thus, the modifications provide no relief from Microsoft’s anticompetitive restrictions as to most browser distribution through ISPs. 85.

Approximately one-third of Internet browser users obtained the browser they use

from their service provider, and Microsoft’s exclusionary agreements with these firms substantially foreclose Microsoft’s browser competitors from a vital means of distribution. As Microsoft has itself acknowledged, distribution of Internet browsers through the largest online services providers is critical to the competitive success and viability of any browser. Microsoft’s Cameron Myhrvold testified that for browsers “the ISP channel and the OEM channel are the two most important channels for distribution.” (C. Myhrvold 4/24/98 Tr. 43). Microsoft

COMPLAINT -- Page 26

substantially foreclosed the ISP channel with agreements with ISPs, and (as discussed below) Microsoft substantially foreclosed the OEM channel through agreements with OEMs. 86.

The exclusionary restrictions in Microsoft’s ISP agreements are not reasonably

necessary to further any legitimate, procompetitive purpose. C.

Exclusionary Agreements with Internet Content Providers 87.

Microsoft has also entered into exclusionary agreements with Internet Content

Providers (“ICPs”) -- firms such as Disney, Hollywood Online, and CBS Sportsline, that provide news, entertainment, and other information from sites on the web. One of the new features included in Internet Explorer 4.0 is the provision of "channels" that appear on the right side of the Windows desktop screen after Internet Explorer 4.0 has been installed on a Windows 95 PC. The same channels will appear automatically on the Windows 98 desktop screen if Microsoft is permitted to tie Internet Explorer 4.0 to Windows 98 in license agreements with OEMs and in sales to consumers. 88.

Microsoft provides different levels of channel placement, "platinum" being the

most prominent. Under Microsoft’s Internet Explorer 4.0 channel agreements, beginning in mid1997, ICPs who desired "platinum" placement (and even some seeking lower-level placement) were required to agree: a.

not to compensate in any manner the manufacturer of an "Other Browser"

(defined as either of the top two non-Microsoft browsers), including by distributing its browser, for the distribution, marketing, or promotion of the ICP’s content; b.

not to promote any browser produced by any manufacturer of an “Other

Browser”; c.

not to allow any manufacturer of an “Other Browser” to promote and

highlight the ICP’s “channel” content on or for its browsers; and

COMPLAINT -- Page 27

d.

to design its web sites using Microsoft-specific, proprietary programming

extensions so that those sites look better when viewed with Internet Explorer than when viewed through a competing browser. 89.

These exclusionary restrictions are not reasonably necessary to further any

legitimate, procompetitive purpose. 90.

Notwithstanding these restrictions on their dealings with competing browsers,

ICPs have entered into Internet Explorer 4.0 channel agreements with Microsoft. ICPs had to agree to these restrictions in order to gain placement on the Windows desktop, which provides a valuable distributional and promotional mechanism for their content. 91.

Microsoft’s exclusionary ICP contracts, expressly targeted at its primary Internet

browser competitors, further foreclose these firms from access to customers, and further impede their ability to compete against Internet Explorer on the merits of the respective products. 92.

Microsoft has recently announced that it intends to change its agreements with

ICPs. However, the changes announced by Microsoft will not remedy the anticompetitive effects the exclusionary provisions of those agreements have had to date, and there is no certainty that Microsoft will not reimpose the same or similar restrictions in the future. D. Microsoft’s Contractual Restrictions on OEM Modification or Customization of PC Boot-Up Sequence and PC Screens 93.

In or around August 1996, Microsoft imposed on OEMs licensing terms that

restrict OEMs’ ability to alter the Windows 95 boot-up sequence. Specifically, among other things, Microsoft’s license agreements prohibit OEMs from: a.

modifying or obscuring the sequence or appearance of any screens

displayed by Windows from the time the user first begins the boot-up process with a new PC until the “Welcome to Windows” screens have run and the Windows desktop screen first appears; COMPLAINT -- Page 28

b.

modifying or obscuring the sequence or appearance of any screens

displayed by Windows in all subsequent boot-ups unless the user initiates some action to change the sequence; c.

displaying any content, including visual displays, sound, welcome or

tutorial screens, until after the Windows desktop screen first appears; d.

modifying or obscuring the appearance of the Windows desktop screen,

beyond a narrowly limited set of permitted changes; or e.

adding a screen that would automatically appear after the initial boot-up

sequence or in place of the Windows desktop screen. 94.

These contractual restrictions have (and were intended by Microsoft to have) two

basic effects on competing browser suppliers. First, they enhance Microsoft's control over the screens presented to users and thus increase Microsoft's ability to require preferential treatment for Internet Explorer from ISPs and ICPs in return for such ISPs’ and ICPs’ access to the Windows desktop. Second, these contractual restrictions greatly limit an OEM’s ability to modify or customize the screens or initial “boot-up” sequence on a new PC either in response to customer demand or in an attempt to differentiate their products, or to substitute or feature a nonMicrosoft browser, alternative user interface, or other Internet offerings. 95.

The Windows desktop screen is the screen through which most PC users access

application programs and the other functionality on their PCs. The desktop screen contains, among other things, icons (i.e., graphical representations of certain features or functions) that, when selected by “clicking” on the icon with the left button of the “mouse,” provide quick access to other installed software. Microsoft places a number of icons on the Windows desktop screen, prohibits OEMs from removing any of them, and permits OEMs to add others only subject to strict limitations.

COMPLAINT -- Page 29

96.

Although Microsoft allows some customization of the “Active Desktop” in

Windows 98 and Internet Explorer 4.0, an OEM may not delete icons or folders. Furthermore, an OEM that does not preinstall the Active Desktop may not add to Windows desktop screens new icons or folders that are of a size or appearance different from those already placed on the desktop by Microsoft. 97.

Through these restrictions, Microsoft leverages its Windows monopoly to ensure

that Microsoft-designated applications or other software reach all new Windows users, and that no software not designated by Microsoft receives preferential placement, no matter which OEM has built the computer or what options the OEM would like to have in presenting software products to its customers. Moreover, these restrictions ensure that users of Windows continue to see the Microsoft-specified Windows desktop unless and until they take affirmative steps to change the screens presented. 98.

The restrictions preserve the advantageous desktop positioning that Microsoft

secures for Internet Explorer and other Microsoft or Microsoft-designated software, foreclose competing Internet browsers from securing preferential placement, and foreclose OEMs from choosing among competing browsers on the merits. Microsoft’s refusal to permit OEMs to alter the initial boot-up sequence and screens, or to install an alternative user interface, precludes OEMs from developing such alternative interfaces on their own or with competing browser suppliers. The effect of these restrictions is to significantly restrict the access of competing browsers to the important OEM channel and further perpetuate Microsoft’s operating system monopoly by making the successful introduction of a new platform more difficult. 99.

OEMs (including Micron, Hewlett Packard, and Gateway) have requested that

Microsoft allow them to provide new PC purchasers with an alternative user interface, boot-up sequence, or initial or default screens, but Microsoft has refused.

COMPLAINT -- Page 30

100.

Microsoft recognizes and intends that these restrictions consolidate its strategic

power over the valuable real estate that the desktop screen represents for the provision of software, advertising and promotion. Indeed, Microsoft’s Vice President of Marketing and Developer Relations made clear in an internal document that the underlying purpose of the restrictions was to prevent OEMs or others from ultimately gaining control over the desktop: "In order to protect our position on the desktop and increase the likelihood that IE gets the prominent position with the end user we should move the [Internet] Sign Up Wizard into the boot-sequence some where, before we give control over to the OEM. . . ." (MS6 9136A-9139A). 101.

In Windows 98, Microsoft has done exactly as its Vice President of Marketing

and Developer Relations urged, moving the Internet Connection Wizard feature of Internet Explorer, which presents new users with the ability to sign up (at the time of the initial boot and before the Windows desktop appears) with any of a number of ISPs, none of which (according to Microsoft’s Cameron Myhrvold) is permitted to distribute or promote any other browser more favorably than Internet Explorer. 102.

Microsoft’s boot-up and first-screen restrictions make it more difficult for

competing browsers to attract users and have resulted in fewer choices for OEMs and PC end users. These restrictions are not reasonably necessary to serve any legitimate, procompetitive purpose. E.

The Tying of Microsoft’s Internet Browser Software to Windows 95 103.

Internet Explorer is recognized by both Microsoft and the industry as a product

separate and apart from Windows. For example: a.

Microsoft has always sold Internet Explorer separately at retail, distributed

it separately through the Internet, and paid for it to be distributed separately;

COMPLAINT -- Page 31

b.

Microsoft has distributed Internet Explorer as a separate product through

ISPs and other channels and has tied and conditioned the access of numerous companies (e.g., ICPs and ISPs) to Windows facilities on such companies’ distribution of Internet Explorer as a separate product; c.

Microsoft and the industry separately track browser market share and

operating system market share; d.

Microsoft bundles, and plans to continue to bundle, the stand-alone

version of IE 4.0 with other application programs (e.g., Word, Works, Encarta) in a package that will be the successor to the Microsoft Works and Microsoft Home Essentials packages; e.

Microsoft promotes, and enlists others to promote, the distribution and use

of Internet Explorer as a separate product; f.

ISPs consider IE to be a separate product from Windows, and, recognizing

the demand for a browser separate from the operating system, Microsoft deliberately markets it as such to ISPs. (C. Myhrvold Tr. 26-27); g.

Internet browsers and operating systems perform different functions; and

h.

Microsoft markets Internet Explorer for non-Windows operating systems,

including operating systems produced by Apple Computer and Sun Microsystems. Indeed, Microsoft devoted a substantial effort towards developing these versions of its Internet Explorer -- a counter-intuitive step (i.e., enhancing the capabilities and functionality of non-Windows, non-Microsoft operating systems) that is in Microsoft's interest because it is part of Microsoft's effort to foreclose opportunities for nonMicrosoft browsers to establish themselves. Microsoft’s Paul Maritz believed in June 1996 that in order to accomplish its browser share objectives: “In addition to shipping IE

COMPLAINT -- Page 32

3 on W95/NT, we need to get AOL & CompuServe shipping IE3. We need to ship IE3 on Win 3.1 & Mac.” (MS6 6010346). 104.

There is separate demand for Internet browsers from the demand for operating

systems. For example: a.

many PC users (who, of course, require an operating system) do not need

or want a browser; b.

for a significant number of customers, the forced inclusion of a browser

with the operating system is a significant negative -- including corporate customers who do not want their employees connected to the Internet (Y. Mehdi Tr. 34; D. Cole Tr. 5051; M. Ransom 3/19/98 Tr. 9-10; B. Chase Tr. 80) and customers that would prefer only a different browser. Microsoft has acknowledged that some OEMs and PC users want to be able to delete Internet Explorer from Windows 95 and has provided the ability, through the Add/Remove utility, for them to do so; c.

many customers who want a browser do not need another operating

system -- a majority of all browsers distributed to date have been distributed to users who already had a PC with an operating system installed; and d.

other PC customers want an up-to-date Windows operating system

together with non-Microsoft browsers. 105.

Microsoft has consistently treated and referred to its browser software as a

separate product, and not merely as a component of the operating system, both internally and in agreements with other companies. 106.

However, over "the last couple of years" Microsoft was told by its counsel to be

“careful” not to refer to its browser software in such a way that it appeared that the software was a separate product. (P. Maritz Tr. 106 and MS7 005306). Microsoft executives became “very

COMPLAINT -- Page 33

concerned” that statements in the ordinary course of business made IE “appear separate” and concluded it was “critical” that there be “a thorough walk-through looking for places in the UI that can be corrected" and that there be a “sweep” of the IE web site to remove references inconsistent with Microsoft's present legal position. (MS7 005306). It was agreed that there would be “a review of win 98" by Microsoft executives and “someone from legal staff” to “ensure IE is properly presented.” (Ibid.). 107.

Microsoft recognized that there was a potential danger that a competing Internet

browser could eventually “obsolete Windows.” (MS7 004127). Microsoft also recognized that Netscape was initially the leading browser supplier and that Netscape’s “survival depends on their ability to upgrade a significant chunk of their installed base” (MS7 004128). 108.

Microsoft’s top executives internally declared that gaining browser market share

for Internet Explorer and depriving Netscape of market share was a top priority. Microsoft recognized, however, that it could not win what it described as the “browser war” (MS6 6012954) on the merits alone, even if it gave its browser away for free — indeed, even if it paid bounties for its distribution. Microsoft concluded that to win the browser war and preserve its Windows monopoly it would have to tie its Internet browser to the Windows 95 operating system that was being preinstalled on most new PCs. For example, Microsoft’s Megan Bliss and Rob Bennett recognized that designing Windows 95 “to win the browser battle” required “a very substantial set of trade-offs.” Nevertheless, they concluded the “key factors to keep in mind” were, first, the need to increase browser share and, second, that the way to do that was: “Leveraging our strong share on the desktop will make switching costs high (if they get our technology by default on every desk then they'll be less inclined to purchase a competitive solution. . . .)” (MS7 002689).

COMPLAINT -- Page 34

109.

Accordingly, Microsoft tied Internet Explorer to Windows 95 and continued to do

so until January of this year, when it came into compliance with an Order of the Court prohibiting it from distributing its Internet Explorer browser as a condition of licensing Windows 95. Microsoft effectuated this tie, among other things, by requiring, as a condition of licensing Windows 95, that OEMs also license, install and distribute Microsoft’s Internet browser software, including software that provides the Internet Explorer icon and the other means by which users may readily use IE to browse the web. It is this software that establishes Internet Explorer’s identity for commercial purposes as a separate product. 110.

Microsoft's internal documents make clear that Microsoft tied that software to its

Windows operating system, and refused to give OEMs an unbundled option, not because Microsoft believed the market wanted only a bundled product, but rather in order to foreclose OEM choice. For example: a.

Microsoft executive Chris Jones noted in 1995 concerning “Internet

Explorer” that OEMs “want to remove the icon from the desktop” but that the OEMs should be told “this is not allowed” (MSV 0009129 A); b.

in the Spring of 1996, Micron asked if it could delete IE from Windows.

Microsoft refused; c.

in June 1996, Compaq wanted to (and, for a time, did) remove the IE icon

from the Windows desktop. Microsoft compelled Compaq to restore the icon by threatening to terminate Compaq's license to install the Windows operating system if Compaq did not comply; and d.

“On several occasions, Gateway representatives have asked [Microsoft] to

remove the icon for IE from the desktop, but [Microsoft] representatives have refused

COMPLAINT -- Page 35

each request, saying that the browser cannot be removed or sold separately. . . .” (Gateway 2000 Inc. 9/19/97 Answers to Interrogatories, p. 8). 111.

By tying Internet Explorer to Windows 95 in this way, Microsoft has substantially

foreclosed competing Internet browsers from a significant channel of distribution. Among other things, tying Internet Explorer to Windows 95 has significantly reduced the willingness of OEMs to install or distribute other browsers because of concerns about customer confusion and increased support costs; and the forced tying has made it impossible for OEMs to differentiate their products by, or to receive consideration for, distributing only a non-Microsoft browser on some or all of their products. Tying Internet Explorer to Windows 95 also reduced demand for other browsers, even by users and OEMs that would otherwise have preferred another browser. 112.

Microsoft’s tying of Internet Explorer to Windows 95, and its refusal until

ordered by the Court to permit OEMs to utilize the Add/Remove utility to remove IE from Windows 95, furthered no legitimate procompetitive purpose. Microsoft has distributed and continues to distribute Internet Explorer separate from its Windows 95 operating system, and it is efficient for it to do so. Microsoft can also efficiently distribute or permit the distribution of Windows 95 without Microsoft’s Internet browser software. F. The Tying of Microsoft’s Internet Browser Software To Windows 98 113.

Microsoft concluded in January 1997 that, for Windows 98, priority "#1 is to

build IE 4 share via OEM distribution." (MS7 001033). 114.

Microsoft considered not bundling IE with Windows 98 (code named "Memphis")

as late as the Spring of 1997. However, it was decided (as Microsoft Senior Vice President James Allchin had previously proposed) “to tie IE and Windows together.” (MS7 005526). For example:

COMPLAINT -- Page 36

a.

Microsoft’s Christian Wildfeuer wrote on February 24, 1997: “It seems

clear that it will be very hard to increase browser market share on the merits of IE 4 alone. It will be more important to leverage the OS asset to make people use IE instead of Navigator” (MS7 004346) (emphasis added); b.

Microsoft Senior Vice President James Allchin had similarly written on

December 20, 1996, that unless Microsoft were to “leverage Windows . . . . I don’t understand how IE is going to win . . . . Maybe being free helps us, but once people are used to a product it is hard to change them . . . . My conclusion is that we must leverage Windows more. Treating IE as just an add-on to Windows which is cross-platform los[es] our biggest advantage — Windows marketshare. We should dedicate a cross group team to come up with ways to leverage Windows technically more . . . . We should think first about an integrated solution — that is our strength;” c.

on January 2, 1997, Mr. Allchin wrote concerning “IE and Windows” that

Microsoft needed to begin “leveraging Windows from a marketing perspective” if it was to defeat Netscape. Allchin complained that without leveraging Windows from a marketing standpoint: “We do not use our strength — which is that we have an installed base of Windows and we have a strong OEM shipment channel for Windows.” Allchin emphasized: “I am convinced we have to use Windows — this is the one thing they don’t have . . . . We have to be competitive with features, but we need something more — Windows integration. If you agree that Windows is a huge asset, then it follows quickly that we are not investing sufficiently in finding ways to tie IE and Windows together.” Using Microsoft’s code name, Memphis, for the next version of Windows, Allchin concluded that, “Memphis must be a simple upgrade, but most importantly it must be a

COMPLAINT -- Page 37

killer on OEM shipments so that Netscape never gets a chance on these systems.” (MS7 005526); d.

on March 25, 1997, Microsoft’s Megan Bliss wrote: "I thought our #1

strategic imperative was to get IE share (they’ve been stalled and their best hope is tying tight to Windows, esp. on OEM machines). That is, unless I’ve woken up in an alternate state and now work for Netscape." (TXAG 0009634); e.

on March 27, 1997, Microsoft’s Kumar Mehta, after analyzing "how

people get and use IE" concluded that "based on all the IE research we have done . . . it is a mistake to release Memphis without bundling IE with it." (MS7 004273); f.

Microsoft concluded in late March 1997 that if Windows 98 and IE "are

decoupled, then Navigator has a good chance of winning" (MS7 003001) and that "if we take away IE from the O/S, most nav users will never switch to us." (MS7 004273); g.

as Microsoft Vice President Brad Chase recognized in an April 21, 1997,

memorandum, "Memphis is a key weapon in the IE share battle." (MS7 004365); and h.

as a January 5, 1997, presentation to Microsoft CEO Bill Gates had

emphasized: "Integrate with Windows" was a way to "Increase IE share." (MS7 00552944). 115.

For several weeks after entry of the Court’s December 1997 Order, published

reports quoted Microsoft as saying that it planned to offer Windows 98 in two versions – one with Internet Explorer included and one with Internet Explorer removed. However, Microsoft has since made clear that it intends to tie Internet Explorer to Windows 98. Microsoft intends to offer only a single, bundled version of Windows 98 and to require, as a condition of licensing Windows 98, that OEMs license, install and distribute Microsoft’s Internet browser software.

COMPLAINT -- Page 38

116.

Microsoft has acknowledged that some OEMs and PC users want to be able to

delete Microsoft’s Internet browser software from Windows 98 (and Microsoft provided the ability to remove such software from Windows 95 for this reason). Nevertheless, in order not to facilitate such a deletion from Windows 98, even by end users, Microsoft has designed Windows 98 so that the Add/Remove utility will not remove all or any part of IE. 117.

Microsoft is tying its Internet browser software to the Windows 98 operating

system in order to achieve a monopoly in the Internet browser market and to stifle the potential competition to Microsoft’s operating system monopoly that competing Internet browsers might generate. Microsoft has distributed and continues to distribute Internet Explorer separately from its Windows operating system, and it is efficient for it to do so. Microsoft intends to continue marketing the Internet Explorer browser separately through retail outlets. Microsoft also intends to release an updated version of Internet Explorer, 5.0, in multiple distribution channels and for multiple non-Windows operating systems as a stand-alone product, without Windows. 118.

Microsoft can, at a minimum, efficiently distribute or permit the distribution of

Windows 98 without its Internet browser software. Microsoft’s refusal to permit OEMs to delete such software from Windows 98, or to offer OEMs a version of Windows 98 from which it has already been deleted or in which it is not included, furthers no legitimate competitive interest. Microsoft can, at a de minimis cost per copy of Windows 98, either include in Windows 98 a ready means for OEMs and users to delete its Internet browser software or test any such means that are developed by or on behalf of OEMs. The deletion of such software will not impair any non-web browsing function of Windows 98. 119.

Indeed, if including Microsoft’s Internet browser software with Windows 98 is

efficient, the combined product should thrive in a competitive market in which the two products are also available separately. A competitive browser market in which customers are free to

COMPLAINT -- Page 39

choose among alternative Internet browsers or to choose no browser at all will lead to continuing innovation and price competition as suppliers compete on the merits for customers’ favor. Microsoft has chosen to deprive customers of the competitive options of obtaining Windows 98 with Internet Explorer, with a competitive Internet browser, or with no Internet browser at all. 120.

One consequence of tying Internet Explorer to Windows is that the Internet

browser is made available to purchasers of Windows at no additional charge. Microsoft is devoting more than a thousand people and hundreds of millions of dollars to various aspects of browser development, and Microsoft has recognized that it would ordinarily be desirable for the company to earn a direct return on some of this investment by charging customers of Windows 98 separately for Internet browser functionality. Even though the leading browser supplier (Netscape) was charging OEMs for its browser, Microsoft made a decision to forgo the revenue that would have resulted from charging separately for Internet browsing functionality in Windows in order to gain Internet browser market share and exclude competition. 121.

Microsoft could have charged for Internet Explorer separately, and it considered

doing so. Microsoft's Vice President of Advanced Technology Sales Cameron Myhrvold testified that there was "a time where we thought we could charge for the browser" but that view was disavowed "quickly." (C. Myhrvold 4/24/98 Tr. 74). A proposal to separately price the “Active Desktop” shell (believed at the time to be an important way for Windows 98 users to use IE for web browsing) was made by Microsoft’s Joe Belfiore and supported by Microsoft’s Moshe Dunie. Microsoft Group Vice President Paul Maritz acknowledged that the proposal was “tempting” and “had merit” but ultimately rejected it because requiring customers to pay for the “shell” would impair Microsoft’s ability to achieve its “number 1 goal” of becoming dominant in the Internet browser market.

COMPLAINT -- Page 40

122.

Throughout Microsoft’s internal analyses there is one consistent theme: Building

a dominant Internet browser market share and restraining browser competition will protect Microsoft’s Windows operating system monopoly. Microsoft has repeatedly recognized that the reason to win the browser war is to maintain the revenues and profits that flow from the PC operating system monopoly. For example: a.

in a June 20, 1996, memo entitled “windows & internet issues” Microsoft

Group Vice President Paul Maritz explained that among the reasons why “job #1 is browser share” was that: “No matter what happens, we have to slow Netscape’s ability to drive new protocols/stds down.” (MS6 6010346). Mr. Maritz went on to explain that it was necessary “to fundamentally blunt Java/AWT momentum” (momentum supported by cross-platform browsers) to “protect our core asset Windows – the thing we get paid $’s for.” (MS6 6010347) (emphasis in original); and b.

similarly, in an April 4, 1997, Planning Memo entitled “Preserving the

desktop paradise,” Microsoft Vice President Brad Chase warned that, unless stopped, browsers could “obsolete Windows,” “commoditize the OS,” and “make the NC [network computer] viable” (MS7 004127). 123.

If it is permitted to tie Internet Explorer and Windows 98 -- by forcing OEMs to

license and distribute, with Windows 98, Microsoft’s Internet browser software -- Microsoft will substantially foreclose its Internet browser competitors from a significant channel of distribution, thereby restraining competition on the merits and depriving customers of choice.

VII. THE NEED FOR PRELIMINARY RELIEF 124.

In the absence of preliminary relief, consumers will be deprived of their choice of

browsers and consumers and the public will be deprived of the benefits of competition during the

COMPLAINT -- Page 41

pendency of this action. Relief at the conclusion of this case cannot remedy the damage done to consumers and the public during the interim. 125.

In addition, the damage to competitors and competition during the pendency of

this case that would occur in the absence of preliminary relief cannot practically be reversed later. 126.

Aided by Microsoft’s anticompetitive conduct, Microsoft’s share of the browser

market has increased dramatically from 3% or 4% in early 1996 to approximately 50% or more in early 1998. In the absence of interim relief, Microsoft’s share of the browser market will grow substantially as a result, among other things, of Microsoft’s tying of its Internet browser software to Windows 98 and other anticompetitive practices. 127.

Microsoft’s browser competitors will be effectively foreclosed from important

opportunities to supply alternative browsers to customers so long as the tie-in and Microsoft’s other exclusionary practices continue. Particularly because of the market’s network effects, the significant increase in Microsoft’s share of the browser market that will result in the absence of preliminary relief will tip the market in Microsoft’s favor and accelerate its dominance and competition’s demise. 128.

In addition, the barriers that exist to the entry of new competitors or the expansion

of smaller existing competitors, including network effects, mean that dominance once achieved cannot readily be reversed. 129.

In the absence of preliminary relief, the increase in Microsoft’s position that will

result from its continuing illegal conduct will so entrench it (and so weaken its competitors) that the cost of reversing Microsoft’s imminent domination of the Internet browser market “could be prohibitive.” See United States v. Microsoft Corporation, 980 F. Supp. 537, 544 (D.D.C. 1997).

COMPLAINT -- Page 42

.

VIII. CLAIMS FOR RELIEF First Claim for Relief: Unlawful Exclusive Dealing and Other Exclusionary Agreements in Violation of Section 1 of the Sherman Act 130.

Plaintiff incorporates the allegations of paragraphs 1 through 129 above.

131.

Microsoft’s agreements with ISPs, ICPs, and others pursuant to which such

companies agree not to license, distribute, or promote non-Microsoft products (or to do so only on terms that materially disadvantage such products), and its agreements with OEMs restricting modification or customization of the PC boot-up sequence and screens, unreasonably restrict competition and thus violate Section 1 of the Sherman Act. These agreements unreasonably restrain trade and restrict the access of Microsoft’s competitors to significant channels of distribution, thereby restraining competition in the Internet browser market, among other markets. 132.

The purpose and effect of these agreements are to restrain trade and competition in

the Internet browser and PC operating system markets. These agreements violate Section 1of the Sherman Act, 15 U.S.C. § 1. 133.

After the commencement of the United States’ investigation of Microsoft’s

exclusionary agreements, Microsoft modified certain of those agreements. However, the continuing anticompetitive effect of the agreements is substantial; the modified agreements are themselves anticompetitive and there is a serious threat that, unless enjoined, Microsoft will reimpose the unlawful terms that it has only recently expressed an intention not to enforce.

COMPLAINT -- Page 43

B.

Second Claim for Relief: Unlawful Tying in Violation of Section 1 of the Sherman Act 134.

Plaintiff incorporates the allegations of paragraphs 1 through 129 above.

135.

Windows operating systems and Microsoft’s Internet browser software are separate

products. They are sold in different markets; their functions are different; there is separate demand for them; and they are treated by Microsoft and by other industry participants as separate products. It is efficient for Microsoft not to tie them and/or to permit OEMs to distribute Windows 95 and Windows 98 without Microsoft’s Internet browser software. 136.

Microsoft has tied and plans again to tie its Internet browser to its separate

Windows operating system, which has monopoly power, in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. 137.

The purpose and the effect of this tying are to prevent customers from choosing

among Internet browsers on their merits and to foreclose competing browsers from an important channel of distribution, thereby restraining competition in the Internet browser market. C. Third Claim for Relief: Monopolization of the PC Operating Systems Market in Violation of Section 2 of the Sherman Act 138.

Plaintiff incorporates the allegations in paragraphs 1 through 137 above.

139.

Microsoft possesses monopoly power in the market for PC operating systems.

Through the anticompetitive conduct described herein, Microsoft has willfully maintained, and unless restrained by the Court will continue to willfully maintain, that power by anticompetitive and unreasonably exclusionary conduct. Microsoft has acted with an intent illegally to maintain its monopoly power in the PC operating system market, and its illegal conduct has enabled it to do so, in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2.

COMPLAINT -- Page 44

D.

Fourth Claim for Relief: Attempted Monopolization of the Internet Browser Market in Violation of Section 2 of the Sherman Act 140.

Plaintiff incorporates the allegations of Paragraphs 1 through 137 above.

141.

Microsoft has targeted software products that have the potential to compete with or

facilitate the development of products to compete with PC operating systems and thereby to erode Microsoft’s Windows operating system monopoly. Microsoft has willfully engaged, and is engaging, in a course of conduct, including tying and unreasonably exclusionary agreements, in order to obtain a monopoly in the Internet browser market, and there is a dangerous probability that, unless restrained, it will succeed, in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2. Microsoft has acted with a specific intent to monopolize, and to destroy effective competition in, the Internet browser market.

VIII. PRAYER FOR RELIEF WHEREFORE, PLAINTIFF PRAYS FOR RELIEF AS FOLLOWS: 1.

That the Court adjudge and decree as follows: a.

That Microsoft’s conduct in requiring OEMs to license and distribute the

Internet Explorer web browser or any other software product as a condition of licensing any Microsoft operating system product violates Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2; b.

That Microsoft’s agreements with OEMs restricting their right to modify

the screens and functions of Microsoft’s Windows operating system, or to add nonMicrosoft Internet browser software or other software products during the boot-up sequence, or to substitute non-Microsoft Internet browser software or other software COMPLAINT -- Page 45

products for Microsoft Internet browser software or other software products, violate Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2; c.

That Microsoft’s conduct in requiring persons to license and distribute its

Internet browser software or any other software product as a condition of receiving placement in or access to any Microsoft operating system product, including any screen or function thereof, violates Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2; d.

That Microsoft’s conduct in requiring or inducing persons to agree not to

license, distribute, or promote any non-Microsoft Internet browser, or to license, distribute, or promote such browser only on terms or under conditions that materially disadvantage it, violates Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2; e.

That Microsoft has attempted to monopolize the market for Internet

browsers in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2; and f.

That Microsoft has willfully maintained its monopoly in the market for PC

operating systems in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2. 2.

That Microsoft, all persons acting on its behalf or under its direction or control, and

all successors thereto, be preliminarily and permanently enjoined from: a.

Requiring any person to license or distribute Microsoft’s Internet browser

software or any other software product or service as a condition of licensing or distributing any Microsoft operating system product; b.

Requiring or inducing any person to agree not to license, distribute, or

promote any non-Microsoft Internet browser software or other software product, or to do so on any disadvantageous, restrictive or exclusionary terms; c.

Taking or threatening any action adverse to any person in whole or in part

as a direct or indirect consequence of such person’s failure to license or distribute Microsoft’s Internet browser software or other software product, of such person’s licensing COMPLAINT -- Page 46

or distributing any non-Microsoft Internet browser or other software product, or of such person’s cooperation with the United States; d.

Restricting the right of any person to modify the screens, boot-up sequence

or functions of any Microsoft operating system product which such person has licensed so as automatically or otherwise to add non-Microsoft Internet browser software or other software products, including but not limited to alternative user interfaces, or automatically or otherwise to substitute such non-Microsoft Internet browser software or other software product for Microsoft’s Internet browser software or other software product, so long as such addition or substitution does not materially impair the performance of such Microsoft operating system product; e.

For a period of three years (or such other period as the parties may agree or

the Court may order), distributing a single version of its operating system which includes Microsoft’s browser software, unless i.

Microsoft also includes with such operating system the most current

version of the Netscape Internet browser, and ii.

each OEM is permitted at its option to delete the software that

provides the Internet Explorer icon and the other means by which users may readily use IE to browse the web, the software that provides the icon and the other means by which users may readily use the Netscape Internet browser, or both; and f.

Distributing at a single price a version of Windows 98 bundled with the

software that provides the Internet Explorer icon and the other means by which users may readily use IE to browse the web unless: i.

Microsoft makes available to any OEM that licenses the operating

system a practical and commercially reasonable option of deleting (after first installation) or not installing (at first installation) the software that provides the COMPLAINT -- Page 47

Internet Explorer icon and the other means by which users may readily use IE to browse the web, and ii.

for any OEM that deletes (after first installation) or does not install

(at first installation) the software that provides the Internet Explorer icon and the other means by which users may readily use IE to browse the web, Microsoft deducts from that OEM’s Windows 98 royalty an amount equal to the OEM’s reasonable cost of deleting or not installing such software or its functions. 3.

That the Court enter such other preliminary and permanent relief as is necessary

and appropriate to restore competitive conditions in the markets affected by Microsoft’s unlawful conduct. 4.

That the Court enter such additional relief as it may find just and proper.

5. That the plaintiff recover the costs of this action. Dated: May 18, 1998

Joel I. Klein Assistant Attorney General

A. Douglas Melamed Principal Deputy Assistant Attorney General

Rebecca P. Dick Director of Civil Non-Merger Enforcement

Christopher S Crook Chief Phillip R. Malone Steven C. Holtzman Pauline T. Wan Karma M. Giulianelli Michael C. Wilson Sandy L. Roth John F. Cove, Jr. Jeane Hamilton Mark S. Popofsky Attorneys

Jeffrey Blattner Special Counsel for Information Technology

COMPLAINT -- Page 48

U.S. Department of Justice Antitrust Division 450 Golden Gate Avenue Room 10-0101 San Francisco, CA 94102 415/436-6660

U.S. Department of Justice Antitrust Division 950 Pennsylvania Avenue, N.W. Washington, D.C. 20530-0001

COMPLAINT -- Page 49

David Boies Special Trial Counsel

Go to Trial Documents listing Go to initial reference

Microsoft's Reply to the Department of Justice's Complaint (July 28, 1998)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA UNITED STATES OF AMERICA, Plaintiff, Civil Action No. 98-1232 (TPJ)

vs. MICROSOFT CORPORATION, Defendant.

STATE OF NEW YORK ex rel. Attorney General DENNIS C. VACCO, et al., Plaintiffs, vs.

Civil Action No. 98-1233 (TPJ)

MICROSOFT CORPORATION, Defendant.

DEFENDANT MICROSOFT CORPORATION’S ANSWER TO THE COMPLAINT FILED BY THE U.S. DEPARTMENT OF JUSTICE Defendant, Microsoft Corporation (“Microsoft”), by its undersigned counsel, for its Answer to the Complaint filed by the Antitrust Division of the U.S. Department of Justice (“DOJ”), states as follows: 1.

Denies the allegations of Paragraph 1 of the Complaint, except

(a) admits that (i) the DOJ purports to bring this action under Sections 1 and 2 of the

Go to Trial Documents listing Go to initial reference

Microsoft's Reply to the Department of Justice's Complaint (July 28, 1998)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA UNITED STATES OF AMERICA, Plaintiff, Civil Action No. 98-1232 (TPJ)

vs. MICROSOFT CORPORATION, Defendant.

STATE OF NEW YORK ex rel. Attorney General DENNIS C. VACCO, et al., Plaintiffs, vs.

Civil Action No. 98-1233 (TPJ)

MICROSOFT CORPORATION, Defendant.

DEFENDANT MICROSOFT CORPORATION’S ANSWER TO THE COMPLAINT FILED BY THE U.S. DEPARTMENT OF JUSTICE Defendant, Microsoft Corporation (“Microsoft”), by its undersigned counsel, for its Answer to the Complaint filed by the Antitrust Division of the U.S. Department of Justice (“DOJ”), states as follows: 1.

Denies the allegations of Paragraph 1 of the Complaint, except

(a) admits that (i) the DOJ purports to bring this action under Sections 1 and 2 of the

Sherman Act, 15 U.S.C. §§ 1, 2; and (ii) Microsoft is the largest independent supplier of computer software for personal computers; and (b) avers that computer software is one of the fastest moving, most innovative and most competitive businesses in history. 2.

Denies the allegations of Paragraph 2 of the Complaint, except

(a) denies knowledge or information sufficient to form a belief as to the truth of the allegations of the second and third sentences of that Paragraph; and (b) admits that manufacturers of personal computers are often referred to as Original Equipment Manufacturers or “OEMs.” 3.

Denies the allegations of Paragraph 3 of the Complaint, except

admits that software developers have chosen to create a large number of applications that run on various versions of Microsoft’s Windows operating system software. 4.

Denies the allegations of Paragraph 4 of the Complaint, except

admits that new software products that support or provide alternative “platforms” to which applications can be written are a source of competition to Microsoft’s operating system software products. 5.

Denies the allegations of Paragraph 5 of the Complaint.

6.

Denies the allegations of Paragraph 6 of the Complaint, except

(a) admits that (i) software providing web browsing functionality is a source of competition to Microsoft’s operating system software products, including Microsoft’s Windows operating system; and (ii) various types of software providing web browsing functionality permit end users, among other things, to “locate, access, display, and manipulate content and applications located on the Internet’s World Wide Web;” and

-2-

(b) respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 7.

Denies the allegations of Paragraph 7 of the Complaint, except

(a) admits that (i) software providing web browsing functionality is a source of competition to Microsoft’s operating system software products, including Microsoft’s Windows operating system; and (ii) the “Java” programming language can be used by software developers who chose to do so to write Java applets that can run on more than one operating system and Java applications that can run on more than one operating system but only after additional development work is done specific to the Java Virtual Machines on which the developers wish their applications to run; and (b) avers on information and belief that (i) such “cross-platform” Java applications typically run more slowly and are less full-featured than Java applications optimized for a single operating system; and (ii) attempts to develop significant applications in Java, such as a Java version of Netscape Navigator or Corel WordPerfect, have ended in failure because of the shortcomings of the Java technology. 8.

Denies the allegations of Paragraph 8 of the Complaint, and

respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 9.

Denies the allegations of Paragraph 9 of the Complaint, except

(a) admits that (i) Netscape Communications Corp. (“Netscape”) has described its Navigator web browsing software as a “platform” to which certain software programs can be written; and (ii) Netscape has created versions of Navigator that will run on operating

-3-

systems other than Microsoft’s Windows operating system; and (b) respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 10.

Denies the allegations of Paragraph 10 of the Complaint, except

(a) admits that (i) Netscape’s web browsing software is a source of competition to Microsoft’s operating system software products; (ii) Microsoft responded to this competition by, inter alia, constantly improving the various Internet-related technologies included in its operating system software products and promoting the use of those technologies; and (iii) “Internet Explorer” (which is sometimes abbreviated as “IE”) is a marketing term used by Microsoft to describe the various Internet-related technologies in Windows 95 and Windows 98; (b) admits on information and belief that certain Microsoft executives on occasion may have referred to the competition between Microsoft and Netscape as a “jihad” or the “browser war”; and (c) avers that Microsoft decided to include Internet Explorer technologies in Windows 95 before Netscape even was founded, in response to consumer demand for Internet-enabled operating systems and the need to remain competitive with IBM’s OS/2 Warp and the Apple Macintosh operating systems, both of which were being enhanced to include Internet-related technologies, such as software providing web browsing functionality. 11.

Denies the allegations of Paragraph 11 of the Complaint, except

(a) admits on information and belief that Netscape has been and still is “the leading browser supplier,” as defined by share of usage; (b) admits that Microsoft was well positioned to develop and market software providing web browsing functionality in competition with Netscape; and (c) avers that (i) there are sound reasons for Microsoft’s decision to integrate Internet-related technologies into its Windows operating systems -4-

rather than develop a free-standing product (akin to Netscape Navigator) that provides web browsing functionality to end users; (ii) the competition between Microsoft and Netscape continues to be vigorous and has resulted in the development of innovative products at lower prices, the ultimate objective of the federal antitrust laws; and (iii) other companies have entered and will continue to enter the business of supplying software providing web browsing functionality. 12.

Denies the allegations of Paragraph 12 of the Complaint, and

(a) avers that Microsoft has vigorously competed with Netscape on the merits and continues to do so; and (b) respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 13.

Denies the allegations of Paragraph 13 of the Complaint.

14.

Denies the allegations of Paragraph 14 of the Complaint, except

admits that representatives of Microsoft met with representatives of Netscape in Redmond, Washington, on June 2, 1995, and again in Mountain View, California, on June 21, 1995, to explore ways in which the two companies could work together to improve their respective products. 15.

Denies the allegations of Paragraph 15 of the Complaint.

16.

Denies the allegations of Paragraph 16 of the Complaint, except

(a) admits that Microsoft does not charge separately for the Internet Explorer technologies in Windows because those technologies are integral elements of the operating system; and (b) respectfully refers the Court to the quoted news articles for a complete and accurate description of their contents, which do not necessarily reflect accurate quotations of statements by Microsoft executives. -5-

17.

Denies the allegations of Paragraph 17 of the Complaint, except

(a) admits that Microsoft has engaged in the socially desirable and pro-competitive activity of promoting and distributing the Internet Explorer elements of Windows 95 and Windows 98 through various third parties; (b) avers that, contrary to the Complaint, Microsoft did not make any payment to Intuit in return for Intuit’s switching from Navigator to Internet Explorer; and (c) respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 18.

Denies the allegations of Paragraph 18 of the Complaint, and avers

that Internet Explorer technologies are integral elements of Windows 95 as licensed to OEMs by Microsoft. 19.

Denies the allegations of Paragraph 19 of the Complaint, and avers

that Internet Explorer technologies are integral elements of Windows 98 as licensed to OEMs by Microsoft. 20.

Denies the allegations of Paragraph 20 of the Complaint, and avers

that Internet Explorer technologies cannot be removed from Windows 98 without seriously impairing the functionality of the operating system or rendering it entirely inoperable. 21.

Denies the allegations of Paragraph 21 of the Complaint, except

(a) admits that (i) Microsoft has distributed operating system upgrades, including improved versions of Internet Explorer technologies, to the installed base of Windows 95 users to permit them to take advantage of those new technologies without installing an entirely new operating system; (ii) Microsoft plans to distribute a further improved version of Internet Explorer technologies (referred to by the marketing name Internet -6-

Explorer 5.0) to permit the installed base of Windows 95 and Windows 98 users to take advantage of those new technologies; and (iii) Microsoft supplies software programs under brand names that include the term Internet Explorer for “non-Microsoft operating systems”; and (b) avers that (i) software programs providing web browsing functionality created for use with non-Microsoft operating systems have different features and functionality and are built on different code bases from software providing web browsing functionality in Windows; and (ii) Microsoft chose to refer to Internet-related technologies created for use with non-Microsoft operating systems by the name Internet Explorer for consistency in branding, marketing and promotion. 22.

Denies the allegations of Paragraph 22 of the Complaint, and avers

that (i) end users are, and have always been, free to use whatever software providing web browsing functionality they wish with Windows 95 and Windows 98; (ii) OEMs are, and have always been, free to license, promote and distribute any software providing web browsing functionality they wish with new computers on which Windows 95 or Windows 98 are preinstalled; (iii) Microsoft does nothing to foreclose other vendors of software providing web browsing functionality from taking advantage of numerous available channels of distribution for their products, including arrangements with OEMs to preinstall such software providing web browsing functionality on their new computers; and (iv) Netscape has taken advantage of such distribution channels to distribute its web browsing software in vast quantities. 23.

Denies the allegations of Paragraph 23 of the Complaint, and

respectfully refers the Court to the quoted document for a complete and accurate description of its contents. -7-

24.

Denies the allegations of Paragraph 24 of the Complaint, except

(a) admits that (i) Microsoft’s license agreements with OEMs, consistent with industry practice and Microsoft’s rights under the federal copyright laws, generally provide that those OEMs may not modify or delete any part of Microsoft’s copyrighted Windows operating system software program without a license from Microsoft to do so; and (ii) Microsoft’s license agreements with OEMs generally require that the very first time an end user turns on a new computer on which Windows has been installed by an OEM, the Windows operating system be permitted to go through its full startup sequence as designed, developed and tested by Microsoft and display the Windows “desktop” screen without any aspect of that screen having been deleted by the OEM; (b) avers that (i) OEMs may add as many icons as they want to the Windows desktop; (ii) much of the utility of Windows and the consumer appeal of the product would be eliminated if OEMs were licensed to develop their own idiosyncratic versions of “Windows,” as Plaintiffs seek by way of remedy; and (iii) end users have broad flexibility to make whatever changes they want to the Windows operating system; and (c) respectfully refers the Court to Microsoft’s license agreements with OEMs for a complete and accurate description of their terms. 25.

Denies the allegations of Paragraph 25 of the Complaint, and avers

that Microsoft’s license agreements with OEMs give those OEMs broad flexibility to differentiate their products in response to perceived consumer preferences. 26.

Denies the allegations of Paragraph 26 of the Complaint, except

(a) admits that Microsoft has entered into cross-marketing agreements with certain Internet Service Providers (“ISPs”) and Internet Content Providers (“ICPs”); and (b) re-8-

spectfully refers the Court to those agreements for a complete and accurate description of their terms. 27.

Denies the allegations of Paragraph 27 of the Complaint, and avers

that Microsoft has done nothing to foreclose access to any channels of distribution for competing software products providing web browsing functionality. 28.

Denies the allegations of Paragraph 28 of the Complaint, except

(a) admits that (i) Microsoft has entered into cross-marketing agreements with certain ISPs and Online Service Providers (“OLSs”); and (ii) Windows 95 and Windows 98 provide access to a web site that provides information concerning services provided by certain of the ISPs and OLSs that have entered into such agreements with Microsoft; (b) denies knowledge or information sufficient to form a belief as to the truth of the allegation that these arrangements are “of substantial value to ISPs;” and (c) respectfully refers the Court to Microsoft’s agreements with ISPs and OLSs for a complete and accurate description of their terms. 29.

Denies the allegations of Paragraph 29 of the Complaint.

30.

Denies the allegations of the first sentence of Paragraph 30 of the

Complaint and denies knowledge or information sufficient to form a belief as to the truth of the allegations of the second sentence of that Paragraph. 31.

Denies the allegations of Paragraph 31 of the Complaint, except

admits that (i) prior to the filing of this action, Microsoft modified its ISP agreements to eliminate certain provisions challenged by the DOJ in its Complaint; (ii) those

-9-

modifications do not apply to Microsoft’s agreements with certain OLSs; and (iii) America Online (“AOL”) and Compuserve are examples of such OLSs. 32.

Denies the allegations of Paragraph 32 of the Complaint, except

(a) admits that (i) Microsoft has entered into cross-marketing agreements with a small number of ICPs; and (ii) “channel buttons” that are initially configured to provide links to Internet sites maintained by certain ICPs are a feature of Windows; (b) avers that (i) OEMs are licensed to install Windows with such channels turned off by default and to modify the channel bar in certain ways; and (ii); consumers are free to use the channel bar to link to any web site of their choosing; and (c) respectfully refers the Court to Microsoft’s ICP agreements for a complete and accurate description of their terms. 33.

Denies the allegations of Paragraph 33 of the Complaint, except

(a) admits that Microsoft has entered into cross-marketing and promotional agreements with certain ICPs; (b) avers that (i) Microsoft’s ICP agreements do not in any way restrict ICPs from developing content that is optimized for use with competing software providing web browsing functionality; and (ii) many of Microsoft’s competitors, including Netscape, have entered into similar arrangements with ICPs; and (c) respectfully refers the Court to Microsoft’s ICP agreements for a complete and accurate description of their terms. 34.

Denies the allegations of Paragraph 34 of the Complaint, except

admits that Microsoft has recently modified its ICP agreements to eliminate certain provisions subsequently challenged by the DOJ in its Complaint. 35.

Denies the allegations of Paragraph 35 of the Complaint.

-10-

36.

Denies the allegations of Paragraph 36 of the Complaint, except

(a) admits that the antitrust laws do not purport “to inhibit Microsoft from competing on the merits by innovation or otherwise”; and (b) avers that the remedies sought in the Complaint would inhibit innovation by Microsoft and others in the design and development of computer software. 37.

Denies the allegations of Paragraph 37 of the Complaint, and avers

that computer software in general— including software providing web browsing functionality in particular—has been and continues to be one of the most innovative sectors of the United States economy. 38.

Denies the allegations of Paragraph 38 of the Complaint.

39.

Does not contest jurisdiction.

40.

Does not contest venue.

41.

Admits the allegations of Paragraph 41 of the Complaint, except

denies that Microsoft “sells” (as opposed to “licenses”) its operating system software products. 42.

Denies the allegations of Paragraph 42 of the Complaint, except

(a) admits that the DOJ filed a complaint against Microsoft in this District on July 15, 1994 in an action captioned United States v. Microsoft Corp., Civil No. 94-1564; and (b) respectfully refers the Court to the DOJ’s complaint in that action for a compete and accurate description of its contents. 43.

Denies the allegations of Paragraph 43 of the Complaint, except

(a) admits that (i) simultaneously with the filing of the Complaint in that action, Microsoft and the DOJ settled the action pursuant to a Consent Decree without the DOJ -11-

having proved any element of its claims, without any admission of wrongdoing by Microsoft, and without any judicial finding that Microsoft had violated the antitrust laws; and (ii) this Court entered the Consent Decree as a Final Judgment on August 21, 1995; and (b) respectfully refers the Court to the Consent Decree for a complete and accurate description of its contents. 44.

Denies the allegations of Paragraph 44 of the Complaint, and avers

that the Competitive Impact Statement—written by the DOJ with no input from Microsoft—does not establish the “purpose” of any provision of the Consent Decree. 45.

Denies the allegations of Paragraph 45 of the Complaint, except

(a) admits that, on October 20, 1997, the DOJ filed a petition for an order to show cause why Microsoft should not be found in civil contempt of the Consent Decree; and (b) respectfully refers the Court to the DOJ’s petition for a complete and accurate description of its contents. 46.

Admits the allegations of Paragraph 46 of the Complaint, and avers

that, in a decision dated June 23, 1998, in United States of America. v. Microsoft Corporation, No. 97-5343, the United States Court of Appeals for the District of Columbia Circuit (the “Court of Appeals”) reversed the Court’s December 11, 1997 Order. 47.

Denies the allegations of Paragraph 47 of the Complaint, except

(a) admits that (i) Microsoft did not seek “any modification or clarification of the Court’s” December 11, 1997 order; and (ii) on December 15, 1997, Microsoft sent its OEM customers a letter informing them of new licensing options relating to the Court’s

-12-

December 11, 1997 Order; and (b) respectfully refers the Court to the referenced letter for a complete and accurate description of its contents. 48.

Denies the allegations of Paragraph 48 of the Complaint, except

(a) admits that (i) on December 17, 1997, the DOJ filed a motion for judgment of civil contempt; (ii) on January 21, 1998, the DOJ and Microsoft entered into and submitted a stipulated proposed order to the Court for its approval; and (iii) the Court entered that stipulated order on January 22, 1998; and (b) respectfully refers the Court to the stipulated order for a complete and accurate description of its contents. 49.

Denies the allegations of Paragraph 49 of the Complaint, except

(a) admits that Microsoft filed a Notice of Appeal on December 15, 1997; (b) avers that the Court of Appeals subsequently reversed this Court’s December 11, 1997 Order; and (c) respectfully refers the Court to the briefs that Microsoft submitted to the Court of Appeals, as well as to the Court of Appeals’ June 23, 1998 opinion, for a complete and accurate description of the arguments that Microsoft made on appeal and the contents of those documents. 50.

Denies the allegations of Paragraph 50 of the Complaint, except

(a) admits that, (i) on May 5, 1998, Microsoft filed with the Court of Appeals a motion for a stay of the preliminary injunction insofar as it relates to Windows 98; and (ii) Microsoft stated in that motion that “the District Court prima facie included Windows 98 within the scope of its preliminary injunction;” (b) avers that the Court of Appeals stated in its May 12, 1998 Order granting Microsoft’s motion for a stay that “it [was] comparatively impracticable” for this Court to grant the requested relief given that “the appeal ha[d] progressed so near resolution;” and (c) respectfully refers the Court to -13-

Microsoft’s motion and the Court of Appeals’ May 12, 1998 Order for a complete and accurate description of the arguments that Microsoft made in support of the motion. 51.

Admits that the Court of Appeals granted Microsoft’s motion for a

stay on May 12, 1998, and respectfully refers the Court to the Order entered by the Court of Appeals for a complete and accurate description of its contents. 52.

Denies the allegations of Paragraph 44 of the Complaint, except

admits that the complaint requests preliminary and permanent injunctive relief. 53.

Denies the allegations of Paragraph 53 of the Complaint.

54.

Denies the allegations of Paragraph 54 of the Complaint, except

admits that (i) operating system software, inter alia, schedules the execution of tasks by the microprocessor of a computer and controls the flow of information among various hardware components such as the keyboard, disk drives, the monitor and printers; (ii) operating system software also provides a platform on which various applications and other software products run; (iii) word processing and spreadsheet programs are examples of applications software; and (iv) competition in the licensing of operating systems and other computer software occurs throughout the world. 55.

Denies the allegations of Paragraph 55 of the Complaint, except

(a) admits that the interaction among the hardware and software components of a personal computer is complex; and (b) avers that many operating systems, such as Windows NT, run on a variety of microprocessor architectures. 56.

Denies the allegations of Paragraph 56 of the Complaint, except

admits that (i) software providing web browsing functionality permits end users, inter

-14-

alia, to “locate, access, display, and manipulate content and applications located on the web”; and (ii) competition in the licensing of such software occurs throughout the world. 57.

Admits the allegations of the first sentence of Paragraph 57 of the

Complaint and, as to the second sentence of that Paragraph, admits that (i) Microsoft made Windows 98, the successor to Microsoft’s popular Windows 95 operating system, available to OEMs on May 18, 1998; and (ii) Microsoft commercially released Windows 98 to the general public on or about June 25, 1998. 58.

Denies the allegations of Paragraph 58 of the Complaint, except

admits that (i) the popularity of an operating system is to some extent a function of the number, variety and quality of applications available for use with that operating system; and (ii) software developers tend to write applications for operating systems that are popular. 59.

Denies the allegations of Paragraph 59 of the Complaint, except

(a) admits that (i) the primary channel through which Microsoft distributes its operating systems software is through “preinstallation” by OEMs on new computers; and (ii) a personal computer that is designed to run an operating system such as MS-DOS, Windows 95, Windows NT, IBM’s OS/2, Caldera’s DR-DOS, the many variants of Unix, Linux or others, “can perform virtually no useful tasks without an operating system”; (b) avers that many computing devices are designed to operate without a distinct operating system; and (c) respectfully refers the Court to the referenced transcripts of ex parte deposition testimony—which constitute inadmissible hearsay—for a complete and accurate description of their contents.

-15-

60.

Denies the allegations of Paragraph 60 of the Complaint, except

(a) admits that (i) virtually all applications written for Windows 95 will run on Windows 98; (ii) some OEMs began shipping computers with Windows 98 not long after the new operating system was made available to them; (b) admits on information and belief that many consumers demand the latest operating system technology; and (b) respectfully refers the Court to the referenced transcript of ex parte deposition testimony—which constitutes inadmissible hearsay—for a complete and accurate description of its contents. 61.

Denies the allegations of Paragraph 61 of the Complaint, except

admits on information and belief that Netscape commercially released its first “Navigator” product in or about December 1994. 62.

Denies the allegations of Paragraph 62 of the Complaint, except

admits that (i) the first version of Windows 95 provided to OEMs in July 1995 included Internet Explorer 1.0; (ii) Microsoft subsequently provided OEMs with updated versions of Windows 95 that provided various upgrades to the operating system, including improved versions of Internet-related technologies; and (iii) Microsoft referred to those improved versions of Internet-related technologies in Windows 95 as Internet Explorer 2.0, 3.0 and 4.0, respectively. 63.

Denies the allegations of Paragraph 63 of the Complaint, except

(a) admits that (i) one function of the Internet Explorer technologies in Windows 95 and Windows 98 is to enable users to “locate, access display, and manipulate content displayed on the World Wide Web”; (ii) Microsoft attempts to monitor the share of usage of Internet Explorer relative to Netscape Navigator and other software providing web browsing functionality; (iii) an important corporate goal for Microsoft has been to -16-

become a leading supplier of Internet-related technologies, including software providing web browsing functionality; (iv) Microsoft plans to continue to distribute operating system upgrades, including improved versions of Internet Explorer technologies, to the installed base of users of Windows 95 and Windows 98 to permit them to take advantage of those technologies without installing an entirely new operating system; and (v) Microsoft distributes under the trade name “Internet Explorer” software providing web browsing functionality designed “for use on the Apple Macintosh, Sun Solaris, and other non-Microsoft operating systems”; and (b) avers that (i) such software products providing web browsing functionality created for use with non-Microsoft operating systems have different features and functionality and are built on different code bases from the software providing web browsing functionality in Windows; and (ii) Internet Explorer technologies are integral elements of Windows 95 and Windows 98, not a “separate software program.” 64.

Denies the allegations of Paragraph 64 of the Complaint, except

(a) admits that Microsoft software providing web browsing functionality has obtained an increasing share of usage relative to Netscape Navigator and other software providing web browsing functionality as Microsoft has steadily improved the quality of that software; and (b) avers on information and belief that (i) Internet Explorer technologies are generally recognized to be superior to Netscape Navigator for computer users as well as for software developers creating new programs that interact with software providing web browsing functionality; and (ii) Netscape has contended publicly that its web browsing software still has a share of usage of approximately 55%.

-17-

65.

Denies the allegations of Paragraph 65 of the Complaint, except

(a) admits that (i) the Internet and the World Wide Web are growing at a very rapid pace; (ii) consumer demand for software providing web browsing functionality has increased substantially over the last four years; and (iii) the Internet presents potentially lucrative commercial opportunities to an extremely broad range of companies and individuals; and (b) avers that future technological and business developments related to the Internet are highly unpredictable and occur very rapidly. 66.

Denies the allegations of Paragraph 66 of the Complaint, except

admits that (i) many popular applications have been written to run on Windows; (ii) in 1995 and 1996, Netscape repeatedly promised—but has failed to deliver—a version of its web browsing software that functions as a “middleware” layer that exposes application programming interfaces (“APIs”) to which software developers can write a broad range of applications; (iii) the same technologies that provide web browsing functionality can be used to provide a user “interface” (as Microsoft has done in Windows 98); and (iv) certain narrow classes of applications can be, and are, written to APIs exposed by web browsing software such as Netscape’s Navigator rather than to APIs exposed by the underlying operating system software; and (b) avers that (i) most software programs include an “interface”; and (ii) any software program can be written to expose APIs for use by other software programs, and many such programs exist. 67.

Denies the allegations of Paragraph 67 of the Complaint, except

(a) admits that (i) software providing web browsing functionality can be, and has been, written to run on operating systems other than Windows; and (ii) web browsing software such as Netscape’s Navigator is a significant source of competition to Microsoft -18-

operating system products such as Windows; and (b) avers that (i) the notion of software providing web browsing functionality that is capable of running applications consistently across multiple operating systems is more in the nature of marketing hype than business reality; and (ii) any software program can be written to expose APIs for use by other programs and to operate on a variety of operating systems. 68.

Denies the allegations of Paragraph 68 of the Complaint, and avers

that Microsoft products — including Windows 95 and Windows 98 — are a primary means of distribution of Java Virtual Machines. 69.

Denies the allegations of Paragraph 69 of the Complaint, and

respectfully refers the Court to the referenced documents for a complete and accurate description of their contents. 70.

Denies the allegations of Paragraph 70 of the Complaint, except

admits that (i) representatives of Microsoft met with representatives of Netscape on two occasions in June 1995 to explore ways in which the two companies could work together to improve their respective products; and (ii) Internet Explorer 1.0 was part of the initial version of Windows 95 made available to OEMs in July 1995. 71.

Denies the allegations of Paragraph 71 of the Complaint.

72.

Denies the allegations of Paragraph 72 of the Complaint, except

admits that Netscape has continued to compete vigorously with Microsoft “with successive versions of Navigator that work on Windows 95,” as well as other operating systems. 73.

Denies the allegations of Paragraph 73 of the Complaint, except

admits that Netscape has sometimes sought to portray its software providing web browsing functionality as an “alternative platform” to Windows. -19-

74.

Denies the allegations of Paragraph 74 of the Complaint.

75.

Denies the allegations of Paragraph 75 of the Complaint, except

(a) admits that (i) Microsoft has entered into agreements with OLSs (such as AOL and Compuserve) and ISPs (such as MCI and Earthlink); and (ii) the DOJ, for purposes of advancing its arguments, refers to ISPs and OLSs jointly in its Complaint as Internet Access Providers (“IAPs”); and (b) respectfully refers the Court to Microsoft’s agreements with OLSs and ISPs for a complete and accurate description of their respective terms. 76.

Denies the allegations of Paragraph 76 of the Complaint, and

respectfully refers the Court to Microsoft’s agreements with ISPs included in the Internet referral server for a complete and accurate description of their terms. 77.

Denies the allegations of Paragraph 77 of the Complaint, except

(a) admits that (i) many personal computers in the United States are shipped with a copy of Windows preinstalled; and (ii) Microsoft’s license agreements, consistent with industry practice and Microsoft’s rights under the federal copyright laws, generally provide that OEMs may not modify or delete any part of Microsoft’s copyrighted Windows operating system software; and (b) avers that companies in the business of providing products and services for the Internet, including ISPs and ICPs, have available to them numerous methods of promoting and distributing those products and services effectively. 78.

Denies the allegations of Paragraph 78 of the Complaint, and

(a) avers that agreements between Microsoft and ISPs have never included an exclusivity provision regarding distribution of software providing web browsing functionality; and -20-

(b) respectfully refers the Court to Microsoft’s agreements with ISPs in the Internet referral server for a complete and accurate description of their respective terms. 79.

Denies the allegations of Paragraph 79 of the Complaint, except

(a) avers that the Complaint obscures the distinction between Microsoft’s agreements with the 12 ISPs in the Internet referral server and Microsoft’s agreements with thousands of other ISPs; and (b) respectfully refers the Court to Microsoft’s agreements with ISPs in the Internet referral server for a complete and accurate description of their terms. 80.

Denies the allegations of Paragraph 80 of the Complaint, except

avers that (i) Microsoft’s agreements with ISPs in the Internet referral server at one time provided that, if an ISP failed to distribute Internet Explorer to a specified percentage of the ISP’s new customers (typically 75%), then Microsoft at its option could elect to stop promoting the ISP’s business by removing the ISP’s subscriber information from the Internet referral server; (ii) Microsoft did not police its agreements with ISPs to determine whether they were falling below the specified distribution threshold; and (iii) Microsoft did not remove a single ISP’s subscriber information from the Internet referral server based on a failure to meet the distribution threshold specified in the ISP’s agreement with Microsoft notwithstanding the failure of certain such ISPs to meet the specified distribution threshold. 81.

Denies the allegations of Paragraph 81 of the Complaint, and

respectfully refers the Court to the referenced transcripts of deposition testimony for a complete and accurate description of their contents.

-21-

82.

Denies the allegations of Paragraph 82 of the Complaint, except

(a) admits that, prior to the filing of this action, Microsoft unilaterally waived most of the provisions of its agreements with ISPs that the DOJ challenges in its Complaint; and (b) avers that Microsoft became fully aware of the DOJ’s investigation of Microsoft’s relationships with ISPs in or before November 1996. 83.

Denies the allegations of Paragraph 83 of the Complaint, except

(a) admits that Microsoft has not modified its agreements with OLSs such as AOL and Compuserve; and (b) avers that (i) Compuserve is a subsidiary of AOL; and (ii) the DOJ’s varying description of AOL as an “ISP,” an “OLS,” and an “IAP” within Section VI.B. of the Complaint obscures rather than enlightens. 84.

Denies the allegations of Paragraph 84 of the Complaint, except

admits that (i) Microsoft’s agreements with ISPs in the Internet referral server typically require ISPs to promote (not distribute) Internet Explorer in parity with their promotion of other software providing web browsing functionality in the event that and for as long as the ISP wishes to receive promotional benefits from Microsoft; (ii) Microsoft has not modified its agreements with OLSs; and (iii) OLSs currently provide Internet access to a significant percentage of Internet users in the United States. 85.

Denies the allegations of Paragraph 85 of the Complaint, except

(a) denies knowledge or information sufficient to form a belief as to the truth of the allegation that approximately “one-third of Internet browser users obtained the browser they use from their service provider”; (b) avers that there are numerous channels of distribution available for software providing web browsing functionality, as demonstrated by the fact that Netscape expects that participants in its “Netscape Everywhere” campaign will -22-

distribute more than 100 million copies of Netscape Navigator during 1998 alone; and (c) respectfully refers the Court to the referenced transcript of deposition testimony for a complete and accurate description of its contents. 86.

Denies the allegations of Paragraph 86 of the Complaint.

87.

Denies the allegations of Paragraph 87 of the Complaint, except

admits that (i) Microsoft has entered into cross-marketing agreements with ICPs such as Disney, Hollywood Online and CBS Sportsline (which collectively account for a miniscule portion of the total content available on the Internet); (ii) ICPs “provide news, entertainment, and other information from sites on the web”; (iii) copies of Windows 95 that have been upgraded to the Internet Explorer 4.0 level of functionality display a “Channel Bar” on the right side of the Windows desktop that may be removed from the desktop with one “click” by computer users; and (iv) Windows 98 includes a “Channel Bar” that OEMs may elect to display or not the first time a new personal computer running Windows 98 is turned on, and consumers may easily elect to display the “Channel Bar” or not as they choose. 88.

Denies the allegations of Paragraph 88 of the Complaint, except

(a) admits that Microsoft has entered into short-term “platinum” agreements with a very small number of ICPs that appear on the top level of the Channel Bar; and (b) respectfully refers the Court to those agreements for a complete and accurate description of their terms. 89.

Denies the allegations of Paragraph 89 of the Complaint.

90.

Denies the allegations of Paragraph 90 of the Complaint, except

(a) admits that Microsoft has cross-marketing agreements with various ICPs; and -23-

(b) avers on information and belief that ICPs entered into those agreements voluntarily because they found it in their business interest to do so. 91.

Denies the allegations of Paragraph 91 of the Complaint.

92.

Denies the allegations of Paragraph 92 of the Complaint, except

admits that, prior to the filing of this action, Microsoft modified its agreements with ICPs to eliminate the provisions that the DOJ challenges in its Complaint. 93.

Denies the allegations of Paragraph 93 of the Complaint, except

(a) admits that Microsoft’s license agreements with OEMs require that the very first time an end user turns on a new computer on which the OEM has installed Windows, the Windows operating system be permitted to go through its full startup sequence as designed by Microsoft; (b) avers that (i) similar requirements existed in Microsoft’s license agreements with OEMs before August 1996; and (ii) Microsoft has been, and continues to be, willing to work with OEMs seeking to alter the startup sequence of Windows if Microsoft can assure itself that such alterations will not degrade the performance of Windows 98 or otherwise impair the customer’s use of the operating system; and (c) respectfully refers the Court to Microsoft’s license agreements with OEMs for a complete and accurate description of their terms. 94.

Denies the allegations of Paragraph 94 of the Complaint.

95.

Denies the allegations of Paragraph 95 of the Complaint, and avers

that (i) “quick access to other installed software” in Windows 95 is primarily provided via the “Start” button and, in Windows 98, is primarily provided via the “Start” button and icons appearing on the “taskbar”; and (ii) the “Start” button and the “taskbar”

-24-

typically appear along the bottom of a computer screen and typically are visible at all times for “quick access” to installed software. 96.

Denies the allegations of Paragraph 96 of the Complaint, except

(a) admits that (i) Microsoft permits OEMs to customize the “Active Desktop”; and (ii) Microsoft’s license agreements, consistent with industry practice and Microsoft’s rights under the federal copyright laws, generally provide that OEMs may not delete any part of Microsoft’s copyrighted Windows operating system; and (b) avers that (i) the most recent version of Windows 95 (called OSR 2.5) and Windows 98 provide OEMs and computer users with the option of displaying the “Active Desktop,” which uses Internet-related technology to provide OEMs and consumers with greater ability to customize the “desktop” screen; and (ii) Microsoft gives OEMs great flexibility to add to the Windows desktop as many icons as they want for as many different software products providing web browsing functionality (or software programs of any kind) as they want. 97.

Denies the allegations of Paragraph 97 of the Complaint, and avers

that it is very simple for computer users to make whatever changes they want to the Windows desktop, including adding custom shells or other automatically launching software (such as Netscape’s web browsing software) that will take over the full screen each time their computer is turned on. 98.

Denies the allegations of Paragraph 98 of the Complaint.

99.

Denies the allegations of Paragraph 99 of the Complaint, except

(a) admits that Microsoft’s license agreements, consistent with industry practice and Microsoft’s rights under federal copyright laws, generally provide that OEMs may not delete any part of Microsoft’s copyrighted Windows operating system; and (b) avers that -25-

(i) OEMs remain free to provide their customers with an alternative user interface that can be invoked with a single mouse “click” or key stroke, and easily set up by the computer user thereafter to start automatically and take over the full screen every time the computer is turned on; and (ii) Microsoft works closely with OEMs to meet the needs of those few OEMs that may wish to modify Windows in some way, consistent with Microsoft’s interest in assuring itself that such modifications would not degrade the performance of Windows 98 or otherwise impair the customer’s use of the operating system. 100.

Denies the allegations of Paragraph 100 of the Complaint, and

respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 101.

Denies the allegations of Paragraph 101 of the Complaint.

102.

Denies the allegations of Paragraph 102 of the Complaint.

103.

Denies the allegations of Paragraph 103 of the Complaint, except

(a) admits that (i) Microsoft creates and distributes various software programs having web browsing functionality and utilizes the marketing term “Internet Explorer” in connection with each of those programs – including (A) Windows operating systems, distributed to OEMs and end-users, (B) Windows operating system upgrades, distributed to end users, (C) web browsing software for “non-Microsoft operating systems,” including operating systems developed by Apple and Sun Microsystems distributed to end users – each of which products satisfies a different source of demand; (ii) Microsoft and various industry organizations track relative shares of usage of different kinds of software providing web browsing functionality; (iii) Microsoft licenses Internet Explorer -26-

technologies to certain independent software vendors for redistribution with their software products that require the most recent version of those technologies to function; (iv) Microsoft enlists others to promote the use of Internet Explorer technologies in Windows; and (v) Microsoft supplies software programs under brand names that include the term “Internet Explorer” for non-Microsoft operating systems, including operating systems developed by Apple and Sun Microsystems; (b) denies knowledge or information sufficient to form a belief as to the truth of the allegation that “ISPs consider IE to be a separate product from Windows;” and (c) respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 104.

Denies the allegations of Paragraph 104 of the Complaint insofar

as the Complaint alleges there is separate demand for operating systems that lack web browsing functionality, and (a) avers that there is no such separate demand; and (b) admits that there are limited sources of separate demand for standalone web browsing software, e.g., Internet Explorer for Solaris. 105.

Denies the allegations of Paragraph 105 of the Complaint.

106.

Denies the allegations of Paragraph 106 of the Complaint, and

respectfully refers the Court to the referenced transcript of deposition testimony and to the referenced document for a complete and accurate description of their contents. 107.

Denies the allegations of Paragraph 107 of the Complaint, except

(a) admits that Netscape Navigator is a source of competition to Microsoft’s operating system software products; (b) avers that Netscape (which claims that 70 million people currently use its web browsing software to access the Internet) is still the leading supplier

-27-

of software providing web browsing functionality; and (c) respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 108.

Denies the allegations of Paragraph 108 of the Complaint, except

(a) admits that improving its position as a supplier of Internet-related technologies has been an important corporate goal of Microsoft for several years; and (b) respectfully refers the Court to the quoted documents for a complete and accurate description of their contents. 109.

Denies the allegations of Paragraph 109 of the Complaint, and

avers that, contrary to the repeated express and implied allegations in this and succeeding paragraphs, Microsoft has never “tied Internet Explorer to Windows 95” or Windows 98 and that web browsing functionality is an integral feature of both operating systems. 110.

Denies the allegations of Paragraph 110 of the Complaint, except

(a) admits that Micron, Compaq and Gateway at different times have inquired about the possibility of removing the Internet Explorer icon from the Windows desktop and were advised that they are not licensed to modify Windows in that way; and (b) respectfully refers the Court to the quoted documents for a complete and accurate description of their contents. 111.

Denies the allegations of Paragraph 111 of the Complaint.

112.

Denies the allegations of Paragraph 112 of the Complaint, except

admits that (i) Microsoft, consistent with industry practice and its rights under the federal copyright laws, generally does not permit OEMs to modify or delete any part of Microsoft’s copyrighted Windows operating system; and (ii) Microsoft distributes operating system upgrades, including improved versions of Internet Explorer -28-

technologies, to the installed base of Windows users to permit them to take advantage of those new technologies without installing an entirely new version of the operating system. 113.

Denies the allegations of Paragraph 113 of the Complaint, and

respectfully refers the Court to the quoted document for a complete and accurate description of its contents. 114.

Denies the allegations of Paragraph 114 of the Complaint, and

(a) avers that Microsoft always planned to include some version of Internet Explorer technologies in the successor to Windows 95, which was ultimately called Windows 98, just as it had included such technologies in Windows 95; and (b) respectfully refers the Court to the quoted documents for a complete and accurate description of their contents. 115.

Denies the allegations of Paragraph 115 of the Complaint, except

admits that Windows 98, like its predecessor Windows 95, includes Internet Explorer technologies as integral elements of the operating system. 116.

Denies the allegations of Paragraph 116 of the Complaint, except

admits that, because Internet Explorer technologies pervade numerous aspects of Windows 98, the ready means of accessing the web browsing functionality provided by those technologies cannot be “hidden” from end users in Windows 98 as they could be in certain versions of Windows 95 by using an Add/Remove Programs utility. 117.

Denies the allegations of Paragraph 117 of the Complaint, except

admits that (i) Microsoft distributes operating system upgrades, including improved versions of Internet Explorer technologies, to the installed base of Windows users to permit them to take advantage of those new technologies without installing an entirely -29-

new operating system; and (ii) Microsoft plans to distribute such an upgrade (referred to by the marketing name Internet Explorer 5.0) to permit the installed base of both Windows 95 and Windows 98 users to take advantage of the new technologies included therein. 118.

Denies the allegations of Paragraph 118 of the Complaint.

119.

Denies the allegations of Paragraph 119 of the Complaint, and

avers that (i) the incorporation of Internet Explorer technologies into Windows is efficient and produces benefits that users could not otherwise obtain themselves; (ii) vigorous competition between Microsoft and Netscape on the merits is ongoing and has led to “continuing innovation,” one of the primary goals of the federal antitrust laws; and (iii) Microsoft has done nothing to deprive consumers of choice among software providing web browsing functionality. 120.

Denies the allegations of Paragraph 120 of the Complaint, except

(a) admits that Microsoft does not charge “separately” for any of the many functionalities afforded by Windows operating systems; and (b) avers on information and belief that Netscape’s web browsing software has always been available effectively without charge to a majority of users. 121.

Denies the allegations of Paragraph 121 of the Complaint, and

respectfully refers the Court to the referenced transcript of deposition testimony and to the referenced documents for a complete and accurate description of their contents. 122.

Denies the allegations of Paragraph 122 of the Complaint, and

respectfully refers the Court to the quoted documents for a complete and accurate description of their contents. -30-

123.

Denies the allegations of Paragraph 123 of the Complaint,

including the postulated predicate that Microsoft “ties” “Internet Explorer and Windows 98,” and avers that there are numerous channels of distribution available for software providing web browsing functionality such as Netscape Navigator. 124.

Denies the allegations of Paragraph 124 of the Complaint, and

avers that consumers are free to choose among different kinds of software providing web browsing functionality, including Netscape Navigator (which runs flawlessly on Microsoft’s operating system products). 125.

Denies the allegations of Paragraph 125 of the Complaint and

avers that Netscape’s chief executive officer, James Barksdale, has stated publicly that Microsoft’s release of Windows 98 will not have a major impact on Netscape’s leading share of web browsing software. 126.

Denies the allegations of Paragraph 126 of the Complaint, except

admits that usage of Microsoft software providing web browsing functionality relative to Netscape Navigator and other software providing web browsing functionality has grown significantly since 1996 with the introduction of increasingly improved versions of Internet Explorer technologies. 127.

Denies the allegations of Paragraph 127 of the Complaint, and

avers that Netscape Navigator and other software providing web browsing functionality have not been foreclosed from any channels of distribution. 128.

Denies the allegations of Paragraph 128 of the Complaint.

129.

Denies the allegations of Paragraph 129 of the Complaint.

-31-

130.

Incorporates by reference and restates its answers to Paragraphs 1

through 129 of the Complaint as if fully set forth herein. 131.

Denies the allegations of Paragraph 131 of the Complaint.

132.

Denies the allegations of Paragraph 132 of the Complaint.

133.

Denies the allegations of Paragraph 133 of the Complaint, except

admits that Microsoft has recently modified its ISP agreements to eliminate many of the provisions that the DOJ subsequently challenged in the Complaint. 134.

Incorporates by reference and restates its answers to Paragraphs 1

through 129 of the Complaint as if fully set forth herein. 135.

Denies the allegations of Paragraph 135 of the Complaint, except

admits that Internet Explorer for Macintosh and other such products are products “separate” from operating systems. 136.

Denies the allegations of Paragraph 136 of the Complaint.

137.

Denies the allegations of Paragraph 137 of the Complaint.

138.

Incorporates by reference and restates its answers to Paragraphs 1

through 137 of the Complaint as if fully set forth herein. 139.

Denies the allegations of Paragraph 139 of the Complaint.

140.

Incorporates by reference and restates its answers to Paragraphs 1

through 137 of the Complaint as if fully set forth herein. 141.

Denies the allegations of Paragraph 141 of the Complaint.

142.

Denies all of the allegations of the Complaint not specifically

admitted above and that the DOJ is entitled to any relief whatsoever on the purported claims alleged in the Complaint. -32-

DEFENSES Microsoft states the following defenses: First Defense The Complaint fails to state a claim upon which relief can be granted. In attacking Microsoft’s cross-marketing agreements with other firms, the Complaint seeks to deny to Microsoft the use of ordinary competitive arrangements. The challenged contracts (i) foreclose no one from full and complete access to the many available channels for the distribution of software providing web browsing functionality and (ii) are contracts for the promotion of commerce. In attacking the design and licensing of the Windows operating system, the Complaint challenges not anticompetitive conduct but the creation of commerce itself. Far from predatorily injuring the United States, Microsoft’s continuous creation, improvement and marketing of computer software, including operating systems software, has fueled the growth of one of the most important sectors of the economy, enhancing the Nation’s economic output, employment, tax revenues and export earnings.

-33-

Microsoft and the thousands of other software companies that develop and market products for use with Windows — including Netscape — have helped enable the computer industry as a whole to provide greater value to consumers at rapidly decreasing cost. Microsoft has led this explosive creation of commerce by making the technical specifications of successive versions of Windows — including application programming interfaces — available to software developers, as well as to OEMs, months if not years in advance of their introduction to the marketplace. Second Defense The Complaint is barred, in whole or in part, by the doctrine of equitable estoppel. Third Defense The Complaint is barred, in whole or part, by the doctrine of collateral estoppel. Fourth Defense The Complaint is barred, in whole or in part, for failure to join one or more indispensible parties. Fifth Defense The Complaint’s challenges to certain of Microsoft’s ISP and ICP agreements are moot because Microsoft has waived the challenged provisions. Sixth Defense The Complaint’s challenges to Microsoft’s license agreements with computer manufacturers are without legal merit by reason of Microsoft’s rights under the federal copyright laws. -34-

WHEREFORE, Microsoft demands judgment dismissing the Complaint on the merits, in its entirety and with prejudice, and awarding such additional relief as the Court may deem just and proper. Dated: New York, New York July 28, 1998 Respectfully submitted,

______________________________ John L. Warden Richard J. Urowsky Steven L. Holley Theodore Edelman Michael Lacovara Robin D. Fessel Richard C. Pepperman, II Stephanie G. Wheeler SULLIVAN & CROMWELL 125 Broad Street New York, New York 10004 (212) 558-4000 James R. Weiss PRESTON GATES ELLIS & ROUVELAS MEEDS 1735 New York Avenue, N.W. Washington, D.C. 20006 (202) 628-1700 William H. Neukom Thomas W. Burt David A. Heiner, Jr. Steven J. Aeschbacher Diane D’Arcangelo MICROSOFT CORPORATION One Microsoft Way Redmond, Washington 98052 (425) 936-8080 Counsel for Defendant Microsoft Corporation -35-

CERTIFICATE REQUIRED BY RULE 109 OF THE LOCAL RULES OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA I, the undersigned counsel of record for Microsoft Corporation, certify that to the best of my knowledge and belief none of Microsoft’s subsidiaries or affiliates have any outstanding securities in the hands of the public. These representations are made in order that judges of this Court may determine the need for recusal.

______________________________ John L. Warden Attorney of Record for Microsoft Corporation

-36-

CERTIFICATE OF SERVICE I hereby certify that, on this 28th day of July, 1998, I caused true and correct copies of the foregoing Defendant Microsoft Corporation’s Answer to the Complaint Filed by the U.S. Department of Justice to be served by facsimile and overnight courier upon: A. Douglas Melamed, Esq. Principal Deputy Assistant Attorney General Antitrust Division U.S. Department of Justice 10th Street & Pennsylvania Avenue, N.W. Washington, D.C. 20530 Phillip R. Malone, Esq. Antitrust Division U.S. Department of Justice 450 Golden Gate Avenue, Room 10-0101 San Francisco, California 94102 Stephen D. Houck, Esq. Chief, Antitrust Bureau New York State Attorney General’s Office 120 Broadway, Suite 2601 New York, New York 10271 Christine Rosso, Esq. Chief, Antitrust Bureau Illinois Attorney General’s Office 100 West Randolph Street, 13th floor Chicago, Illinois 60601

______________________ Christopher J. Meyers

-37-

Go to Trial Documents listing Go to initial reference

Deposition of Bill Gates by David Boies (August 27, 1998)

2 3 4 5

10 11 12 13 14 15 16 17 18 19 20 21 22

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA, ) ) 6 Plaintiff, ) ) 7 vs. ) No. CIV 98-1232(TPJ) ) 8 MICROSOFT CORPORATION, ) ) CONFIDENTIAL 9 Defendant. ) ) _________________________________ )

DEPOSITION OF BILL GATES, a witness herein, taken on behalf of the plaintiffs at 9:09 a.m., Thursday, August 27, 1998, at One Microsoft Way, Redmond, Washington, before Kathleen E. Barney, CSR, pursuant to Subpoena.

REPORTED BY: Kathleen E. Barney, BARNEY, UNGERMANN & ASSOCIATES CSR No. 5698

23 24 25

Katherine Gale CSR No. 9793 Our File No. 1-49005 1 2 3 4 5

6 7 8 9

APPEARANCES OF COUNSEL: FOR THE UNITED STATES OF AMERICA: UNITED STATES DEPARTMENT OF JUSTICE BY PHILLIP R. MALONE KARMA M. GIULIANELLI 450 Golden Gate Avenue Box 36046 San Francisco, California 94102 (415) 436-6660 BOIES & SCHILLER LLP BY DAVID BOIES 80 Business Park Drive Armonk, New York 10504-1710 (914) 273-9800

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

FOR MICROSOFT CORPORATION: MICROSOFT CORPORATION LAW AND CORPORATE AFFAIRS BY DAVID A. HEINER WILLIAM H. NEUKOM One Microsoft Way Redmond, Washington 98052 (425) 936-3103 SULLIVAN & CROMWELL BY RICHARD J. UROWSKY 125 Broad Street New York, New York 10004 (212) 558-3546 FOR THE PLAINTIFF STATES: STATE OF NEW YORK OFFICE OF ATTORNEY GENERAL BY STEPHEN D. HOUCK GAIL P. CLEARY RICHARD GRIMM 120 Broadway New York, New York 10271-0332 (212) 416-8275 ALSO PRESENT: PRISCILLA ALVAREZ, Paralegal MICHEL CARTER, Video Operator

25

1 2 PAGE 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

I N D E X EXAMINATION BY

WITNESS Bill Gates

Mr. Houck Mr. Boies

5

GOVERNMENT EXHIBITS: 337 338 339 340 E-mail 341 E-mail 342 E-mail 343 E-mail 344 Series 345 346 347

E-mail dated 5/22/96 23 "Microsoft OEM Sales" 30 E-mail dated 10/25/94 36 dated 3/27/97 45 dated 4/6/95 51 dated 4/24/95 57 dated 1/31/95 70 of e-mails, first one 75 dated 4/12/95 "The Internet Tidal Wave" 77 Series of e-mails, first one 85 dated 5/3/95 "Financial Analysts Day 86 Executive Q & A"

19 20 21 22

349

348 Series of e-mails, first one dated 1/8/97 Series of e-mails, first one 93 dated 7/14/97

88

23 24 25

350 Series of e-mails, first one dated 6/12/97

1 2 351 E-mail dated 6/23/95 96 3 352 E-mail dated 7/28/96 114 4 353 E-mail dated 12/1/96 114 5 354 E-mail dated 5/19/96 121 6 355 Financial Times Article 7 356 "Netscape: Sitting Pretty or Sitting Duck?" 8 357 PC Magazine Online Article 9 358 E-mail dated 1/5/96 143 10 359 PC Value Analysis 146 11 360 E-mail dated 12/16/97 146 12 361 E-mail dated 9/8/97 147 13 362 E-mail dated 4/25/97 149 14 363 E-mail dated 5/15/98 152 15 364 The Financial Times Comment 16 and Analysis 17 18 19 20 21 22 23 24 25

10 11 12 13

94

130 138

142

172

1 BILL GATES, 2 a witness herein, having been duly sworn, was deposed 3 and testified as follows: 4 5 MR. HOUCK: Mr. Heiner, I understand 6 you want to make a statement? 7 MR. HEINER: Very briefly. This 8 deposition is being taken, of course, pursuant to the 9 protective order in the case and we will exercise our rights under that to have this transcript treated confidentially. MR. HOUCK: Okay. MR. HEINER: We'll make the appropriate

14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

designations in accordance with the schedule set out in the protective order. EXAMINATION BY MR. HOUCK: Q. Mr. Gates, as I've indicated, my name is Steve Houck, I represent the plaintiff states. I'll be examining you first and I suspect that Mr. Boise on behalf of the U.S. Government will have some questions for you. I understand from your lawyers you don't want to be here any longer than necessary. I will do my best to accommodate that. 5

1 If I move too quickly, let me know and I'll slow 2 down. 3 I'll be showing you some documents 4 during the course of the deposition and I may point 5 out to you, to speed up the process, portions of the 6 document that pertain to the questions I have, but 7 feel free if you want to take more time to read the 8 entire document to get it in context. 9 Also, if you don't understand any of my questions, if they are unclear in any way, let me know and I'll try to make them a little more clear. I understand that you are one of the co-founders of Microsoft; is that correct? A. Yes. Q. When was the company founded? A. 1975. Q. What positions have you held with Microsoft since then? A. Partner, chairman, CEO. Q. What is your present title? A. Chairman and CEO. Q. Have you been deposed before, sir? A. Yes. Q. In other litigations? A. I'm sorry? 6

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Q. In other litigations? You've been deposed in other litigated matters where Microsoft was a defendant; is that correct? A. I've been deposed in cases where Microsoft wasn't a defendant and in cases where it was the defendant. Q. So you understand the deposition process and how it works? Any questions before we proceed into the substance about the procedures? A. I'm not sure what you mean. Q. Well, are you comfortable with the procedures here? Do you have any questions before we proceed about how this deposition works? You have the right to speak to counsel if you'd like. As I

15 16 17 18 19 20 21 22 23 24 25

indicated, if you have any clarifications with respect to any of my questions, please ask me, but I assume you understand the general process since you've been deposed before. With whom have you spoken in preparation for the deposition today? Anyone other than your counsel? A. No. Q. I assume you've reviewed written materials in connection with your preparation for the deposition today; is that correct? 7

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. I was shown some written documents. Q. Did you review in that connection any documents that were prepared especially to prepare you for this deposition as opposed to documents that were generated in the normal course of Microsoft's business? A. No. Q. Do you keep any work-related files at home as opposed to the office? A. In general? Q. Yes. A. I don't have a filing system at home. I sometimes take paper home, but I don't keep paper there. Q. Do you use a computer at home? A. Yes, I do. Q. Do you use that on work-related matters? A. Some of the computers I do and some of the computers I don't. Q. Do you know whether those computers were searched in connection with a document search in this litigation? A. Those computers don't have storage. Q. But you don't know whether the hard 8

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

disk was searched for any material that might be there that -A. You should understand it's a portable computer, it moves back and forth. That's the computer with my e-mail, it moves back and forth. So it's the same computer in my office as at home. Q. I see, okay. And I assume the computer in your office was searched for relevant e-mails; is that your understanding? A. Yes. Q. I gather from time to time you give interviews to the press; is that right? A. Yes. Q. During those interviews, does anybody from Microsoft or Microsoft's PR firm take notes or

16 17 18 19 20 21 22 23 24 25

record remarks that you make to the press? A. Sometimes they do. Most times they don't. Q. Who would be responsible for doing that at Microsoft when that's done? A. Well, if there is nobody in the meeting, then no one. If there's -- usually it would have to be somebody that was actually present. Q. Correct. Is there somebody in the Microsoft PR department that is responsible for 9

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

making notes or recordings of interviews you give to the press? A. I said if there is someone in the meeting, then they can choose to do so. Q. I understand that. A. There is no particular person who comes to those meetings. Sometimes there is no one in those meetings and sometimes there is someone in the meeting. Q. When there is somebody there, who undertakes to take notes or make recordings of your remarks? A. The person who is there. Q. And who has that been in the past? Can you identify any specific people who would have done that? A. Well, I wouldn't know all their names. Sometimes Mitch Matthews might be in interviews. Sometimes -- Katie Erling was in when I talked to an analyst once. Marianne Allison, not in the last few years. Melissa Wagner maybe 15 years ago. Pam Edstrom. Dean Katz. Collins Hemingsway. I don't remember everyone who ever sat in an interview with me. Q. Okay. Have you had any communications 10

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

with anyone from a company outside Microsoft with respect to whether or not somebody from that company might testify at the trial of this matter? A. No. Q. Sir, are you familiar with the Microsoft Press computer dictionary? A. No. Q. You've never cracked it open before? A. No. Q. Well, I'll introduce you to it. I have here the Microsoft Press computer dictionary. It's the third edition dated 1997. It says -- it claims to be the authoritative source of definitions for computer terms, concepts and acronyms from the world's most respected computer software company. I'll give you a softball question.

17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Would you agree that Microsoft is the world's most respected computer software company? A. Some people would agree with that, some people wouldn't. Q. What's your opinion? A. I think we are the most -- if you took it on a statistical basis, yes, we'd be the most respected software company. Q. This computer dictionary defines 11

1 operating system as follows: "The software that 2 controls the allocation and usage of hardware 3 resources such as memory, central processing unit, 4 time, disk space and peripheral devices." 5 Is that an accurate definition of an 6 operating system? 7 A. Well, the notion of what's in an 8 operating system has changed quite a bit over time. 9 So that definition is not really complete in terms of how people think of operating systems in the last decade or so. Q. So this definition in the 1997 dictionary is incomplete in your estimation? A. What I said is that over time the number of things that are in operating systems has increased and so if you want to look at operating systems in the last decade, you'd say the definition is incomplete. Q. Is it accurate? Let me read it to you once again. "The software that controls the allegation and usage of hardware resources such as memory, central processing unit, time, disk space and peripheral devices." A. I said in terms of operating systems in 12

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

the last decade, it's an incomplete definition. Q. In what respects is it incomplete? A. There are aspects of the operating systems in the last decade that aren't included in that definition. Q. And what aspects? A. Do you want -- I mean it's a long answer to that question. Shall we go through them all? Q. Sure, go ahead. A. Okay. Well, typically the way people interact with computers now is on a graphical basis and so the constructs that relate, for example, to fonts are now, in the last ten years, a typical part of the operating system. For example, the idea of how you take a font and render it at different sizes, whether you

18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

have descenders, how you deal with ligatures, how you deal with, say, Arabic ellision, how you deal with Kanji characters or Hangul characters. And so there is a font rasterizer and a set of font resources and a set of font substitution algorithms that are included in the computer. So that when people write applications that run on top of that computer, they can call on those resources in order to render the 13

1 glyphs on the computer screen. And there is a lot of 2 utility software that relates to the management of 3 those fonts. 4 Q. Is that the end of your answer? 5 A. No. No. Another thing that is typical 6 in operating systems for the last decade is a set of 7 utilities for managing the disk space that's on the 8 computer dealing with backup, dealing with being out 9 of memory, dealing with security aspects of managing the disk there. And so the various utility programs help you make sure the disk is being used for the most recent information, to help you archive that information in a variety of ways. So that's something that has been in operating systems over the last decade. Also operating systems have a shell type function that is a way of interacting with the user to navigate through the informational resources. Actually, that's more than a decade that that's been a typical inclusion in the operating system. Do you want me to keep going on? Q. Yeah, finish your answer and I'll ask you another question. Let me know when you're done. A. There's enough things here that I doubt I'll be able to hit them all, but I'll hit another 14

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

set of them.

It's typical in terms of interacting with the user to have some sort of facility for helping the user. That is, if the user is confused about the commands, which utility to use and what to do. It's typical now to have something where they can give some sort of ask for help and help will come up onto the computer screen and be displayed in order to let them interact. It's also typical now not just to map the low-level hardware but also to have very high-level graphics support that's even independent of what's in the hardware that's there. It's typical to have remote booting capabilities so you can get the operating system that can come across the network. It's typical to have things that relate to viruses that you find in computer systems. Let's see. It's also typical to have

19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19

as well what you think of as disk management utilities, some application type programs that let you go in and show off some of the strengths of that operating system, what's actually available with that system. So, for example, if you take a Macintosh, when you get it, it has a variety of little things that you can play around with. 15

1 It's also typical to have a thing like 2 a control panel, I don't know if you've used that on 3 the Macintosh, but it lets you go in do things like 4 set the sound settings and set the keyboard settings, 5 the keyboard repeat factor. It's -- because of the 6 way operating systems now handle languages, there are 7 a lot of things that have to do with configuring the 8 system in that respect. 9 In the whole area of networking there's more and more that's being included in operating systems to let people get out and do things, including often the ability to create electronic mail, receive electronic mail, deal with the system in that fashion. Q. Is it your testimony that the control panel is part of the operating system? MR. HEINER: Objection. What operating system are we talking about? MR. HOUCK: Macintosh operating system. MR. HEINER: Okay. THE WITNESS: Well, they have a control panel that is part of the Macintosh OS, yes. Q. BY MR. HOUCK: Is that part of any OS marketed by Microsoft? A. No. The Macintosh control panel is 16

1 actually unique to the Macintosh operating system. 2 It only appears in the Macintosh operating system. 3 Q. During the course of your answer, you 4 used the word "application" several times, and let me 5 see if you agree with the definition in the Microsoft 6 dictionary of that term. 7 Application is there defined as: 8 "A program designed to assist in the performance of a 9 specific task, such as word processing, accounting or inventory management." Is that an accurate definition, Mr. Gates? A. Could you read it again? Q. Sure. "A program designed to assist in the performance of a specific task, such as word processing, accounting or inventory management." A. I'd say it's a pretty vague definition. Q. Is it accurate, as far as it goes? A. I'd say it's vague but accurate.

20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20

Q. Another term I'm sure we're going to be using throughout the course of the deposition is Web browser. And let me read you the definition from your company's dictionary and see if you think that's accurate. Web browser is defined by the Microsoft 17

1 computer dictionary as follows: "A client 2 application that enables a user to view HTML 3 documents on the World Wide Web, another network for 4 the user's computer, follow the hyperlinks among them 5 and transfer files." 6 Is that accurate? 7 A. It's actually describing browsing 8 functionality. 9 Q. Is it an accurate definition of browsing functionality? A. It describes part of what you do when you browse. Q. What is your definition of a Web browser? A. I'd say browsing technology is what lets you navigate through -- typically it means something that lets you do HTML display and navigation. Q. Is that what you mean when you use the term Web browser? A. Well, software that lets you do Web browsing is sometimes referred to as a Web browser. Q. And Microsoft has marketed a Web browser under the trade name Internet Explorer; is that correct? 18

1 A. We've used the term Internet Explorer 2 to refer to the Internet technologies in Windows as 3 well as some stand-alone products we've done. 4 Q. Let me see if you agree with this 5 definition in the 1997 edition of Microsoft's 6 computer dictionary. The definition is of the term 7 Internet Explorer. 8 Internet Explorer is defined as 9 follows: "Microsoft's Web browser introduced in October, 1995." Is that an accurate definition of Internet Explorer? A. I'm not sure why they say October. I don't think that's right. Q. When is your recollection that it was introduced? A. Well, we shipped Windows 95, including browsing functionality, in August, 1995. Q. Was IE shipped as a stand-alone product in or about October, 1995?

21 22 23 24 25

A. Q. product? A. referring to.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21

No. Was it ever shipped as a stand-alone Well, it depends on what you are If you are talking about Unix or the 19

Macintosh, we did create a set of bits that stood by themselves and could be installed on top of those operating systems. Q. When were those versions of IE first marketed? A. Certainly not in October, 1995. Q. Apart from the timing issue, would you agree that Internet Explorer is defined here correctly as Microsoft's Web browser? A. Did you actually read what was in

there? Q. Yeah, I read the first sentence. I can read you the whole thing if you'd like. A. Well, it seems strange. If you're trying to use the dictionary, you might as well read what it says. You could show it to me. Q. I'll read it to you and I'll show it to you and you tell me if you think there is anything in here that is inaccurate. The full entry of Internet Explorer reads as follows: "Microsoft's Web browser introduced in October, 1995. Internet Explorer is now available in Windows and Macintosh versions. Later versions provide the ability to incorporate advanced design and animation features in the Web 20

1 pages and recognize ActiveX controls and Java 2 applets." 3 Take a look at it and tell me if there 4 is anything else in there that you think is 5 inaccurate? 6 A. Well, certainly the product we shipped 7 that was before October, 1995 was Windows 95. The 8 browsing functionality we had in it we've updated 9 quite a bit several times. And so defining Internet Explorer to be what we shipped just on one particular date can't be considered accurate. You have to say that many times we've taken the browsing functionality in Windows, which we refer to as Internet Explorer, and we've updated that functionality. So you can't really pin the definition to a particular date. It's really a brand name we use for those technologies. Q. Was this definition accurate in 1997 when Microsoft's computer dictionary was sold to the public? A. I already told you that reference to

22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

October, 1995 certainly makes the definition inaccurate. Q. Apart from that, is it accurate? A. It's not accurate to say that Internet 21

1 Explorer is defined at a single point in time, that 2 it's one set of bits because it's a brand that we 3 have used for a set of technologies that have evolved 4 over time. And in that sense I would take exception 5 to the way that the book, that I've never seen there, 6 happened to define it. 7 Q. You've described the Web browser as a 8 killer application, haven't you? 9 A. I'm not sure what you're talking about. You'd have to show me the context. Q. Okay. MR. HOUCK: I'd like to mark as Government Exhibit 1 a memorandum from Mr. Bill Gates to the executive staff dated May 22, 1996. MR. HEINER: We'd like three copies, Mr. Houck. MR. HOUCK: Unfortunately, I have one for the witness. This is yours, Mr. Gates. You can use the original marked by the court reporter and we'll hand out a keepsake for counsel. We have just one, unfortunately. MR. HEINER: You were not expecting more than one of us on this side of the table? MR. HOUCK: I expected to have one lawyer to be the principal representative of 22

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Mr. Gates and if you feel incapable of that, maybe at the break we can make other copies. MR. HEINER: We're capable of having one, but we'd like to have our side have -MR. HOUCK: In the past I've been at depositions where several DOJ and state representatives have appeared and we've received just one ourselves from Microsoft, so I extended you the same courtesy, sir. MR. HEINER: Okay. (The document referred to was marked by the court reporter as Government Exhibit 337 for identification and is attached hereto.) Q. BY MR. HOUCK: I'd like you to look at Exhibit 1, Mr. Gates, right here in front of you. This is a memorandum that purports to be from you to your executive staff dated May 22, 1996, and it attaches, for want of a better word, an essay entitled "The Internet PC" dated April 10, 1996. Do you recall writing that essay? A. It looks like this is an e-mail, not a memorandum.

23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23

Q. Do you recall writing the essay dated April 10, 1996 entitled "The Internet PC"? A. Well, it looks like an essay I wrote. 23

1 I don't remember specifically, but it does look like 2 something I wrote. 3 Q. The portion I refer you to is at the 4 bottom of the first page under the heading called 5 "The Latest Killer App." Do you see that? 6 A. I see a heading. 7 Q. First paragraph under that heading 8 reads as follows: "Our industry is always looking 9 for the next 'killer application'-- for a category of software that, by its utility and intelligent design, becomes indispensable to millions of people. Word processors and spreadsheets were the killer applications for business PCs starting in 1981." And the next sentence reads, "The latest confirmed 'killer app' is the web browser." Do you recall writing that, sir? A. No. Q. Do you have any reason to believe you didn't write it? A. No. Q. Can you explain what you meant here by describing the Web browser as a "killer app"? A. I just meant that browsing would be, in our view, a popular thing, not necessarily on the Web but just browsing in general would be a popular 24

1 activity. 2 Q. Is a killer application an application 3 that drives sales of other products like operating 4 systems and hardware? 5 A. No. 6 Q. Do you have a definition in your own 7 mind of killer application? 8 A. It means a popular application. 9 Q. Let me resort again to the Microsoft computer dictionary, and I'll read you what that says about killer applications. You may disagree with it, and if so, you can tell me. The Microsoft computer dictionary, 1997 edition, defines killer app as follows, and it gives two definitions. And I'll be very complete this time, Mr. Gates. The first definition is, "An application of such popularity and widespread standardization that fuels sales of the hardware platform or operating system for which it was written." Do you agree with that definition? A. Are you saying to me that there is more

24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

in there and you're just reading me part of it? Q. I'm going to read you the second 25

1 definition as well. 2 A. So you're asking me about it without 3 reading me the whole thing? 4 Q. No, sir. There's two definitions. 5 You're familiar with dictionaries, I take it? 6 Sometimes they have more than one definition of a 7 term; correct? 8 A. Sometimes terms have more than one 9 meaning, so it's appropriate that dictionaries would give the two different meanings. And generally before you'd ask somebody if they agreed with the dictionary, you'd actually give them the benefit of reading them what is in the dictionary, not just a part of it. MR. BOISE: Move to strike the answer as nonresponsive. Q. BY MR. HOUCK: I read you the first definition and asked you if you agreed with that definition. A. I don't think it's the only definition. Q. Is that an accurate definition? A. I'd like to hear what the other -Q. I'll read it to you. The second definition is, "An application that supplants its competition." 26

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Let me go back and read you the first definition again, now that you've heard both of them. The first definition reads as follows: "An application of such popularity and widespread standardization that fuels sales of the hardware platform or operating system for which it was written." A. I already told you that my definition of killer app is a very popular application. Q. Is this definition accurate? A. I told you, when I use the term "killer application," in particular when I use it in a piece of e-mail, what I mean by it -- I'm sure there's people -Q. I understand. You've told me that, but there's another question on the table. Do you have any disagreement with this definition? A. I think most people when they use the word "killer app" are not necessarily tying it to any relationship to hardware. Q. What about a relationship to an operating system? A. Usually they're just talking about it being a very popular application. I certainly know

25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

of things that have been referred to as killer 27

1 applications that haven't driven hardware sales or 2 operating system sales. 3 Q. What other applications would you 4 identify as being killer applications? 5 A. Applied simulator. 6 Q. Any others? 7 A. Well, you always have to take a year 8 and a context for those things. For example, when 9 desktop publishing software became popular in the 1980's, many people referred to it that way. When people are talking about interactive TV, they thought video on demand would be a killer application. And something went wrong because, you know, the whole thing never caught on. But people had been using that term, the idea of letting people watch movies, as something that would be extremely popular. Q. In what time frame was the Web browser a killer application? A. Well, I think Web browsers became very popular between, oh, '95 and '97 they became very popular. Q. So at that point in time the Web browser was, in your definition, a killer application? A. They were very popular, yeah. 28

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MS. CLEARY: If I could interrupt for a minute, I'd just like to keep the record straight. We need to renumber Exhibit 1 as Exhibit 337. Q. BY MR. HOUCK: Microsoft currently markets operating systems for personal computers; correct? A. Yes. Q. What's the current version called? MR. HEINER: Objection. Q. BY MR. HOUCK: What operating systems for personal computers does Microsoft currently have on the marketplace? A. Well, we have MS DOS. We've got Windows CE that's got a lot of different versions. We've got Windows 3x, Windows 95, Windows 98, Windows NT Version 3, Windows NT Version 4. Q. Are all those operating systems currently being marketed by Microsoft? A. Yes. Q. Does Microsoft endeavor to track its market share with respect to operating systems on personal computers? A. There's not some unified effort to do that. Q. Is there anybody in Microsoft

29

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 2 3 4 5 6 7 8 9 context

responsible for trying to determine what Microsoft's market share is with respect to PC operating systems? A. No. Q. Have you seen any figures indicating what Microsoft's market share is with respect to operating systems on personal computers? A. From time to time people doing marketing analysis may pull together some figures like that. And depending on, you know, what the is, they will be different numbers. Q. Do you have any -- strike that. MR. HOUCK: I'd like to mark as Exhibit 338 a Fiscal Year 1996 Midyear Review dated January 22, 1996. (The document referred to was marked by the court reporter as Government Exhibit 338 for identification and is attached hereto.) Q. BY MR. HOUCK: Is Exhibit 338 the type of document you referred to that contains market share information? A. I don't know anything about 338. Q. Have you ever seen it before? A. No. Q. Do you know what position Joachim Kempin held in January, 1996? 30

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. Yes. Q. What was his position at that time? A. He is in charge of our relationships with hardware manufacturers. Q. Do you have any understanding that in connection with that position he endeavored to determine what Microsoft's market share was with respect to operating systems sold to hardware manufacturers? A. I'm sorry, say that again. Q. Do you have any understanding that one of Mr. Kempin's job responsibilities in that connection in 1996 was to try to determine what Microsoft's market share was with respect to operating systems sold to hardware manufacturers? A. No. Q. I'd like you to turn to the page of this document that ends in 022. And the heading reads "x86 OS Analysis for Fiscal Year '96." A. Okay. Q. On the page that is titled "x86 OS Analysis for Fiscal Year '96" appears a statement, "All other competitive licenses, less than 5%" Do you have any understanding that in or about early 1996 Microsoft's share of the market 31

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 with respect to operating systems sold for x86 2 computers was in the vicinity of 95 percent? 3 A. No. 4 Q. What is your understanding of what the 5 Microsoft market share was at that time? 6 A. I wouldn't know. 7 Q. Do you have any idea, as you sit here 8 today, what Microsoft's market share is with respect 9 to operating systems sold for x86 architecture computers? A. Well, piracy alone is greater than 5 percent. But no, I don't know the number. Q. What other companies besides Microsoft sell operating systems for x86 architecture computers? A. There's a great number. Q. Can you identify them? A. Santa Cruz. Red Brick. Caldera. IBM in many different products. Sun Microsystems. Microware. Wind River. Those are all I can think of right now. Q. Do you have any estimate as to what the collective market share of those companies is with respect to operating systems sold for x86 architecture PCs? 32

1 A. No. 2 Q. Is it under 10 percent? 3 A. Well, I've said to you I don't know the 4 numbers. 5 Q. Can you estimate it? 6 A. Actually, I know something about 7 piracy. Are you including that or not? 8 Q. No, sir. My question was, you've 9 identified a number of companies that market operating systems for x86 PCs; correct? A. Yes. Q. And the question is, do you have any understanding at all as to approximately what their collective market share is with respect to operating systems sold on x86 machines that come equipped with operating systems? A. I wouldn't be the best source for that data. Q. Can you answer my question? A. I don't know their market share. Q. You are unable to estimate it; is that right? A. I don't think I'd be accurate in guessing and I don't think it's a good idea to guess. Q. You have no idea whatsoever as to 33

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

approximately what the market share is; is that correct? A. I'm reluctant to give a number because I don't consider myself someone who knows the volumes involved. Q. You have no understanding whatsoever as to the approximate market share these companies have? A. Are you asking me for a number or just a -Q. I'm asking for your best -A. If you're asking does Microsoft sell more than they do, yes, I can safely say that. But when you say to me what is their share, which I thought was one of the questions you asked, I'd say it's not good for me to guess at the number. Q. Do you have any understanding as to whether the collective market share of those companies is under 20 percent? A. What time period were you talking about? I guess I should -- what time period are you saying? Q. Fiscal year 1997. Do you have any understanding whatsoever as to whether or not the collective market share of all of Microsoft's competitors in operating systems for x86 PC machines 34

1 is under 20 percent? 2 A. It's probably under 20 percent. 3 Q. Okay. Any idea how far under? 4 A. No. 5 Q. Who is the author of documents you've 6 seen at Microsoft with respect to market share 7 information on operating systems? 8 A. I've told you there is no one whose 9 particular responsibility it is to track those figures, so I'm not sure what documents you're referring to. Q. Correct me if I'm wrong, but I thought you said you had seen documents that contained market share information; is that right? A. I've seen documents where people attempt in some context to estimate various numbers. Q. And what people are you referring to? A. I'm just saying I've seen documents like that. I'm not saying any particular -Q. Do you know who authored those documents? A. No. Q. Do you recall what unit of Microsoft they came from? A. They could have come from the product 35

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 groups or the sales and marketing groups. 2 Q. Do you have any understanding as to how 3 the folks who prepared those documents go about 4 tracking Microsoft's market share? 5 MR. HEINER: Objection. Misstates the 6 testimony. 7 THE WITNESS: Well, I think IDC and 8 Dataquest are examples of firms who are in the 9 business of trying to measure the size of various product sales. And so sometimes we might look at their numbers. I think the Microsoft library subscribes to a number of services that are in the business of trying to guess at numbers. MR. HOUCK: I'd like to mark as Exhibit 339 a memorandum or e-mail from Anthony Bay to Ben Slivka dated October 25, 1994. (The document referred to was marked by the court reporter as Government Exhibit 339 for identification and is attached hereto.) Q. BY MR. HOUCK: Would you take a look at Exhibit 339, Mr. Gates. Exhibit 339 contains a number of e-mails, and I want to ask you a couple questions about one on the first page from Russell Siegelman to yourself and others re MCI as an access provider dated October 13, 1994. 36

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Do you recall receiving this e-mail? A. No. Q. Do you have any reason to believe you didn't get it? A. No. Q. What was Mr. Siegelman's position in October of '94? A. He was involved with looking at Marvel. Q. And what was Marvel? A. It was a code name for what we would do in terms of Internet sites or online service activity. Q. Do you understand that in this e-mail here Mr. Siegelman is opposing a proposal to give MCI a position on the Windows 95 desktop as an Internet service provider? A. I don't remember anything about MCI. This talks about how we'll have a Mosaic client in Windows 95. I don't see anything in here about the desktop. Q. It references in this e-mail the Windows box. What do you understand the Windows box to mean? A. Well, the Windows box is certainly not the Windows desktop. The Windows box is a piece of 37

1

cardboard.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

2 3 4 5 6 7 8 9 subject

Q. Is it your understanding that when he uses "Windows box" here, he means a piece of cardboard? A. Well, he is probably talking about the stuff that's inside. He is saying access to the Windows box. He is talking about the bits that are on the -Q. What do you understand to be the of the memorandum here that he is addressing? MR. HEINER: Mr. Houck, you're at risk here of cutting off the witness. MR. HOUCK: I'm sorry. MR. HEINER: Or I should say you did cut off the witness. MR. HOUCK: I apologize if I did. I'm just trying to move this along, but if I cut you off, I apologize. MR. HEINER: Can we have the last question and answer read back. (Record read.) THE WITNESS: This is electronic mail and Russ is suggesting that he disagrees with doing a deal with MCI under these particular terms. Q. BY MR. HOUCK: In the e-mail he refers 38

1 to Windows distribution as a unique and valuable 2 asset, more specifically as "our one unique and 3 valuable asset." Do you see that? 4 A. I see a sentence that has those words 5 in it. 6 Q. Do you have an understanding as to what 7 he meant? 8 A. Well, the Marvel people were having a 9 hard time coming up with a strategy, and in retrospect we can look back and say they didn't come up with a good strategy. And they were looking at, you know, what could they do that would be attractive to a lot of users. And sometimes their goals and the goals of the Windows group were different. And in retrospect it's clear they weren't able to attract a lot of users. Q. Mr. Gates, I indicated at the outset of the deposition I do want to move through this deposition as quickly as possible, but I must say I think your answers are nonresponsive and rambling, and if that continues to be the case, I'm just letting you know this is going to take much longer than I would have hoped. So I'll pose my question again because I think your answer was nonresponsive. Do you have any understanding as to 39

1 2

what Mr. Siegelman meant here by his reference to Windows distribution being "our one unique and

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

valuable asset"? A. Was that the question I was asked -Q. Yes, sir. A. Can you read me back the previous question? (The record was read as follows: "Q. In the e-mail he refers to Windows distribution as a unique and valuable asset, more specifically as 'our one unique and valuable asset.' Do you see that? "A. I see a sentence that has those words in it. "Q. Do you have an understanding as to what he meant?" THE WITNESS: Well, maybe there is some understanding -- you said do I understand what he meant. I thought you were asking about his e-mail as a whole. Q. BY MR. HOUCK: Let me reask it for the third time and see if I can get an answer. Do you have any understanding what Mr. Siegelman meant when he referred to Windows distribution as our one unique and valuable asset? 40

1 MR. HEINER: This is a line of 2 questioning about the mail that Mr. Gates does not 3 recall reading; is that right? 4 MR. HOUCK: The question has been put. 5 THE WITNESS: I think the Marvel group 6 in their search for what they could do to get 7 millions of users at this particular point in time 8 was thinking about making it easy to sign up to the 9 Windows box being something that would be helpful to them and therefore an asset for the Marvel group in what they were doing. Q. BY MR. HOUCK: Do you understand that Mr. Siegelman in his reference had in mind the large market share that Microsoft has with respect to operating systems? A. I don't see anything about that in here. Q. That's not your understanding? A. Remember, Russ isn't involved with the Windows business, he is involved with the Marvel business. Q. Do you consider Windows distribution a unique asset of Microsoft? A. I know that the inclusion of what Marvel became didn't lead to its being popular. 41

1 2 3

Q. Again, let me ask the question, Mr. Gates. I wasn't asking about Marvel. I was asking about Windows distribution.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 A. Well, Marvel was a thing that was put 5 into the Windows box and so, in fact, if the question 6 is is putting things in there, is that valuable in 7 the sense that it creates popularity for those 8 things, there are many good examples that we know 9 where it obviously does not create popularity. So in terms of how much of a value that is, it's very instructive to look at Marvel and what subsequently happened to that because we did include it in the Windows box as one of the things that the user had on the desktop. MR. HOUCK: Move to strike the answer as nonresponsive. MR. HEINER: Mr. Houck, I'm afraid that if you ask a question with vague terms, you may get answers that you don't like, but that was a very responsive answer to the question. Q. BY MR. HOUCK: Let me put the question again without reference to this document. Mr. Gates, do you believe that Windows distribution is a unique asset that Microsoft has? MR. HEINER: Objection. Form. 42

1 Foundation. Defined terms. 2 THE WITNESS: What do you mean when you 3 say "Windows distribution" there? 4 Q. BY MR. HOUCK: Do you have an 5 understanding what Mr. Siegelman meant by the phrase 6 "Windows distribution" in his e-mail that he wrote to 7 you? 8 A. He means -- I think he means, I don't 9 know for sure, I think he means including an icon on the desktop for access to Marvel. Q. And by "the desktop," you mean the Windows desktop? A. In this case, yes. Q. He goes on in the e-mail to say as follows: "The only real advantage we have in this game is Windows distribution. Why sell it so cheaply when we think is will be a big market and can give us leverage in so many ways in the Iway business." Do you have any understanding what he meant by the phrase "Iway business" here? A. No. I've never -- I don't remember ever seeing that term before. Q. What distribution channels has Microsoft employed to distribute Internet Explorer? A. Well, the primary distribution channel 43

1 2 3 4

is the Internet where people very easily download whatever version of Windows Internet technology they're interested in. We've also distributed it through

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5 retailers, the Windows 95 update product and, you 6 know, wherever Windows goes out, which includes 7 retail, OEM. And then people who do Internet signups 8 have also done some distribution. There's a lot of 9 different marketing programs where we'll have like a conference and we'll make available Internet Explorer to people that attend the conferences. I think we've also included it with Microsoft Office in some cases. Q. Has Microsoft done research to determine which distribution channels are most effective in delivering browsers that are actually used by people? A. I think somebody did a survey to ask people where they get their browser at some point. Q. Do you have any recollection who did that survey? A. No. Q. Do you recall what the results were? A. I know the Internet has always been the primary distribution channel for browsers. 44

1 Q. You're talking about specifically 2 Internet Explorer? 3 A. No. 4 MR. HOUCK: I'd like to mark as 5 Exhibit 340 a memorandum -- or rather an e-mail -6 from Kumar Mehta to Brad Chase and Yusuf Mehdi dated 7 March 27, 1997. 8 (The document referred to was marked 9 by the court reporter as Government Exhibit 340 for identification and is attached hereto.) Q. BY MR. HOUCK: Is this an example of the type of memorandum you've seen in which Microsoft has endeavored to determine which distribution channels are most effective in distributing Web browsers? A. No. Q. What position in the company did Mr. Mehta have in March of 1997? A. I don't know. Q. Do you know if one of his responsibilities was market research? A. No. I mean I'm not copied on this. I mean just looking at it -- and I certainly have no recollection of seeing this. It also seems to contradict some other things that I have seen. 45

1 2 3 4 5

Q. The e-mail reads as follows: "Bob Foulon is gathering data for a John Roberts meeting with Bill Gates tomorrow. Apparently they are going to discuss whether IE and Memphis should be bundled together."

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

6 Do you recall such a meeting with 7 Mr. Foulon and Mr. Roberts? 8 A. No. 9 Q. Do you recall Mr. Foulon or Mr. Roberts sharing with you market research data with respect to how people get their browsers? A. I don't know Bob F-o-u. Q. Do you understand that is a reference to Bob Foulon? A. I don't know Bob Foulon. I don't know anyone whose name is Bob F-o-u anything. Q. Do you know John Roberts? A. Yes. Q. What position does he have with Microsoft? A. He at this time -- is that what you're interested in? Q. Yes. A. At this time I think he works for Brad Chase. 46

1 Q. Did you have a meeting that you recall 2 with Mr. Roberts and/or Mr. Chase in or about March 3 of 1997 where you talked about the results of market 4 research to determine how people obtained Internet 5 Explorer? 6 A. I don't remember. 7 Q. The e-mail I quoted attaches another 8 e-mail dated March 27, 1997, which says in the first 9 two paragraphs, which I'll read, "Bob, here is some information on how people get and use IE that might help you guys. My feeling, based on all the IE research we have done, is that it is a mistake to release Memphis without bundling IE with it. IE users are more likely than other browser users to get it with their computers. Overall, 20% of people who use IE at home obtained it with their computer; and 24% of those using IE at work got it with their computer. Effectively we would be taking away the distribution channel of almost a quarter of all IE users." Do you have any understanding as to the accuracy of the numbers he cites here with respect to the number of people using IE who obtained it with their computer? A. I have no idea what we're talking about 47

1 2 3 4 5 6

in terms of what kinds of users he surveyed or looked at. So no, I have no opinion on it whatsoever. I mean who knows. Q. Do you have any reason to believe the information he reports here is inaccurate? A. I don't have enough of a context to

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

7 even state an opinion. It doesn't even say what kind 8 of users or anything. 9 Q. Do you have any understanding whatsoever as to approximately what percentage of IE users have obtained IE through the OEM channel? A. The only data point I know along these lines is I'm pretty sure I've seen that about 60 to 70 percent of people, the browser they're using they got through the Internet, that's the way they got the browser they're working with. MR. HOUCK: Move to strike the answer as nonresponsive. Can we have the question back, please. MR. HEINER: It's just a way to cut through the line of questioning, which is not really going anyplace and he is telling you about the only data point he has in this general subject area, so it's just a question of efficiency. (The record was read as follows: 48

1 "Q. Do you have any understanding 2 whatsoever as to approximately what percentage 3 of IE users have obtained IE through the OEM 4 channel?" 5 THE WITNESS: Well, I guess I need to 6 explain then how it works. If you take 100 percent 7 and you take the one number that I say I know, which 8 is 60 to 70 percent get it through the Internet, it 9 at least places an upper bound on the number you asked for. And that's all I would know about that statistic. MR. HOUCK: Move to strike that answer as well. Q. What information -- strike that. Can you identify any specific documents you've seen that indicate how IE users obtained IE? A. No. Q. Have you seen any documents like that at Microsoft prepared by Microsoft employees? A. I believe I have, yes. Q. Do you know who prepared them? A. No. MR. HOUCK: Do you want to take a break here? MR. HEINER: Sure. 49

1 2 3 4 5 6 7

VIDEOTAPE OPERATOR: The time is 10:16. We're going off the record. (Recess.) VIDEOTAPE OPERATOR: The time is 10:31. We're going back on the record. Q. BY MR. HOUCK: Was Netscape the first company to market a Web browser that gained

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

8 widespread consumer usage? 9 A. I think Mosaic was the first browser. I don't know what your criteria -- what you're implying in terms of widespread. Mosaic was the first popular browser and that predates the existence of Netscape for their browser. Q. Did Netscape's browser supplant the Mosaic browser as the most popular one? A. There's a point in time where Netscape's browser became more popular in terms of usage share than Mosaic. Q. Do you recall when that was? A. I'm sorry? Q. Do you recall when that was? A. No. I don't think anybody knows exactly when that was. MR. HOUCK: I'd like to mark as Exhibit 340 -- excuse me. I'd like to mark as 50

1 Exhibit 341 a series of e-mails, the first one being 2 from Pat Ferrel, F-e-r-r-e-l, to Bill Gates and 3 others dated April 6, 1995. 4 (The document referred to was marked 5 by the court reporter as Government Exhibit 341 for 6 identification and is attached hereto.) 7 Q. BY MR. HOUCK: I hand you Exhibit 341, 8 Mr. Gates, and this is a series of e-mails and the 9 one I want to ask you about is the one on the second page from Mr. Siegelman to yourself and others dated April 6, 1995. Take a minute to take a look at it. Have you finished reviewing the e-mail? A. I looked at it. Q. The e-mail starts off as follows: "Pat Ferrel and I have been thinking about this problem a lot and watching Netscape very closely. I too am very worried." What position did Mr. Ferrel hold at Microsoft in or about April of 1995? A. He wasn't involved with Windows. He was involved with Marvel. Q. Is he still a Microsoft employee? A. I don't think so. I'm not sure. Q. Do you recall personally being worried about Netscape in or about April of 1995? 51

1 2 3 4 5 6 7 8

A. No. Q. Do you recall discussing Netscape with Mr. Siegelman in this time period? A. I'm sure Russ and I discussed the effect of the Internet in general on online service strategies like the work he was doing that became MSN, but not Netscape in particular, no. Q. The next sentence of the e-mail says,

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

9 "I agree with most of your problem statement, but I think you underestimate the publisher/ISV threat. Netscape is already opening up API hooks in their viewer and many ISVs are hopping aboard." Do you know what his reference is to your "problem statement"? A. No. Q. Do you understand what he means here when he talks about opening up API hooks and many ISVs hopping aboard? A. I don't know what he meant. I can guess if you want. Q. Do you have any understanding as you sit here what he meant by the language used in this e-mail? A. I don't know what he meant. I'd have to ask him what he meant. 52

1 Q. I'm asking for your understanding. Do 2 you have one or not? 3 A. Understanding of what? Of what he 4 meant? 5 Q. Yes. 6 A. No. Of what those words might mean, I 7 can guess. 8 Q. I don't want you to guess. I'm asking 9 if you have any present understanding of what these words mean. A. I've told you I don't know who he means by "you." I don't know what he means by "problem statement." So I'm a little unclear about what he means in this paragraph. Q. Do you have any understanding -- strike that. By ISV do you understand him to be referring to independent software vendors? A. That acronym refers to independent software vendor. Q. And what does the acronym API refer to? A. Application programming interface. Q. Do you recall yourself having a concern in or about April, 1995 about the possibility that Netscape was going to open up API hooks in the 53

1 2 3 4 5 6 7 8 9

Netscape Web browser? A. I can't pin any recollection to that particular time period, no. Q. Did you at some point come to the conclusion that the prospect that Netscape might open up API hooks in their browser was a threat to Microsoft? A. I think in late '95 Andreeson was talking about how he was going to put us out of

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

business, suggesting that their browser was a platform. And, in fact, they did have APIs in their browser. Q. Do you recall having any concern yourself before late 1995 with respect to the threat posed by Netscape opening up API hooks in their browser? A. No. Q. Do you recall that other folks at Microsoft had such concerns before late 1995? A. It's hard to recall other people's concerns. No, I don't recall other people's concerns. Q. In the last paragraph of the e-mail Mr. Siegelman refers to the "danger of letting Netscape create a new platform and get 54

1 ISV/merchant/content provider support." 2 Do you have any understanding what he 3 meant by that language? 4 A. Well, he was in charge of our online 5 service strategy and so he thought of the various 6 things going on in the Internet as affecting what he 7 was going to do. In particular, online services, up 8 until the Internet really exploded in popularity, 9 they'd had content that was unique to their online service. And the whole Internet phenomenon was changing that. And so for Marvel that was a challenge to the business strategy they'd gone down, so I'm sure he is referring to that general issue. Q. Did you understand Mr. Siegelman had a concern in or about April, 1995 that the opening up of API hooks in Netscape's browser constituted a threat to the Windows operating system? A. Well, certainly he wasn't involved in the Windows operating system and none of this is about the Windows operating system, so to try to read that into here is certainly incorrect. MR. HOUCK: Move to strike as nonresponsive. Repeat the question, please. (Record read.) 55

1 2 3 4 5 6 7 8 9 10

THE WITNESS:

I'll give the same

answer. Q. BY MR. HOUCK: In the next sentence Mr. Siegelman says, "I don't think that the way to fight back is simply with a better Web browser either." Do you recall having any discussion with Mr. Siegelman on what the best way to fight back was? A. I certainly had discussions with him

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11

about our online strategies, which subsequently were not successful, and certainly it's clear that for the online strategy, he needed to do quite a bit, including content relationships, not just browsing functionality. Q. Did you have any discussion with Mr. Siegelman as to what the best way was for Microsoft to fight back with respect to any threat posed by Netscape to Windows as a platform? A. Mr. Siegelman wasn't involved with Windows, so I don't understand why you keep asking me about -Q. Well, you can say yes or no, sir. I don't mean to interrupt, but -A. No. My discussions with Russ were 56

1 about his responsibilities, which were online service 2 activities. 3 MR. HOUCK: I'd like to mark as 4 Exhibit 342 a series of e-mails, first one being from 5 Nathan Myhrvold to Mr. Gates dated April 24, 1995. 6 (The document referred to was marked 7 by the court reporter as Government Exhibit 342 for 8 identification and is attached hereto.) 9 Q. BY MR. HOUCK: Before you take a look at that document, do you recall that there was a general discussion at Microsoft at the top executive level in or about April, 1995, with respect to the threat to Microsoft posed by Netscape? A. No. Q. What position did Mr. Myhrvold hold with Microsoft in April of 1995? A. He was Russ Siegelman's boss, so he wasn't involved in the Windows business. He was involved in our online service activities. Q. Was he one of your top executives? A. He was an executive. I'm not sure what you mean by top executive. He didn't manage any of the large products that we offer. Q. Was he sort of Microsoft's resident strategic thinker? 57

1 A. No. 2 Q. Did you value his advice? 3 A. Not over the advice of people who are 4 more directly involved in their businesses. 5 Q. Do you recall consulting Mr. Myhrvold's 6 advice in or about April, 1995 as to how Microsoft 7 should respond to Netscape? 8 A. I'm sure since Nathan was in charge of 9 online services at that time there was some discussion or e-mail about the effect of the Internet growth on the Marvel and Blackbird strategies, but

12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

not in a general sense. Q. If you would, would you take a look at Exhibit 342, and in particular the e-mail on the second page, which is from Mr. Myhrvold to yourself and others regarding Internet strategy dated April 18, 1995. A. There's a lot of different e-mails here. Q. The one I referred you to is the one on the second page, sir, the one at the bottom of that page, and it's from Mr. Myhrvold to yourself and others dated April 18, 1995. A. Doesn't the same e-mail extend for about nine pages or ten pages? Isn't that all one 58

1 e-mail? 2 Q. That's the one I want to ask you about. 3 A. So it's on all those pages; right? 4 Q. Right. And the questions I have, to 5 help you focus, are going to be with respect to the 6 first couple pages of the e-mail. 7 A. Okay. 8 Q. The first paragraph reads, "There has 9 been a flurry of e-mail about Netscape and our general Internet development strategy. This e-mail is my contribution to this topic." Does this refresh your recollection there was a general discussion at the upper levels of Microsoft in or about April, 1995 with respect to Netscape and how to respond competitively to Netscape? A. Well, I think that's a mischaracterization. It appears there was some mail about the effect of Netscape and their activities on our online service strategy. Q. What do you understand about Mr. Myhrvold's reference here to general Internet development strategy? A. This memo is about our strategy with the Blackbird front end and how it should relate to 59

1 2 3 4 5 6 7 8 9 10 11 12

Internet protocols. And it's a very long, nine-page thing about Blackbird and his various opinions about Blackbird. The interesting thing is Blackbird basically was canceled. Q. Is it your testimony and your understanding that this memorandum is limited to a discussion about Blackbird? MR. HEINER: Object to the question because you know the witness hasn't read it. MR. HOUCK: He has read it. He took time to read it. MR. HEINER: You said you would direct

13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13

him to two pages and he read two pages. He can read nine pages and tell you what the nine pages are about, if you'd like. Q. BY MR. HOUCK: Take as much time as you need to review the memorandum and answer my question. MR. HEINER: Could I have the question read back. (The record was read as follows: "Q. Is it your testimony and your understanding that this memorandum is limited to a discussion about Blackbird?") THE WITNESS: You keep using the word memorandum to refer to electronic mail. I don't 60

1 think of electronic mail as a memorandum. So this 2 e-mail, which I haven't read, the part I've glanced 3 at, all the action items, all the things he is saying 4 we should do all relate strictly to Blackbird and the 5 online services activities. 6 Q. BY MR. HOUCK: Did any of the 7 recipients of this e-mail have responsibilities for 8 Windows? 9 A. Well, let's see. He copies Russ, who works for him in online services. He copies Craig, who works on interactive TV, not Windows. He copies Dan Rosen, who works on online service. Pat Ferrel, who works on online service. Peter Neupert, who works on online service. And then he copies Paul, who has another part of the business that includes Windows, and he copies me. So Paul and myself have broad responsibilities, but otherwise all the other people are online service people. Q. Were you and Paul Maritz two senior executives with responsibilities for Windows in April, '95? A. I'm not sure how you'd characterize my role. I'm the CEO of the company, so all the products of the company -- I'm not sure you'd say -you'd use the description you used. 61

1 Q. Windows is a very important product to 2 Microsoft, is it not? 3 A. That's right. 4 Q. Is it fair to say you devote a fair 5 amount of your time to Windows and strategies for 6 marketing Windows and making sure it's a successful 7 product? 8 A. I spend some of my time on that. 9 Q. Was that one of Mr. Maritz's principal responsibilities in April of 1995? A. It was one of his, yes. Q. In the third paragraph of this e-mail Mr. Myhrvold states, "The big issue to be concerned

14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14

about is the same issue that we have faced in the past - proprietary standards coming from competing software companies. Netscape is certainly one of the many companies who will try to promote their proprietary extensions (and entirely new protocols) on the world." Do you have any understanding as to what he was referring to by his reference to issues that Microsoft had faced in the past? A. No. Q. Do you know if he is referring to Lotus Notes there? 62

1 A. I'm quite certain that's not what he 2 was referring to. 3 Q. Do you have any present understanding 4 as to what he meant? 5 A. I'm not sure. 6 Q. On the next page, first full paragraph, 7 Mr. Myhrvold states, "The world of the Internet is 8 rapidly becoming Windows centric because Windows will 9 be the most popular client operating system by a wide margin." Did you understand he was referring here to market share enjoyed by Windows? A. I've said I don't remember the memo specifically, so it's hard for me to say I remember something he was referring to. Q. You have no present understanding of what he meant by this language; is that correct? MR. HEINER: That's a different question. THE WITNESS: It's a different -- which question should I answer? Q. BY MR. HOUCK: Do you have any present understanding of what -- strike that question. Is it your present understanding that by the reference here to Windows being the most 63

1 popular client operating system by a wide margin, 2 Mr. Myhrvold was referring to the market share 3 enjoyed by Windows in or about April, 1995? 4 A. He may have been. 5 Q. Several paragraphs further on in this 6 e-mail Mr. Myhrvold states, "As platform specific 7 work is done on the Internet, we want it to be done 8 on our platform. As proprietary technology and 9 protocols are used, we want them to be ours - in as many broad mainstream areas as is reasonably possible." Is it your understanding that his use of the word "platform" here is a reference to Windows?

15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15

A. No. Q. What is your understanding? A. He is talking about all our platform activities. Q. Which would be what? A. That include Blackbird. That's the primary subject of the memo, as we discussed. Q. Did you consider Blackbird a platform at this point in time? A. Yes. What else is it? Q. Did you have a concern in April of 1995 64

1 that Netscape was somehow threatening Blackbird, 2 Microsoft's product? 3 A. There was a concern that our whole 4 online service strategy, including the Blackbird part 5 of it, may have been something we should change 6 because of all the activity on the Internet in 7 general, including the things Netscape was doing. 8 Q. Did you have a concern that what 9 Netscape was doing was threatening Blackbird as a platform? A. The whole phenomenon of people doing Websites using HTML was changing the framework that had existed for online service people, and so the Marvel and Blackbird strategy, you really had to call into question whether changes should be made. And so Netscape was part of a phenomenon that was making us rethink did Blackbird make sense. And eventually, due to size and speed and delays and various changes in the market, we actually canceled Blackbird. MR. HOUCK: Move to strike the answer as nonresponsive. Can you read the question back, please. (Record read.) MR. HEINER: The answer was directly responsive to the question. You can move to strike 65

1 all the answers and we'll have a short transcript. 2 THE WITNESS: If there is some part of 3 my answer you don't understand, I'll be glad to 4 elucidate, but it's one hundred percent responsive to 5 the question. 6 Q. BY MR. HOUCK: Isn't it a fact, 7 Mr. Gates, that Blackbird never did become a platform 8 at all? 9 A. I told you we canceled Blackbird, but Blackbird -- the whole idea of Blackbird is to be a platform for people to write enhanced content on. That's the reason we invested so much money in building Blackbird. As it says in this memo, there were people who were enthusiastic about what we've done in Blackbird, including Nathan.

16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16

Q. Isn't it a fact that you executives at Microsoft back in April of '95 were concerned that Netscape's Web browser posed a threat to Microsoft's Windows platform? A. Well -Q. You can answer it yes or no, sir. A. I don't know when people began to think of Netscape as a competitor to Windows. I don't think it was that early, but it might have been. I know that by late '95 when people thought about the 66

1 various competitors to Windows, they did think of 2 Netscape. 3 Q. What's the earliest date you could put 4 on the concern expressed to you by Microsoft 5 executives that Netscape posed a threat to the 6 Windows platform? 7 MR. HEINER: Asked and answered. 8 THE WITNESS: I said that in late '95 9 I'm pretty sure people thought of them as a competitor. I couldn't name a date earlier than that. I know that online service people were thinking about Netscape and the Internet at earlier dates. Q. BY MR. HOUCK: Let me ask you a few questions about page 898 of this document, several pages later on. I'll read you the portion of it I want to ask you some questions about so you have that in mind. "The front end which supports these services is basically the union of the MSN front end with Blackbird and O'Hare. At some point this is very smoothly integrated, but at first they are separate pieces of code stuck together at the end user level. 67

1 "The front end should be given away as 2 widely as possible, including: 3 "Put into Windows. I agree with Paul 4 Maritz's comment that we should distribute the front 5 end very broadly by having it Windows, at least at 6 some point down the line. 7 "Distributed free on the Internet. 8 "Distributed free with MSN." 9 Do you recall any general discussion of this subject with Mr. Myhrvold or Mr. Maritz back in April of '95? A. I know there was a plan to have Blackbird include all the HTML support and so it would be a superset in that sense. Q. Is the reference to O'Hare a reference to Internet Explorer?

17 18 19 20 21 22 23 24 25

A. Probably. He says -- in the memo earlier he says, "I've had people tell me that the O'Hare people either are (or should be) working on their own plan to superset Internet protocols." So it appears that the author of this memo is pretty confused about what the O'Hare people are doing and therefore what O'Hare is. MR. HOUCK: Move to strike the last 68

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17

remark, which was not responsive to any question on the table. THE WITNESS: I was answering about what the author of this memo meant by the word "O'Hare". And believe me, that sentence that I read to you is very informative on that point. Q. BY MR. HOUCK: Isn't it a fact that O'Hare is a code name used at Microsoft for Internet Explorer? A. There was a group of people who were looking at doing the Explorer. Nathan says he doesn't know what those people were doing, what their strategy was at this time he wrote the memo. MR. HOUCK: Move to strike again the last portion of his answer. Q. Do you know a gentleman by the name of Ben Slivka? A. Yes. Q. What were his responsibilities, if any, at Microsoft back in early 1995? A. I'm not sure. MR. HOUCK: I'd like to mark as Government Exhibit 343 a series of e-mails, the first one being from Alec Saunders to various people at Microsoft dated January 31, 1995, the subject being 69

1 Frosting and O'Hare. 2 (The document referred to was marked 3 by the court reporter as Government Exhibit 343 for 4 identification and is attached hereto.) 5 Q. BY MR. HOUCK: To expedite your review 6 of this document, Mr. Gates, I'll tell you my 7 questions are going to be limited to the e-mail on 8 the last page of the document. This is an e-mail 9 from Ben Slivka to Tim Harris and others at Microsoft dated February 13, 1995 and does not show you as a recipient. A. Which one? Q. The top one. The first sentence of the e-mail from Mr. Slivka states, "O'Hare is the code name for our Internet Client, and we plan to ship it in the Win95 'frosting' package, which sim-ships with Win95."

18 19 20 21 22 23 24 25

Do you understand his reference here to O'Hare and the Internet Client to be a reference to what became known as Internet Explorer? A. I think Internet Explorer 1.0 that was in part of the Windows 95. Q. Do you recall a plan back in early 1995 to ship a product known as Frosting? A. I don't recall the plan. I know we 70

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18

worked on what we called Frosting. Q. What is your understanding of what Frosting was? A. It became the Windows Plus Pack. It didn't sim-ship I don't think. Q. Was it your understanding that at some point in time it was Microsoft's intention to include Internet Explorer in the Frosting package as opposed to Windows 95? A. Well, for the primary Windows 95 distribution channel, we included Internet Explorer 1.0 with Windows, so when you say Windows 95, it was part of Windows 95. Then there is the Windows 95 Upgrade that was sold at retail, which that had a box labeled "Windows 95 Upgrade" and a box labeled "Windows 95 Plus Pack." Q. Do you recall that in or about February, 1995, it was Microsoft's intention to include Internet Explorer in the Frosting package and not in Windows 95? MR. HEINER: Objection. THE WITNESS: No. I think you misunderstood what I said. Windows 95, the full product, included IE. Windows 95, the upgrade product, did not. But Windows 95, the full product, 71

1 whether sold through the OEM or whatever, that 2 included the capabilities. It was just the upgrade 3 that did not. 4 Q. BY MR. HOUCK: I understood your 5 answer. Let me ask the question again because I 6 don't think you understood the question. 7 The question was, is it your 8 understanding that as of February, 1995, it was not 9 Microsoft's intention to include Internet Explorer in the full product known as Windows 95? A. The product that didn't include Internet Explorer is called the Windows 95 Upgrade. Windows 95, the full product, did include Internet Explorer. Q. I understood -- strike that. I understand that when it was marketed, it included Internet Explorer. The question is, is it your recollection that back in February of 1995,

19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19

it was Microsoft's intention not to include Internet Explorer in Windows 95 but to market it instead as part of the package known as Frosting? MR. HEINER: You're talking about the OEM channels in that question? I'm wondering, for the record. MR. HOUCK: The question is complete as 72

1 it stands. 2 Q. Can you answer the question, sir? 3 A. I'm confused about what you're asking 4 me because you have to differentiate the retail 5 channel, which is the Windows 95 Upgrade and the Plus 6 Pack from Windows 95, the whole product. Windows 95, 7 the whole product, we wanted to include a lot of 8 features. We don't know for sure which features are 9 going to get done in time until really the product is done. So certainly our intention to do it and working hard on doing it, that plan had existed for a long time. We weren't certain for any future on Windows 95 exactly what we would decide to get in or not get in. We did, in fact, get the Internet Explorer 1.0 into the Windows 95 full product. Q. Do you recall that in or about February, 1995, it was Microsoft's intention to ship O'Hare as part of Frosting? A. The thing that was code named O'Hare ended up in the Windows 95 full product as one place it came. And another place was in the Plus Pack. Q. Let me ask it one more time. Was it Microsoft's plan as of February, 1995, to ship Internet Explorer solely in the Frosting package and not in the initial full 73

1 Windows 95 package that was to be marketed? 2 A. No. Our plan was to get it into the 3 Windows 95 full package if possible. 4 Q. Do you recall that in or about 5 February, 1995, it was felt at Microsoft that it was 6 not possible to include O'Hare in the Windows 95 7 package? 8 A. We had a plan to include it if at all 9 possible. In the world of software development there's always skeptics, so you can name any feature of Windows 95 and you can find somebody who would have been skeptical about whether it would get done or not in time for the shipment of the product. Certainly the people involved in doing the development were working hard and, in fact, they succeeded in achieving our plan, which was as best we could to include it in the product. And we did. Q. Do you recall what the -- strike that. Do you recall when Microsoft first

20 21 22 23 24 25

determined that it would be possible to include IE in Windows 95 that shipped in 1995? A. Well, as I've said, until the minute you actually ship a product, you can always change your mind about what's going to be in it and what's not going to be in it. And so there wasn't absolute 74

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20

certainty for the different features until we actually froze the bits. Q. Who was responsible back in 1995 for determining what went into Windows and what didn't? A. That's a decision that I would have the final say on. Q. Who were your senior executives responsible for assisting in that decision? A. Maritz. MR. HOUCK: I think our videotape operator wants to change the videotape, so why don't we take a short break. VIDEOTAPE OPERATOR: The time is 11:15. We're going off the record. (Recess.) VIDEOTAPE OPERATOR: The time is 11:24. We're going back on the record. MR. HOUCK: I'd like to mark as Government Exhibit 344 a series of e-mails, first one being from Paul Maritz dated April 12, 1995. (The document referred to was marked by the court reporter as Government Exhibit 344 for identification and is attached hereto.) Q. BY MR. HOUCK: Exhibit 344, Mr. Gates, is a series of e-mails and the initial questions will 75

1 be about the very last one, which is an e-mail from 2 you to Craig Mundie dated April 10, 1995. 3 What were Mr. Mundie's responsibilities 4 back in April of 1995? 5 A. He was doing the broadband online 6 service work, which was sometimes referred to as 7 Interactive TV. 8 Q. In the first paragraph you say, "Given 9 that we are looking at the Internet destroying our position as a setter of standards in APIs, do you see things we should be doing to use ACT assets to avoid this?" What was your reference to ACT assets? A. ACT, A-C-T. That's Craig Mundie's group. Q. Your e-mail goes on to state, "I admit I find it hard to focus lots of resources on trials and things when the Internet is taking away our power every day." In what sense did you mean the Internet

21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21

was taking away Microsoft's power every day? A. I meant that -- this is copied to people involved in the online service activity, Nathan, Rick and Russ, and not to the Windows people at all. It looks like at 3:00 a.m. that morning I 76

1 was thinking about the fact that our ambitions for 2 online service in the narrow band field, we needed to 3 think of some of the broadband work that Craig was 4 doing to come in and be helpful to that, particularly 5 given that the Internet was changing the framework. 6 Q. What was Mr. Rick Rashid's position in 7 Microsoft back in April of '95? 8 A. He was -- he had actually two jobs at 9 the time. He was involved in research, but mostly he had moved over to help out with the ACT work, which is the Interactive TV activities. MR. HOUCK: I'd like to mark as Exhibit 345 a memorandum from Mr. Gates to his executive staff and direct reports entitled "The Internet Tidal Wave." (The document referred to was marked by the court reporter as Government Exhibit 345 for identification and is attached hereto.) Q. BY MR. HOUCK: Do you recall authoring this memorandum, Mr. Gates? A. Yes. Q. To whom did you send it? A. It appears it was sent to executive staff and direct reports. Q. What does executive staff refer to? 77

1 A. It's an electronic mail alias for a 2 group of people. 3 Q. And who did that constitute as of 4 May of 1995? 5 A. I'm not sure, but it would have 6 included most of the officers. 7 Q. On the second page of the memorandum, 8 second paragraph you say, "Most important is that the 9 Internet has bootstrapped itself as a place to publish content. It has enough users that it is benefiting from the positive feedback loop of the more users it gets, the more content it gets, and the more content it gets, the more users it gets." Can you explain what your reference was to a positive feedback loop? A. Well, it's explained right there. It says "the more users it gets, the more content it gets, and the more content it gets, the more users it gets." I mean I don't expect that people know what the term means, so I explain it right in that sentence.

22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. Is the positive feedback loop something that, in your estimation, would result in ever increasing popularity of the Internet? A. No. 78

1 Q. Did you anticipate in May of 1995 that 2 the Internet would become increasing popular? 3 A. It had become more popular, yes. 4 Q. Was one of the reasons you thought it 5 would be more on popular was that more content would 6 be written for the Internet? 7 A. Created to Internet standards, yes. 8 Q. And was it your understanding or 9 expectation that the more content that was written, the more users there would be? A. Yes. Q. In the fourth page of your memorandum in the second paragraph above the heading "Next Steps," you state, "A new competitor 'born' on the Internet is Netscape. Their browser is dominant, with 70% usage share, allowing them to determine which network extensions will catch on." Do you recall how you determined that Netscape's usage share was 70 percent at this time? A. No. Q. Is your reference to "network extensions" a reference to APIs? A. No. Q. What is it a reference to? A. To network extensions. 79

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Q. And how do you define that? A. Things that let you do richer things across the network. Q. Can you give some examples? A. Advanced HTML. HTML tables. HTML file tags. Q. Did you undertake a reorganization of Microsoft back at this time in order to position the company to respond better to the Internet? A. Not at the time I wrote this memo. Q. Under the heading "Next Steps" you say "The challenge/opportunity of the Internet is a key reason behind the recent organization." What were you referring to? A. I'm not sure. Q. What did you perceive the challenge/ opportunity of the Internet to be at this point in time? A. That users were interested in using the Internet and so we needed to make sure that our software was doing a good job of that and that that was a challenge in the sense that other people could

23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

do it and that was competition and an opportunity in the sense that it would grow the importance of our strong software work. 80

1 Q. On the next page you talk about various 2 critical steps. Were these steps to respond to the 3 challenge/opportunity of the Internet you described 4 in the earlier part of your memorandum? 5 A. I'm not sure what you mean by that. 6 Q. You outline several critical steps. 7 Can you explain why you felt they were critical? 8 A. For all the reasons I cite in the 9 entire memo. I mean the whole memo -- there's part of the memo that precedes these steps. I could read the memo up to the point of the critical steps to you if you want. Q. What was your purpose in sending this memorandum to your key executives? A. To talk about my view of the Internet tidal wave. Q. Did you also outline your views as to what steps Microsoft needed to take to respond to the Internet tidal wave? A. There's a part of the memo that talks about steps. Q. And in that part of the memorandum, are you outlining the steps that needed to be taken in your view to respond to the Internet tidal wave? A. I'm suggesting some steps I think we 81

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

should take. I wouldn't say they are all related to one particular thing, but I make some recommendations here. Q. The second step here relates to something called the "Client." Is that a reference to Internet Explorer? A. No. Q. What is it a reference to? A. Client here means Windows. Q. You say, "First we need to offer a decent client (O'Hare) that exploits Windows 95 shortcuts." Is not O'Hare a reference to client here? A. Client means client operating system. Q. Why did you put "O'Hare" in parentheses after the word "client"? A. Probably because that's the part of Windows that exploits Windows 95 shortcuts. Q. What Windows 95 shortcuts did you have in mind? A. Windows 95 shortcuts is a technical term. And the O'Hare part of Windows exploits this

24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

feature known as Windows shortcuts. It doesn't mean shortcut as in the common sense use of the term 82

1 shortcut. It means the technical feature Windows 95 2 shortcuts. 3 Q. When you use the term "O'Hare" in the 4 e-mails that you write, what do you mean? 5 A. Well, this -- in this case I meant the 6 group that was working on that part of Windows 95. 7 Q. And what part is that? 8 A. The part that supported HTML. 9 Q. Is that the part that became known as Internet Explorer? A. Yes. Most of the work in Internet Explorer came out of that group. Q. Further down in this paragraph you refer to Plus pack. Is that again a reference to something also referred to at Microsoft as Frosting? A. Yes, Frosting was a name we used for what later became known as Plus pack. Q. Do you recall it was in or about that time frame that Microsoft was doing everything it possibly could to include the O'Hare client in the Windows 95 package? A. And by that you mean the Windows 95 full product? Yes. Q. Who was responsible at Microsoft for accomplishing that? 83

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

A. I'm not sure you could point to one individual. Q. Was there one individual that had primary responsibility? A. Brad Silverberg managed the group that was doing a lot of that work. Q. Did you periodically have something you called Think Week? A. Yes. Q. What is Think Week? A. It's setting aside a week of time where I have no meetings or phone calls and I get a chance to use products and learn about new research work that we're doing and other people are doing. Q. Do you recall one of the subjects you devoted time to in your 1995 Think Week was the Internet? A. I'm sure I did. Q. Do you recall receiving information from your subordinates in connection with your 1995 Think Week on the subject of the Internet? A. Well, before I go off on Think Week, I get boxes of information, usually three cardboard boxes. And some of that I get a chance to look at

25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

and some of it I don't. I don't recall specifically 84

1 what I was given for that Think Week. 2 MR. HOUCK: Let's mark as Exhibit 346 a 3 memorandum -- strike that -- an e-mail from Pat 4 Ferrel to Russ Siegelman dated May 3, 1995, on the 5 subject of Bill G's Think Week documents. 6 (The document referred to was marked 7 by the court reporter as Government Exhibit 346 for 8 identification and is attached hereto.) 9 Q. BY MR. HOUCK: Do you recall whether you reviewed the attachment to Exhibit 346 in connection with your Think Week activities in 1995? A. I don't think I did. Q. I won't ask you any questions about it then. How did the process work for giving you Think Week materials? Did your senior executives collect items that might be of interest to you and send them to you for your review? A. Well, most of my Think Week time is focused on technology issues and so there is a variety of people I solicit to provide input. It's not -- many of them are not executives, but people who might have things that I'm interested in learning about. Q. Do you recall that Mr. Siegelman was 85

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

one of the people whom you asked to collect materials for you for your 1995 Think Week? A. I think probably I asked Brian Flemming to gather the material and he would have gone out to the other people asking. Q. What position did Mr. Flemming have in -A. He had an assistant position working for me. Q. Was it your expectation that the inclusion of Internet Explorer with Windows would drive up Internet Explorer's market share? MR. HEINER: Objection. Ambiguity. THE WITNESS: I'm not sure what you mean. We do know that when we included Internet Explorer in Windows, it gained basically no market share. MR. HOUCK: I'd like to mark as Exhibit 347 what purports to be a transcript of a question-and-answer session with Mr. Gates and others at Microsoft's Financial Analysts Day on July 24, 1997. And this is a document I've downloaded from the Microsoft Website, Mr. Gates. (The document referred to was marked by the court reporter as Government Exhibit 347 for

86

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 identification and is attached hereto.) 2 Q. BY MR. HOUCK: I'll ask you to take a 3 look, sir, at page 8 of Exhibit 347. 4 And before you do so, let me ask you 5 this. Do you recall attending this Financial 6 Analysts Day Executive Q & A session? 7 A. Yes. 8 Q. And what is that exactly? 9 A. It's a chance for people to ask questions. Q. And who attends? A. Some people from the press, some people from various financial firms or investment firms. Q. On page 8 appears the following question: "Bill and Steve, you both referred to the importance of building browser share over the coming year. Can you be more explicit about why browser share is important to various aspects of your business and maybe talk about some of the initiatives you're going to be undertaking to increase it?" And then Mr. Ballmer gives a response, the last paragraph of which is as follows: "There are a lot of things we're investing in over the course of the next year in marketing. Of course, the new browser is the key thing - IE 4.0. But if you 87

1 take a look at the initiatives, the content 2 partnership that Paul's teams have formed, the things 3 that we're doing with ISP, the work we're doing with 4 large accounts on digital nervous systems, where the 5 IE browser -- IE 3 today, IE 4 tomorrow -- is fairly 6 fundamental to what we're doing on browser share, the 7 way we're trying to get large accounts, and large and 8 small accounts to author their content to use our 9 dynamic HTML stuff; all of those actions should help, I think, drive up our browser share." And you're quoted as saying, "Yeah, along with the integration." Do you recall that question and your giving an answer, Mr. Gates? A. No. Q. Do you have any reason to doubt the accuracy of this transcript? A. Well, in general, transcripts like this which come off an audio tape are somewhat unreliable, but I don't have a specific recollection about that specific question and answer. MR. HOUCK: I'd like to mark as Exhibit 348 an e-mail from Mr. Allchin to various people dated January 6, 1997. (The document referred to was marked 88

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 by the court reporter as Government Exhibit 348 for 2 identification and is attached hereto.) 3 Q. BY MR. HOUCK: What do you understand 4 the second e-mail to contain, Mr. Gates, on 5 Exhibit 348? 6 A. Looks like Ben Slivka is making some 7 comments on something. 8 Q. Do you understand that this e-mail 9 contains slides that were prepared for a presentation you made or were to make in or about January of 1997? A. No, these are not slides that were prepared for me to give. I think these are -- it may have been something that Ben Slivka was looking at doing, I'm not sure. Q. The subject of the second e-mail from Mr. Slivka to Mr. Maritz is "Overview slides for BillG/NC & Java session with 14+'s on Monday." Do you know what the reference here is to a "session with 14+'s"? A. Well, 14 probably refers to the fact that in our jobs in the technical group, level 14 is a fairly high level. And I know we had a meeting where we asked some of those high-level people to come and sit and talk about our strategy and indicate what they thought about the strategy. 89

1 2 3 4 5 6 7 8 9 session

Q. Do you recall making a presentation yourself at that meeting? A. I made a presentation, but not of these slides. Q. What was the subject of your presentation? A. I don't recall exactly, but it certainly wasn't these slides. Q. Do you recall a discussion at that of the NC and Java challenge? A. No. Q. Do you have any understanding as to what is meant here by the NC and Java challenge? A. I'm sure NC stands for network computer and the competition that came from that direction. And Java I'm sure refers to the competition coming from that direction. Q. Why did you consider Java to be a challenge at this point in time? A. Well, the term Java is used in a lot of different ways. There's a part of it with respect to run times that was a direct competitor to Windows. Q. Under "Key Platform Challenge" the memo states "Possible emergence of a set of APIs and underlying system software that lead to lesser or no 90

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

role for Windows." Do you recall any of the portion of the discussion on this subject at that meeting? A. No. Q. The next sentence says, "Puts our other (server and apps) businesses at a disadvantage." Do you recall any portion of the discussion on this subject at this meeting? A. No. Q. Under the heading "Response Summary" various items appear. One is "Increase IE share" followed by "Integrate with Windows." Do you recall any discussion about this portion of the meeting? A. Remember we haven't established that these slides were ever presented at any meeting, so no, I don't recall that being discussed, but doing it in the context of the slides means nothing to me because I don't -- certainly don't think I presented any slides like this. Q. Do you have any recollection of a discussion at this meeting as to how to increase IE market share? A. No. Q. Next page refers to another response as 91

1 "Differentiate through Windows integration." 2 Do you recall any aspect of a 3 discussion on this subject? 4 A. No. 5 Q. Do you recall -- strike the question. 6 Is it correct that the Netscape browser 7 was one of the principal means through which the Java 8 virtual machine was distributed? 9 A. I don't know what you mean "was distributed." Certainly the Java virtual machine has the ability to be distributed with any application over the Internet, so just like all software on the Internet, distribution is wide open. Q. Did you form any judgment yourself as to whether the Netscape browser was the major distribution vehicle for the Java virtual machine? A. Well, I don't know what you mean "the Java virtual machine." Understand that many different companies have Java virtual machines. Netscape had one that was different than the one that Sun had, which was different than ours, which was different than HP's, which was different than IBM's, which was different from Novell's, so you'll have to be more specific. But in terms of distributing those things, they're out there on the Internet easy to 92

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 get. 2 MR. HOUCK: I'll mark as Exhibit 349 an 3 e-mail from Paul Maritz to Mr. Gates and others dated 4 July 14, 1997. 5 (The document referred to was marked 6 by the court reporter as Government Exhibit 349 for 7 identification and is attached hereto.) 8 Q. BY MR. HOUCK: To save time, I'll tell 9 you I'm going to ask you about the very first e-mail here from Mr. Maritz to Mr. Dunie and yourself and others. And in particular, where it says "If we look further at Java/JFC being our major threat, then Netscape is the major distribution vehicle." Do you see that? A. I see it. Q. What does JFC refer to here, if you know? A. Well, as I said, it's all about run time APIs and JFC was the term for what Netscape was putting out as a set of run time APIs, which was different than what Sun was putting out but was their Netscape 1. Q. Do you have any understanding as to what Mr. Maritz meant here when he referred to Netscape as the major distribution vehicle? 93

1 A. Well, Netscape had some unique APIs and 2 one of the ways they were distributing it was through 3 their software products, including the browser. 4 Q. Did you understand that in Mr. Maritz's 5 view Netscape was the principal means by which people 6 were acquiring the Java virtual machine? 7 A. Well, you actually started these 8 questions asking about Sun's virtual machine and I 9 explained to you that Netscape's is different, so I'm not sure what you're referring to now. Q. What did you understand, sir, by Mr. Maritz's reference to being the major distribution vehicle -- strike that. When Mr. Maritz said that Netscape was the major distribution vehicle, what did you understand him to be saying the vehicle for? A. The Netscape run time bits. Not Sun's virtual machine. It says JFC there, so obviously it's not Sun. MR. HOUCK: I'd like to mark as Exhibit 350 an e-mail from Mr. Slivka to various people dated June 12, 1997. (The document referred to was marked by the court reporter as Government Exhibit 350 for identification and is attached hereto.) 94

1

Q.

BY MR. HOUCK:

The second e-mail on the

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

2 first page here is from Chris Jones and it says, 3 "Here is final copy of the memo we sent to BillG for 4 Think Week about what we should do to get to 30% 5 browser share." 6 Do you recall reviewing the attachment 7 as part of your 1995 Think Week? 8 A. I didn't review it. 9 Q. What were Mr. Jones's responsibilities in 1995? A. Good question. Q. Do you recall? A. No. He might have worked for Maritz. MR. HOUCK: I'd like to take a short break now. Do you want to stop for lunch now or -MR. HEINER: Let's take a lunch break. VIDEOTAPE OPERATOR: The time is 12:04 p.m. We're going off the record. (Lunch recess.) THE VIDEOGRAPHER: The time is 12:54. We're going back on the record. Q BY MR. HOUCK: In or about June 1995, Mr. Gates, did you become involved in the planning for some meetings with Netscape? A No. 95

1 Q I'd like toe mark as Exhibit 352 -2 351. I'd like to mark as Exhibit 351 an e-mail 3 chain. This appears to have been produced from 4 Mr. Gates' file. 5 (The document referred to was marked by 6 the court reporter as Government's Exhibit 351 for 7 identification and is attached hereto.) 8 Q BY MR. HOUCK: Mr. Gates, Exhibit 351 9 is a series of e-mails that relate to some meetings with Netscape. And I'm -- I'm going to start my questioning from the earliest one chronologically which is at the back of the group of e-mails here. So I think to save time, it might make sense for you to look seriatim at the ones I'm going to be asking you about. A Seriatim? Q Yeah. In other words, my first questions are going to be about the e-mail dated June 1, 1995. A June what? Q June 1, 1995 at the back of this package. So I'm suggesting before I ask you questions about a particular e-mail, you review that, and then when I come to the next e-mail, you can review that one. 96

1 2

it's up to you.

If you'd like to do them all together, I'm just trying to save some time

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

here.

A What does seriatim mean? Serially? Q Correct. One right after the other. A But does it mean more than serially? Q I'm going to ask you about one e-mail at a time. I'll point out to you the one that I'm going to ask you about. A Okay. Q And my suggestion is you'll read that one first, and then I'll ask you about that. And then when I turn to the next one, I'll let you know, and you can look at that one. But if you want to look at all of them together, you're welcome to do that. So if you proceed as I suggest, seriatim or serially, whatever the case may be, what I'm going to do is ask you first about the e-mail that appears on what's page 100 of the document here. MR. HEINER: Mr. Houck, one question for you, if you know, did we produce these to you stapled like this? Or is this a collection that -MR. HOUCK: Actually, that's a question I had for you. I'm going to throw it back at you 97

1 that this was produced serially, as you'll see, by 2 the production number they're consecutive numbers. 3 But the pages at the bottom are not consecutive, and 4 I was going to ask you if you knew why that was, if 5 there were some documents or pages that were a part 6 of a group of memoranda or e-mail that was not 7 produced to us. As you'll see, they're consecutive 8 production numbers. 9 So if you could take that under advisement and let me know what the answer is, I'd appreciate it. MR. HEINER: Okay. I certainly don't know the answer sitting here now. Which pages are we talking about? Are you talking about the Bates numbering or something else? MR. HOUCK: Yeah. The Bates numbering is consecutive, but the page numbers applied by Microsoft at the bottom are not consecutive, so it looks like these are part of a larger document. And my question is if there are pages missing that were not produced to us. MR. HEINER: Okay. Those page numbers just FYI are just a funny thing to see down there. I'm not sure even what those refer to, but we'll try to figure it out. 98

1 2 3

MR. HOUCK: Thank you. Okay. Q The e-mail I want to ask you about first, Mr. Gates, is dated June 1, 1995, and the very

4 top portion indicates that the bottom portion is 5 being sent to you for your information by Paul 6 Maritz, and the bottom portion is an e-mail from 7 Thomas Reardon dated June 1, 1995, on the subject of 8 working with Netscape. 9 Do you recall receiving this memorandum 10 or e-mail? 11 A E-mail, no. 12 Q I apologize for using my old-fashioned 13 terminology. 14 You don't recall receiving this e-mail 15 particularly? 16 A No. 17 Q The e-mail states that, 18 "Dan and Barb and I met late 19 yesterday to review our recent 20 discussions with Netscape and form 21 our next few action items. Dan is 22 meeting with Jim Barksdale, their 23 CEO, shortly." 24 Do you understand the reference to Dan 25 to be a reference to Dan Rosen? 99

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 A Probably. 2 Q And is the reference for Barb a 3 reference to Barbara Fox? 4 A I mean, you could ask Thomas. 5 Probably. 6 Q Do you have any understanding, sir? 7 A Based on -- I've never spoken to Thomas 8 about this. I don't remember seeing the e-mail. 9 Q Do you recall speaking to anyone about the meeting referred to here between Dan Rosen and Jim Barksdale? A No. Q The e-mail goes on to list working goals which are: "1. Launch STT, our electronic payment protocol. Get STT presence on the Internet. "2. Move Netscape out of the Win32 Internet client area. "3. Avoid cold or hot war with Netscape. Keep them from sabotaging our platform evolution." Do you understand the reference to Win32 Internet client to be a reference to Windows 95? 100

1 2 3

A Q reference to?

No. What do you understand it to be a

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 A Win32. 5 Q Can you describe what that is? 6 A 32 bit Windows. 7 Q Is Windows 95 a 32 bit Windows product? 8 A It's one of them. 9 Q Were there any other 32 bit products in development in June of 1995? A Certainly. Q Which ones? A Windows NT. Q Do you know whether Mr. Reardon was referring to Windows NT and Windows 30 and Windows 95 or one or the other? A Win32's a term that refers to all the 32 bit platforms. Q And as I understand your testimony, is that the 32 bit platforms under development in June of 1995 were Windows NT and Windows 95; is that correct? A No. Windows NT was shipping and there was a new version that was under development. Q And Windows 95 was in development at 101

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

this time? A Certainly. Q In the portion of the e-mail denominated No. 2 which is, "Move Netscape out of Win32/Win95, avoid battling them in the next year," there appears the following statement in the second paragraph, quote, "They appear to be moving fast to establish themselves in the value-add app business by leveraging Netscape itself as a platform." Do you recall whether you agreed that that's what Netscape was doing back in June '95? A At this time I had no sense of what Netscape was doing. Q Okay. The next e-mail I want to ask you about is on page 231 of the document, and it's an e-mail from Paul Maritz to various people including yourself regarding the Netscape meeting, and it's dated June 5, 1995. A How did you find that? MR. HEINER: You have to go surprisingly the opposite direction. MR. NEUKOM: You have to go by Bates 102

1 2 3 4

numbers. THE WITNESS: Yeah. If you just use those numbers, those numbers are sequential. MR. BOIES: 9594.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5 THE WITNESS: 237? Okay. 6 MR. HEINER: No. Which one? 7 MR. HOUCK: 231. Page 231. Bates No. 8 594. I'll take your eminent counsel's suggestion, 9 and refer to it by Bates number, make it a little bit easier. Q Here Mr. Maritz reports that he did not get the impression from the meeting he had that Netscape was ready for a broad, strategic relationship. Do you see that? A Do you think that refers to a meeting he had? I don't think so. Q Let me refer you to page 596, Bates No. 596. A Okay. Q It's e-mailed the same date. And it says, "Attached is my summary of the meeting that Nathan, Paul and I had with Jim Barksdale of Netscape." 103

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Do you understand the reference of Paul to be a reference to Paul Maritz? A Oh, maybe he is talking about a meeting he had. Q Do you have any recollection of discussing Mr. Maritz's impression of this meeting with Netscape? A I didn't think Paul had met with Netscape. Q So you have no present recollection of discussing with Mr. Maritz his views based on a meeting he had with Mr. Barksdale in or about the early part of June 1995? A No. Q Let me refer you next to a Bates No. page 585. And this is an e-mail to you and others from Dan Rosen regarding a Netscape meeting, and the date of the e-mail is June 22, 1995. It's page 585 Bates number. You got it? A Uh-huh. Q Do you want to look at the e-mail first before I ask you some questions, or do you want me to proceed? A Go ahead. 104

1 2 3 4 5

Q

Do you recall getting this particular

e-mail? A No. I recall getting this e-mail from Brad Silverberg on 584 but not this one from Dan (indicating).

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

6 Q And you have no reason to believe you 7 didn't get it; is that correct? 8 A That's right. I'm still confused if it 9 actually was enclosed in the other one or not. From the way it's printed out, it may have been. And although my name is there, I don't remember getting that one. I do remember getting this one which it may also be an enclosure to. Q Do you understand this to be Mr. Rosen's report on the meeting he had on June 21, 1995, with Netscape executives? A It looks like it. The thing I recall is the Reardon -Q Right. A What he calls his perspective that Brad sent to me. Q Right. Did you understand that Mr. Reardon had a somewhat different perspective on the meeting than Mr. Rosen had? A Yes. 105

1 2 3 4 5 6 7 8 9 at the

Q Who was the senior Microsoft executive at the June 21st meeting? A There were no senior executives at that meeting. Q Who was the most senior of the people there? A You would have to tell me who was at the meeting. I have no idea who was at the meeting. Q Did you understand that Dan Rosen was meeting? A Apparently from this e-mail, yes. Q Did you understand that Tom Reardon was at the meeting? A From his e-mail, yes. Q Did you understand that Jim Allard was at the meeting? A Jim who? Q Allard. A Jay Allard? Q Jay Allard, yeah. A I don't know. Q How about Chris Jones? A I don't know. Does one of these list who was at the meeting? Q Let me just ask you: Do you have any 106

1 2 3 4 5 6

recollection as you sit here as to who you were told attended the meeting on behalf of Microsoft other than Mr. Reardon? MR. HEINER: Can I have the question read back? (Question read.)

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. HEINER: Objection. Foundation. THE WITNESS: I'm not certain what you

mean, "told." Q BY MR. HOUCK: Were you informed, Mr. Gates, who attended the meeting on behalf of Microsoft? A I don't think so. Q Do you have any understanding, as you sit here today, who attended that meeting on behalf of Microsoft? A Well, the last page of the thing you gave me on 599 might relate to that. But I don't have any prior knowledge about it. Q The e-mail from Mr. Rosen on the first page says, quote, "Our goals going into the meeting were (in priority order): "1. Establish Microsoft ownership of the Internet client 107

1 2 3 4 5 6 7 8 9

platform for Win95. "2. Have Netscape add value to the NT server and Back Office platform (above our stuff), making it the preferred Internet solution. "3. Have Netscape preferentially support Microsoft authoring tools/solutions and support our viewers. 10 "4. Send a message to the 11 marketplace that Netscape and 12 Microsoft were cooperating on 13 Internet issues." 14 Do you recall discussing these goals 15 with any of the Microsoft people who attended the 16 meeting in advance of the meeting? 17 A No. 18 Q The next page of the e-mail says, 19 "Chris Jones summed up the 20 purpose nicely: 'We need to 21 understand if you will adopt our 22 platform and build on top of it or if 23 you are going to compete with us on 24 the platform level.'" 25 Did you understand that was a principal 108

1 2 3 4 5 6 7

purpose of Microsoft in attending this meeting with Netscape? MR. HEINER: Objection. THE WITNESS: No. It says in the Rosen memo the purpose of the meeting was to scope out specific areas that the relationship between the two companies might take and to set in place a process to

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

either conclude a strategic relationship or go our separate ways. Q BY MR. HOUCK: Do you have any present recollection as you sit here as to what the purpose of the Microsoft executives was in attending the meeting? A Well, there were no Microsoft executives in the meeting. Q You don't consider Mr. Rosen a Microsoft executive? A No. Inside Microsoft -- I don't know about other companies -- but the VPs are called executives and the non-VPs are called non-executives, and there were no executives at that meeting. Q Let me rephrase the question then. Do you have any understanding as you sit here today as to what the purpose was of the Microsoft employees who attended the meeting with 109

1 Netscape on June 21, 1995? 2 A I can read to you from the stuff you've 3 given me here. 4 Q I don't want you just to read, I'm 5 asking for your present recollection if you have one. 6 I can read the document myself. 7 A I don't know what you mean my present 8 recollection. 9 Q As you sit here today, do you have any recollection as to what your understanding was back in June 1995 as to the principal purpose of the Microsoft employees in the meeting with Netscape? A I wasn't involved in setting up the meeting, so I -- I can see what Reardon said here, I can see what Rosen said here. You've read something that purports to be something that Jones said. I mean -Q As we discussed before, did you understand that Mr. Reardon and Mr. Rosen had different perspectives on the meeting? A Well, I -- I got some e-mail from Brad Silverberg after the meeting that showed that Reardon seemed to have a more realistic view of what was going on. Q Did you share his view? 110

1 2 whatsoever. 3 4 5 6 7

MR. HEINER: Objection. THE WITNESS: I had no view Q BY MR. HOUCK: When you said Reardon had a more realistic view of the meeting, can you explain what you meant? A Well, Reardon's mail says, "Maybe I am being a dick,

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

but there is no deal here. If we are smart and deft and engaged at the right levels, we have a chance to cooperate on a few of these smaller things." So usually the -- if you have two people that go to a meeting and one comes back and says "Looks great," and the other comes back and says "It doesn't look good," my business experience is the person who says that it doesn't look good is probably the one who has the most accurate view of the meeting, particularly when you're dealing with Thomas Reardon and Dan Rosen. Q So you thought that Reardon's view of how the meeting went was likelier the more accurate one? A In the sense that it didn't look like much would come out of it, yes. 111

1 Q Okay. 2 Do you recall, as you sit here today 3 apart from just reading these e-mails, anything that 4 was reported back to you by any of the participants 5 from Microsoft at this June 21st meeting? 6 A Well, I think somewhere about this time 7 somebody said to me that -- asked if it made sense 8 for us to consider investing in Netscape. And I said 9 that that didn't make sense to me, I didn't see that as something that made sense. Q Do you recall who said that to you? A It would have been probably suggested in a piece of e-mail from Dan, I think. Q Do you recall when you got that suggestion, whether it was before or after the meeting? A Oh, it would have been after the meeting. Q Do you recall anything else that anyone told you back in June '95 about the meeting? A No. Q Did you personally devote time, Mr. Gates, to studying Netscape and trying to determine what their sources of revenue were? A In what time frame are we talking 112

1 2 3 4 5 6 7 8

about? Q Well, do you recall doing that at all? A I personally didn't make any study of it. But I know that in late '95 when we reviewed a bunch of different competitors, one of those was Netscape, and there was some revenue analysis done as part of that. Q Do you recall an employee at Microsoft

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

by the A Q A Q A I have no idea Q Mr. Chase? A Q A of Amar? Q A Q

name of Amar Nehru? I know Amar. Did he work for you directly? Never. Who did he work for? He's at least five levels below me, and who he works for. Do you recall that he worked for I'm certain that he did not. Let me mark as exhibit -Are you talking -- what's the last name It's Amar Nehru. Yeah. He did not. N-e-h-r-u. Mark as Exhibit 352 an e-mail from 113

1 Mr. Gates to Amar Nehru. 2 (The document referred to was marked by 3 the court reporter as Government's Exhibit 352 for 4 identification and is attached hereto.) 5 MR. HOUCK: I think I marked the wrong 6 document, but we'll probably get that at some point. 7 I apologize. So let me mark as the next exhibit, 8 Exhibit 353 -- strike what I said, I think we do have 9 the right document, and I apologize for the confusion. Okay. I gave you the wrong document. Let me mark as Exhibit 353 the December 1, 1996 e-mail. I apologize once more. THE WITNESS: December 1, 1996? MR. HOUCK: Yeah. THE WITNESS: Oh, is this something I haven't seen? MR. HOUCK: Yes. And I apologize. There were a couple of e-mails from Mr. Nehru -- or to Mr. Nehru, I gave you the wrong one, I don't want to ask you about that one right now. So what I want to ask you about is Exhibit 353, and this is a December 1, 1996 e-mail from you to Mr. Nehru. (The document referred to was marked by the court reporter as Government's Exhibit 353 for 114

1 2 3 4 5 6 7 8 9

identification and is attached hereto.) Q BY MR. HOUCK: Do you recall asking Mr. Nehru in or about December 1996 to collect for you information about Netscape revenues? A No. Q Do you recall sending this e-mail on or about December 1, 1996 to Mr. Nehru? A No. Q Okay.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Do you recall receiving from Mr. Nehru the attached e-mail dated November 27, 1996? A From time to time we do reviews of various competitors, and at least one point in time Netscape was one of the people that we looked at. So it doesn't surprise me, but I don't remember it specifically. Q On the second page of the exhibit, which is part of Mr. Nehru's November 27, 1996 e-mail, he talks about browsers. A What page? Q Page 2. A Okay. Q He identifies there sources of Netscape's revenue. He says, "Browser revenue for the 115

1 2 3 4 5

quarter amounted to $45 million (a 32 percent increase over the last quarter) representing 60 percent of total Netscape revenue." Do you have any reason to doubt

the

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

6 accuracy of the information reported there? 7 A Well, I know that Mr. Nehru didn't work 8 for Netscape, so I'm sure he didn't have access to 9 the figures directly. If you're interested in that, you should ask Netscape. Q Was this the best information you had in December of 1996 as to the proportion of Netscape's revenue that was derived from browsers? A I don't know. Q Do you recall receiving any other information than this on that subject? A I might have seen an analyst report. It says here we're 70 percent confident about our numbers. Q Do you recall why it was in this time frame you had asked Mr. Nehru to collect this information for you? A I don't think I did. I already told you that. Q You have no recollection of asking him 116

1 2 3 4 5 6 7 8 9

for this information? A I'm quite certain I wasn't the one who asked for the information. Q Do you have any recollection as to who did? A Perhaps Steve. Q Steve, you mean Steve Ballmer? A Uh-huh. Q In your memo here -- strike that.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

In your e-mail here you say, "What kind of data do we have about how much software companies pay Netscape?" Do you recall asking that question to Mr. Nehru in or about December 1996? A It looks like I sent him that question after he sent out one of these competitive analysis reports. Q Do you recall -- strike that. Do you have any reason to believe you didn't ask him for this information on December 1, 1996? A Now, wait a minute. Now, you're confusing two things. There's the information here enclosed which I didn't ask him for. Q I understand. 117

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10

A And that's what you've been asking me about earlier. Q No, sir. A Then there's the question here in my e-mail, I have no idea if he ever responded to that, but that question certainly looks like it came from me. But that's different than -Q I understand. I'm not confused. A Okay. Q Let me straighten the record out here. Your testimony, as I understand it, is you believe that in all likelihood the information initially collected by Mr. Nehru was sought by Mr. Ballmer; is that right? A I know it wasn't -- I'm pretty sure it wasn't me who asked for it. Q Correct. And then you got this e-mail from Mr. Nehru and you in turn asked him what kind of data do we have about how much software companies pay Netscape; is that right? A That's part of the e-mail I sent to him it looks like, yes. Q Okay. The -- Exhibit 353, in particular Mr. Nehru's memo, says his conclusion was of the $45 118

1 2 3 4 5 6 7 8 9 called

million in revenue obtained that quarter by Netscape as a result of the browsers ISPs commanded the largest share at 40 percent of browser revenue. Did you have any reason to doubt the accuracy of that information obtained by Mr. Nehru? A Well, I'll say two things about that: First of all, he's not including the prime -- when he gives that number he's not including the primary browser revenue source which is what was service revenues in this report; that is,

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11

taking the ad space in the browser, which is proven to be the biggest source of revenue and a significant source of revenue for browsers, he's not including that in. So that would be a rather significant change. Also, although I haven't had a chance to read his entire e-mail, it says that his confidence in these numbers is about what he says 70 percent. So clearly, there are people at Netscape who would be 100 percent sure about the numbers. Q Do you know what, if any, service revenue Netscape was earning from its browsers in or about the first quarter of 1996? 119

1 2 3 4 5 6 7 8 9 them.

A No, I don't. Q Was Microsoft earning any service revenue on its browsers the first quarter of 1996? A In the first quarter of 1996? No. That developed into a large business subsequently in our case. Q Do you know whether Netscape was any different or not? A Well, it's a measurable business for You can just read what I say in the mail. Q Do you know how that source of revenue -- strike that. Why don't we just take a very short break. MR. HEINER: Okay. THE VIDEOGRAPHER: The time is 1:32. We're going off the record. (Recess.) THE VIDEOGRAPHER: The time is 1:47. We're going back on the record. MR. HEINER: During the break I checked with our people who do document productions about Exhibit 351 and asked them what these page numbers are at the bottom of the pages. And they said that we found these documents instead of archives so we 120

1 2 3 4 5 6 7 8 9 subject

went back and searched in connection with the current case. So these were documents that were actually printed out back for some other case, presumably in 1995 or something like that. And when we printed the documents they would just page number every single page. So the documents -- and then we produced the responsive documents. So pages -whatever pages are missing here are e-mail about any under the sun. And then that also tells you that

12 13 14 15 16 17 18 19 20 21 22 23 24 25

whether or not we produced these stapled, they probably shouldn't be stapled. It's really individual e-mail strings. MR. HOUCK: Okay. MR. HEINER: For what it's worth. MR. HOUCK: I would like to mark as Exhibit 354 an e-mail from Mr. Gates to various people dated May 19, 1996, on the -- and the subject is "Some thoughts on Netscape." (The document referred to was marked by the court reporter as Government's Exhibit 354 for identification and is attached hereto.) Q BY MR. HOUCK: Is Exhibit 354 a memorandum you prepared on or about May 1996? 121

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12

A It looks like it is. I don't have a specific recollection. Q On the second page under the heading "Netscape" you say, "During this Thinkweek I had a chance to play with a number of Netscape products. This reenforced the impression that I think all of us share that Netscape is quite an impressive competitor." Do you recall what it was that led you to the conclusion that Netscape was an impressive competitor? A I think the memo speaks for itself in terms of outlining that. Q Did you come to believe that their products would be popular with consumers? A That's a very vague question. Q Can you answer it or not? A In its current vague form? No. Q Did you come to the conclusion that Netscape had high quality products in or about this time frame? A Not all of their products but some of them. 122

1 Q Which products did you believe were of 2 high quality? 3 A Well, the memo gets into that. I'm 4 glad to read it. 5 Q Do you have any additional recollection 6 as you sit here apart from just reading the 7 memorandum? 8 A No. 9 Q Was it your understanding that in or about this time frame Netscape sought to generate revenue by charging money for its browser? A That's kind of a complex area because,

13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13

in fact, they didn't really charge people for the browser. If you wanted to just download it and use it, they never followed up and charged anyone. So as I show in the memo, one of the -when it's under "Their price," I show "Free." Q You also show $49; correct? A Yeah. It says "$49 & free." 49 was the nominal price which no one had any reason to pay at all. Q Did you understand from Mr. Nehru and/or other people at Microsoft that, in fact, Netscape was generating revenue by sales of its browser? 123

1 2 3 4 5 6 7 8 9 through

A Nothing significant, I think, came out of that $49 offering. They had a retail value at an offering at a different price, and they had some corporate licensing. But in terms of the $49, I don't know of any data that I had that would suggest that that was something people were paying. Q Do you have any recollection at all as you sit here today of receiving any data that indicated how much revenue Netscape was generating sales of its browser at a $49 price? A Well, I know they were getting revenue from the Search button and the Home Page hits essentially advertising fees. And I had seen some data about that. Q Did you see any data at all with respect to how much money was being generated by sales of the browser? A I just said I saw some data about revenue they got from essentially the advertising sales. Q Right. Do you recall seeing any data with respect to revenue generated from sales of the browser itself? MR. HEINER: Is this any particular 124

1 time, any particular channel? 2 MR. HOUCK: In or about this time 3 period, which is May of 1996. 4 MR. HEINER: And is the question about 5 the $49 retail offering? 6 MR. HOUCK: Correct. 7 THE WITNESS: I don't think that $49 8 retail offering is very popular. The particular memo 9 that you've got in front of me here is -- doesn't relate much to that. It's talking more about the different products and Microsoft plans to have better products. MR. HOUCK: Move to strike that answer

14 15 16 17 18 19 20 21 22 23 24 25

as nonresponsive. Q As you sit here today, Mr. Gates, do you have any recollection of receiving data that purported to show how much, if any, revenue was being generated by Netscape through sales of its web browser at retail? A The $49 product? Q Can you answer the question? MR. HEINER: Asked and answered. THE WITNESS: Which SKU? MR. HOUCK: The $49 product. THE WITNESS: I don't remember any 125

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

specific data. But as to that SKU, I'm -- I don't think their sales were ever significant. Q BY MR. HOUCK: The next -- strike that. On Bates No. page 954 appears the heading "Browser War." Do you see that? A Uh-huh. Q What did you mean by your use of that phrase? A I think somebody -- I wasn't the one who created that phrase. I think it was a phrase that some people had used to refer to the competition in the browser space including that between us as the provider of Windows and Netscape with Navigator. Q Under the heading of your memo entitled "Browser War" appears the following statement: "If we continue to have minimal share in browsers, a lot of our other efforts will be futile." Do you recall what other efforts you had in mind there? A Well, for example, our desire to get advertising revenue from the Search button and the Home Page in the browser. Q Do you recall anything else you had in 126

1 2 3 4 5 6 7 8 9 10 11 12 13 14

mind? A I don't know if Blackbird had been canceled by this point or not. But since it was a superset browser, it would have fit that category. Q Anything else? A Well, MSN, our online service, because of its dependency on the Blackbird technology. Q Do you recall any other efforts that you had in mind here? A No. Q You go on to say, quote, "By the end of the year we have got to get more than 25 percent share so we are taken seriously,"

15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15

close quote. Do you recall why you came to that conclusion? A I don't remember what I was thinking at the time I wrote the memo. Q Do you recall who you had in mind as taking you seriously? A At the time I wrote the memo? Q Yes. A No I don't recall. Q That paragraph concludes with your 127

1 statement as follows, quote, 2 "I'm very excited that we 3 are going to incent OEMs to focus 4 their efforts around IE." 5 IE is a reference, I take it, is a 6 reference to Internet Explorer; is that correct? 7 A It looks like it's referring to IE3 8 there. 9 Q Do you recall what it was you were going to do to incent OEMs to focus their efforts around Internet Explorer 3.0? A We did something where we encouraged them to pick up the Windows Update that included the improvements in the IE technology that took us from IE2 which had been included, of course, in Windows for quite some time. We -- in the normal course, it takes OEMs six to nine months before they get updates widely available. And I think there was a plan to incent them to update their Windows bits on their machines more rapidly than normal so that users would have a chance to get IE3 on the machine instead of IE2, which although it had been a part of Windows, had not received measurable market share. Q Your memo concludes with the following 128

1 statement: 2 "At some point financial 3 minded analysts will begin to 4 consider how much of a revenue stream 5 Netscape will be able to generate." 6 Do you recall what your thinking was in 7 noting this to the other recipients of the memo? 8 A Well, this memo, if you look at it, is 9 not really about financial issues at all. It's about the good work we're doing in various software categories relative to some of the work that Netscape's doing. And I wouldn't call it a conclusion, but there's a paragraph there in the end that talks about Netscape revenue. I don't have any recollection about

16 17 18 19 20 21 22 23 24 25

what I was thinking when I wrote that paragraph at this point. Q Of what significance was it to you what financial analysts concluded about Netscape's revenue stream? A Netscape was a competitor of ours and we actually pay attention to our competitors' revenue since it's a measure of the popularity of their products and we can compare how we're doing in customer popularity with how they're doing sometimes 129

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

by looking at revenue. Sometimes that doesn't work. But it's -- I think it's -- it's typical to know what -- what our revenue is. Q Do you generally make public comments about the financial health or welfare of Microsoft's competitors? A I'm often asked about various companies, and I respond to questions. But I've never given a presentation that had that focus. Q Do you recall making public statements in mid-1996 calling into question Netscape's financial viability? A I may have been asked questions about that by the press, but I didn't go out and make any speeches or statements about it. Q I'd like to mark as Exhibit 355 a copy of an article that appears in The Financial Times of London dated July 3, 1996. (The document referred to was marked by the court reporter as Government's Exhibit 355 for identification and is attached hereto.) Q BY MR. HOUCK: The next to the last page of Exhibit 356 appears the following quote, "'Our business model works even if Internet software is free,' 130

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

says Mr. Gates. 'We are still selling operating systems.' Netscape, in contrast, is dependent upon its Internet software for profits, he points out." Do you recall making statements to this effect to The London Financial Times in or about July 1996? A I'm quite sure I didn't make a statement. I think I was interviewed by Louise Kehoe where she kept saying to me how various people were predicting, including Netscape, that we would go out of business because of the Internet and that we were doomed because of the Internet. Q Do you recall in or about July 1996

17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17

providing the information attributed to you here to the reporter for The London Financial Times? A I don't know what you mean "providing the information." Louise Kehoe is a reporter. She interviewed me about this time with the proposition that we were on our way out of business. And I said to her, "If we didn't do a good job for our customers in terms of what they wanted, that would be the case, 131

1 but that we thought we could do -- do good work 2 around the new scenarios that customers were 3 interested in." 4 MR. BOIES: Move to strike the answer 5 as nonresponsive. 6 Q BY MR. HOUCK: Do you recall, 7 Mr. Gates, giving the quotation imputed to you here 8 to Ms. Kehoe? 9 A Well, the best -- I don't recall this specific interview. It would be valuable to understand what her questions were and what the sequence of questions were. She probably has a tape of that that you could get. Q Do you have any reason to believe that she has inaccurately quoted you here in her article? A I know it was an interview where the basic supposition was that Netscape and others were going to put us out of business. That much I recall. But in terms of the specific quote, I'm not sure. Q When you say you're not sure, do you mean -- strike that. Do you have any reason, as you sit here today, to believe that this statement attributed to you is improperly reported by Ms. Kehoe? A I think if you want to understand what 132

1 I said in the interview with her, you should get the 2 transcript of it and understand what series of 3 questions -- what the context was for anything that I 4 said. 5 Q Sir, do you deny making the statement 6 attributed to you here? 7 A I think it was in the context of some 8 fairly aggressive questions about was my company 9 going to go out of business in the near future. And I think it's -- it's valuable to know that context whenever you look at an answer somebody gives to a question. Q Well, can you answer my question "yes" or "no"? Read the question back to him, please. (The following question was read:

18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18

"Q Sir, do you deny making the statement attributed to you here?") THE WITNESS: I'm not denying making the statement, but I am pointing out that I didn't just make a statement. I was in an interview with a reporter, and it would be valuable to understand her questions. And I do recall the general tenure of 133

1 those questions. And so if your interest is 2 understanding the quote, understanding that context 3 is, I think, quite valuable. 4 Q You understood, did you not, Mr. Gates, 5 that people interested in the computer business 6 followed very carefully what it was you said about 7 the future of the business? 8 A That's quite a vague question. 9 Q You've appeared on covers of various magazines; correct? A My picture has. Q Right. And is it not your understanding that many newspaper reporters and financial analysts are very interested in getting your views on future developments in the computer business? A I've never done anything that would give me any measurement of that. Q You have no understanding whatsoever? A I know I've been interviewed a lot of times. I mean, when you say "popularity," help me understand what sort of answer you want. Do you want a number? Q You just answered when you made statements like this about Netscape that had the 134

1 potential to affect Netscape's stock price? 2 A I've told you several times that I 3 object to your using the word "statement" to refer to 4 the interview. 5 Q When you gave quotations like this to 6 financial analysts and reporters, you understood, did 7 you not, that statements like this could have a 8 negative impact on Netscape's stock price? 9 A I participated in an interview with Louise Kehoe, and I explained why her basic proposition that we were going -- going to go out of business soon wasn't necessarily the case. And so the focus of the interview was certainly on Microsoft and our future, our lack of a future. She's not a financial analyst, she's a reporter. Q Okay. Move to strike. Would you read the question to him

19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19

again. And I'll ask you if you could answer the question, Mr. Gates. (The following question was read: "When you gave quotations like this to financial analysts and reporters, you understood, did you not, that statements like this could 135

1 have a negative impact on Netscape's 2 stock price?") 3 THE WITNESS: I don't know what you 4 mean "quotations like this." 5 Q BY MR. HOUCK: When you gave this 6 particular quotation to Ms. Kehoe, did you consider 7 that it might have a negative impact on Netscape's 8 stock price? 9 A It certainly was not in any way a consideration of my defending Microsoft in this particular interview. Q Did you understand, sir, that application vendors would be less likely to write applications for a browser marketed by a company that did not have long-term prospect for financial viability? A I've been quoted many times as talking about Netscape as a company that has a good future. And, you know, I'm -- when I've been directly asked about that, I've said that they're in an exciting field and have lots of opportunity. MR. HOUCK: Move to strike the answer as nonresponsive. Q Do you recall any other statements -strike the word "statements" since you don't like it. 136

1 Do you recall any other quotations 2 attributed to you, Mr. Gates, in the press with 3 respect to your views of Netscape's financial 4 viability? 5 A Well, I was at MIT and -- meeting with 6 the W3C people, and I spoke in front of some 7 students. And a student asked what would I think 8 about him going and taking a job at Netscape. And I 9 said I thought that would be an interesting thing and that Netscape had a lot of opportunities, and I subsequently saw that quoted in the press. So I remember that as one example. Q Anything else? A I don't recall any other specific times when I was questioned about Netscape. Q Do you recall making statements to the press to the effect that Microsoft did not need to make any revenue from its Internet software to be successful as a company?

20 21 22 23 24 25

A Well, I don't know what you mean -- you see, that's the -- I'm not sure what you mean by "Internet software." What of our products? Could you designate for me which ones you mean as being Internet software? Q I'm going to get marked as Exhibit 137

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20

357 -- 356. I'm going to have marked as Exhibit 356 a copy of a story from the Business Week dated July 15, 1996. (The document referred to was marked by the court reporter as Government's Exhibit 356 for identification and is attached hereto.) Q BY MR. HOUCK: Exhibit 356 on the second page contains the following statement, quote -- which is attributed to you, "'One thing to remember about Microsoft,' says Chairman William H. Gates III, 'We don't need to make any revenue from Internet software.'" Can you tell me what you had in mind there when you referred to Internet software? MR. HEINER: Objection. Foundation. THE WITNESS: So what was the question? MR. HOUCK: Well, let me withdraw the question and ask you. Q Do you have any reason to doubt that you made a statement to this effect to a Business Week reporter? A I'm pretty sure I wasn't interviewed by Business Week for this article, so I think it's an 138

1 indirect quote of some kind. 2 Q Do you recall publicly stating that one 3 thing to remember about Microsoft was that it didn't 4 need to make any revenue from Internet software? 5 A As I told you earlier, I never 6 commented on Netscape or their prospects in a speech 7 or a statement. The only time where that ever came 8 up, I'm quite sure, is when reporters would push on 9 the fact that maybe Microsoft was about to be put out of business by the Internet and various things going on relative to the Internet. So there -- I mean, there was no statement like that. There may have been an answer along those lines, but I don't think I can recall specifically. Q Do you have any reason to doubt that the quotation attributed to you is accurate? A No. I think there's something strange because I'm pretty sure I wasn't interviewed for this article. I've never been interviewed by Robert Hof who is the author, and I think I'd remember if I had

21 22 23 24 25

been interviewed for this article. Q Did you believe that the Internet threatened to put Microsoft out of business? A There were a lot of things, including the move to the Internet, that if Microsoft doesn't 139

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21

do a lot of innovative work means that our revenue will drop to zero. Q Did you ever come to the point where you seriously reached the conclusion that Microsoft's -- Microsoft was likely to be put out of business by the Internet? A Our risk of being put out of business has been a constant feeling for me ever since we've been in business. Q The Business Week article that we've been looking at says that: "Microsoft's expected fiscal 1996 sales were on the order of $8.6 billion with $2 billion in aftertax profits." Is that approximately correct? A I'm not sure. There's a lot of ways to get those figures. Q Do you have any understanding what Microsoft's 1996 revenues were? A No. Q Do you have any estimate, as you sit here today, as to what Microsoft's aftertax profits were in 1996? A No. 140

1 2 3 4 5 6 7 8 9 because figure.

Q approximately? A Q were -- strike

Were they on the order of $2 billion

I told you I don't know. You have no way of estimating what they the question. What's your best estimate of what the -- Microsoft's aftertax profits were in fiscal year 1996? A I don't think it's good to guess it would be very easy to go get the real

Q And you'd have to guess; is that right? A If you don't let me get the real figure, then I would have to guess. But if you give me a few minutes I can go get the real figure. So if you're at all interested in the facts, just give me a few minutes. Q I am. So go ahead, go get it. A Okay. MR. HEINER: Take a break. THE VIDEOGRAPHER: The time is 2:23.

22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22

We're going off the record. This is the end of Tape 2 of the deposition of Bill Gates: (Recess.) THE VIDEOGRAPHER: The time is 2:32. 141

1 We're going back on the record. This is Tape 3 of 2 the videotaped deposition of Bill Gates. 3 Q BY MR. HOUCK: Mr. Gates, were you able 4 to obtain the information you were looking for? 5 A Yeah. It looks like the numbers given 6 in the Business Week article, the sales and profit 7 numbers are accurate. 8 Q We've seen a number of references in 9 documents we've looked at to browser share. And you've been quoted as saying, "We wake up in the morning thinking browser share." Do you recall that quotation? A No. Q I'd like to have marked as Exhibit 357 an article from PC Magazine Online dated March 13, 1996. (The document referred to was marked by the court reporter as Government's Exhibit 357 for identification and is attached hereto.) Q BY MR. HOUCK: Exhibit 357, Mr. Gates, is a report on a keynote speech you gave at the San Francisco Microsoft Developers Conference. Do you recall giving a speech in that conference? A Yeah. I spoke there. 142

1 Q It quotes you as saying, "We wake in 2 the morning thinking browser share." 3 Do you recall saying that? 4 A It's reasonably illiterate. I'd have 5 to look at the transcript. It's not typical for me 6 to be illiterate. 7 Q Do you deny making the statement 8 attributed to you here, Mr. Gates? 9 A It's very possible I made a statement to this effect in a more literate form, but the transcript's available. Q Isn't it a fact that winning a browser share was a very important goal for Microsoft in 1996? A We were measuring web usage share to see how popular browser was. And we had -- one of our goals was to increase that. MR. HOUCK: I'd like to mark as Exhibit 358 an e-mail from Mr. Gates to Joachim Kempin dated January 5, 1996. (The document referred to was marked by the court reporter as Government's Exhibit 358 for

23 24 25

identification and is attached hereto.) Q BY MR. HOUCK: Do you recall writing this e-mail, Mr. Gates, on or about January 5, 1996? 143

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23

A No. Q Do you have any reason to doubt you wrote it? A No. Q First sentence says, quote, "Winning Internet browser share is a very important goal to us," close quote. Why did you believe that to be the case in January of 1996? A Are you asking me to reconstruct my state of mind on January 5th? Q Do you recall why it was, Mr. Gates, that in the beginning of 1996 you came to believe that winning Internet browser share was a very important goal for Microsoft? A I can't say for sure what I was thinking at the time, but I can explain to you why it makes sense to me that I would have written this mail. Q Am I correct that you have no present recollection of what it was specifically that led you to this conclusion back in January, 1996? A I don't remember my exact thinking in January 1996. Q Okay. 144

1 2 3 4 5 6 7 8 9 people

A I can explain my general recollection of that time period, but I can't reconstruct what I was thinking when I wrote the mail. Q What is your general recollection of the time period? A We thought that people -- the usage of the Internet was increasing, and it was important for us to build a browser with better features including integration that would be attractive enough that would choose to use it. Q Who was Microsoft's principal competitor for browser share in January of 1996? A I think at that stage Netscape had 80 to 90 percent usage share which is a particular way of measuring browser hits. Q Is it your understanding that the percentage of the PC system price attributable to the operating system has risen in recent years? MR. HEINER: Objection. Vague and ambiguous. THE WITNESS: I'm not sure which of our products you're asking me about. Q BY MR. HOUCK: Have you seen any

24 25

studies at Microsoft comparing the trend of pricing with respect to PC systems to the price Microsoft 145

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

charges for its operating system products? A No. I've seen a comparison of our operating system prices with other people's operating system prices. Q I'd like to mark as Exhibit 359 a chart entitled "PC Value Analysis" dated March 4, 1996. (The document referred to was marked by the court reporter as Government's Exhibit 359 for identification and is attached hereto.) Q BY MR. HOUCK: Do you recall seeing Exhibit 359 before, Mr. Gates? A No. I'm pretty sure I haven't seen it. Q Do you know by whom at Microsoft it was prepared? A No. When I haven't seen something it's very rare for me to know who prepared it. Q Let me mark as Exhibit 360 an e-mail from Mr. Kempin to yourself, Mr. Gates, dated December 16, 1997. (The document referred to was marked by the court reporter as Government's Exhibit 360 for identification and is attached hereto.) Q BY MR. HOUCK: Do you recall receiving Exhibit 360 from Mr. Kempin? A No. 146

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Q What was Mr. Kempin's position in December of 1997? A He was in charge of our relationship with hardware manufacturers. Q By "hardware manufacturers" you mean OEMs? A That's a shorthand term. Q This e-mail says, "feedback appreciated." I take it you don't recall whether or not you gave him any feedback? A No. Q From time to time does Microsoft do surveys of people known as web professionals? A I don't know. Q I'd like to mark as Exhibit 361 -- I'd like to mark as Exhibit 361 an e-mail from Brad Chase to Bill Gates, Paul Maritz and Steve Ballmer dated September 8, 1997. (The document referred to was marked by the court reporter as Government Exhibit 361 for identification and is attached hereto.) Q BY MR. HOUCK: Does Exhibit 361 refresh your recollection that Microsoft from time to time

25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

conducts surveys of web professionals? 147

1 2 3 4 5 6 7 8 9 mean by

A Do you want me to read this thing? Q Just answer my question, if you can. You don't have to read the whole thing to answer my question, and I'll point you to one particular page that I want to ask you about. A I haven't seen the document before, but it appears to be a specific case where some information is gathered about what the document seems to call web professionals. I don't know what they that term. Q That wasn't my question. You have no understanding of what's meant by "web professionals," sir? A In the context of this document I don't. I can give you many possible definitions for the term. Q Okay. Do you have any understanding as to the type of web professionals that were surveyed here? A If I studied the document, I could learn something about that. I haven't read it. Q Do you have any reason to believe this document was not sent to you on or about September 8, 1997? A No. 148

1 Q Okay. 2 Do you recall receiving information in 3 or about April 1997 that many users did not want to 4 have a browser integrated into the operating system? 5 A No. 6 Q I'd like to mark as Exhibit 362 -7 MR. HEINER: That's the way to do it. 8 Don't even hazard a guess. 9 MR. HOUCK: I'd like to mark as Exhibit 362 an April 25, 1997 e-mail or memo from Randy Trower to Chris Jones, Joe Belfiore and others including Mr. Gates? THE WITNESS: That's Tandy. MR. HOUCK: Tandy Trower. I'm sorry, I misspoke. (The document referred to was marked by the court reporter as Government's Exhibit 362 for identification and is attached hereto.) Q BY MR. HOUCK: Who's Tandy Trower? A That's hard to answer. He's an employee of Microsoft who often looks at user interface issues and a number of job roles he's had over the years. Q Back on -- strike that. Do you recall receiving this

149

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

memorandum? A I think I do. Q Back on Bates stamp page 130 under the heading "Desktop/Web Integration." A Yep. Q The memo states: "The concept of unifying the user's desktop and web experience sounds good and reasonable, but it's not clear that this is what users want and certainly is not what they expect." Do you know the basis of the statement made here? A He's talking about how to refine the Desktop/Win integration. It says we need to do a better job. And then he talks about how to do the integration and what he thinks is a different, better way. Q Do you know the source of the information he reports here to you? A I'm sorry? Q Do you know what the source of his information was that he's reporting to you here? A No. 150

1 2 3 4 5 6 7 8

Q

He says in the next line, quote, "Many users expect to just get browser improvements with IE4, and I've heard many a remark from users that they don't want to view their folders to look like web pages." Do you know where he obtained

that 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

information? A No. Q Would you agree that it's fair to describe Windows 98 as not a vital upgrade for PC users? MR. HEINER: Objection. THE WITNESS: I'm not sure what you mean by "vital." I mean, it -Q BY MR. HOUCK: I'd like to mark as Exhibit 363 an e-mail from Brad Chase to Walt Mossberg and Mr. Gates dated May 15, 1998. The last portion of this document, Mr. Gates, purports to be an e-mail from yourself to Mr. Mossberg of the Wall Street Journal where you say -- referring to Windows 98 -- "You are right that it is not a vital upgrade." Do you see that? A I see the paragraph there.

151

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 2 3 4 5 6 7 8 9 change

Q Do you recall sending this e-mail to Mr. Mossberg of The Wall Street Journal? A It looks like the e-mail I sent him. (The document referred to was marked by the court reporter as Government's Exhibit 363 for identification and is attached hereto.) MR. HOUCK: At this time I'm going to turn the examination over to Mr. Boies. Why don't we go off the record while we places. THE VIDEOGRAPHER: The time is 2:52. We're going off the record. (Off the record.) THE VIDEOGRAPHER: The time is 2:54. We're going back on the record. EXAMINATION BY MR. BOIES: Q Good afternoon, Mr. Gates. I'd like to begin by following up with Exhibit 356 and Exhibit 355 that I think you have in front of you. First, with respect to Exhibit 356, which is a 1996 Business Week article. I understand your testimony to be that you do not recall giving an 152

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

interview to the reporter who wrote this. But do you recall saying the statement attributed to you, whether you said it to that reporter or to someone else? And the statement I'm referring to is the statement at the end of the article in which you are quoted as saying: "'One thing to remember about Microsoft,' says Chairman William H. Gates III, 'We do not need to make any revenue from Internet software.'" A I don't remember saying that. Q Did you say it, sir? MR. HEINER: Objection. Asked and answered. THE WITNESS: I don't remember saying it. Q BY MR. BOIES: That wasn't my question, sir. Did you say it? MR. HEINER: Objection. Harassing the witness. MR. BOIES: I'm not harassing the witness. I want to know whether he had a recollection of -- he may not know whether he said 153

1

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

it, he may think he didn't say it. I'm trying to 2 clarify what the witness's testimony is. 3 MR. HEINER: Can I have the first of 4 those two questions of those read back? 5 (The following record was read: 6 "Q First, with respect to 7 Exhibit 356, which is a 1996 Business 8 Week article. I understand your 9 testimony to be that you do not recall giving an interview to the reporter who wrote this. But do you recall saying the statement attributed to you, whether you said it to that reporter or to someone else? And the statement I'm referring to is the statement at the end of the article in which you are quoted as saying, "'One thing to remember about Microsoft,' says Chairman William H. Gates III, 'We do not need to make any revenue from Internet software.' "A I don't remember saying that. 154

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

"Q Did you say it, sir? "MR. HEINER: Objection. Asked and answered. "THE WITNESS: I don't remember saying it.") MR. HEINER: The witness doesn't remember saying it. Q BY MR. BOIES: Do you doubt that you said it, sir? A Same answer. Q Well, my question, sir, is whether you doubt it. And I'd like the best answer you can give to me on that question, whether you doubt saying this. I understand -A Given that I don't have a recollection of saying it, you're sort of asking me to make some kind of a guess. Q Move to strike the answer as nonresponsive. A And I have -MR. HEINER: There's likely to be testimony during the rest of the afternoon that you may not like from time to time. You'll probably have to accept that as part of the examination. MR. BOIES: Absolutely. And if it's 155

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

responsive, it will be his testimony. But if it is not responsive, I intend to preserve the record and move to strike it as nonresponsive. MR. HEINER: And you should continue to answer the questions as best you can responding to the questions posed. Q BY MR. BOIES: Do you have any reason to believe that Business Week would make this quote up, sir? A They had made mistakes, but I'm not suggesting that I know that they did in this case. Q Do you recall saying publicly the substance of what is attributed to you here? Perhaps not the words but the substance of, "One thing to remember about Microsoft, we don't need to make any revenue from Internet software"? A I feel quite sure I never gave a speech or made a statement along those lines. I may have, in response to reporters suggesting that Microsoft was on the verge of doom, talked about the fact that we were doing a lot of work and that we thought we had a good opportunity on the Internet. Q Now, at the time that, according to you, reporters were suggesting that Microsoft was on the edge of doom, Microsoft had profits of over $2 156

1 billion dollars in aftertax profits; is that correct? 2 A Well, I think it mischaracterizes what 3 I said completely to say that I'm just suggesting it. 4 That's really quite a misstatement. 5 MR. BOIES: Could I have the question 6 reread and the answer reread? 7 (The following record was read: 8 "Q Now, at the time that, 9 according to you, reporters were 10 suggesting that Microsoft was on the 11 edge of doom, Microsoft had profits 12 of over $2 billion dollars in 13 aftertax profits; is that correct? 14 "A Well, I think it 15 mischaracterizes what I said 16 completely to say that I'm just 17 suggesting it. That's really quite a 18 misstatement." 19 Q BY MR. BOIES: Having heard the 20 question, do you want to change your answer? 21 A I'll add to it if you want. 22 Q No. Do you want to change your answer? 23 A I'll be glad to add to it. 24 Q My question, sir, is: Do you want to 25 change your answer? You can say "yes" or "no." 157

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A I don't see any reason to change it. I'll be glad to add to it. Q Were reporters suggesting to you in 1996 that Microsoft was on the edge of doom, as you have used that phrase? A Many reporters suggested that, yes. Q And in 1996 what were Microsoft's revenues compared to Netscape's revenues? A I don't know Netscape's revenues. Q Approximately, sir? A Approximately what? Q Approximately what were Netscape's revenues compared to Microsoft's revenues? A You want me to guess at Netscape's revenues? Q I want you to give me your best judgment and estimate as a chairman and CEO of Microsoft, sir. If you call it guessing, you can call it whatever you want. What I want is your best estimate under oath as you sit here. A I know that Microsoft's revenues would be dramatically higher than Netscape's, but I -- I really won't want to hazard a guess at Netscape's revenue in particular. Q As you sit here now, can you give me 158

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

any estimate or range at all of what Netscape's revenues were in 1996? A Zero to 200 million. Q As you sit here now, can you tell me any estimate or range of what Netscape's revenues are today? A I think zero to 500 million. Q Can you be any more specific than that; that is, can you narrow the range at all? A Yeah. 200 million to 500 million. Q Can you narrow the 1996 range at all? The 1996 range you gave me was zero to 200 million. A 30 million to 200 million. Q Is that the best you can do as you sit here now? A Well, the chance of my being wrong goes up as I narrow the range. Q You've given me the very best estimate that you can? That's your testimony? A Well, it's all about probability. I think it's highly probable that their revenue fell into the range I gave you. Q Did you make any effort in 1996 to find out what Netscape's revenues actually were? A Personally? 159

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 2 3 4 5 6 7 8 9 had for that.

Q Either personally or through some of the many employees of Microsoft? A Oh, I'm sure there were people at Microsoft who looked at Netscape's revenues during that year. Q Did they communicate with you as to what those revenues were at all? A Among the thousands and thousands of e-mail messages I get, I'm sure there were some that certain periods of time information about

Q Did you request any information concerning Netscape's revenues in 1996? A I'm sure I was in meetings where the information was presented, but I don't think I was the one who specifically asked for the presentation. Q Whether you specifically asked for a presentation in a meeting or not, did you ask people to provide you with information concerning Netscape's revenues in 1996? A I may have asked some questions about their revenue. Q Do you recall doing that, sir? A No. Q Did you receive any answers to your 160

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

questions about Netscape's revenues? A Although I don't specifically recall it, I'm sure that in most cases I did. Q It would be usual within Microsoft that if you asked a question, you would receive an answer; is that fair, sir? A No. There's no -- there's lots of questions I ask I don't get answers to. But well over 50 percent I do. Q When you say that there are lots of questions that you ask people of Microsoft that you don't get answers to, do you mean you don't get any answer at all, they just ignore it? A That happens. Q Does it happen from people with a sustained career within your company, sir? A If they're busy enough on priorities that I set for them, then yes. Q You're the chief executive officer of Microsoft. Does Microsoft have a president? A Depends on the time period that you're asking about. Some time periods, yes; some time periods, no. Q Does it have one? 161

1

A

Today, yes.

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q Who is that? A Steven Ballmer. Q How long has Mr. Ballmer been president? A About 30 days. Q What was his position before that? A Executive vice president. Q How long had he held that position? A That's a good question. There's been an increase in the grand nature of titles over a period of time. Steve has been a very high level executive for a long time. But I don't think I came up with the use of the term "executive vice president" until something -- no -I'm not sure when I started using that term -- when we used that term for his position. Q Is it fair to say that Mr. Ballmer has been a very high executive, to use your phrase, within Microsoft for several years? A Yes. Q Did you ever ask Mr. Ballmer to provide you with information concerning Netscape's revenues? A No. I don't remember doing that. It would be a very unusual thing for me to ask Steve. 162

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

He's -- as we discussed, he's a fairly high level executive, so he doesn't generally go out and work on my behalf gathering numbers. Q Let me ask you to look at Exhibit 355 and, in particular, the second paragraph of the third page which reads, quote, "'Our business model works even if all Internet software is free,' close quote, says Mr. Gates. Quote, 'We are still selling operating systems,' close quote. Netscape, in contrast, is dependent on its Internet software for profits, he points out." You've testified as to the context in which this statement was made. Did you understand at the time that these words were used, that the publication of these words might well affect Netscape's business? MR. HEINER: Asked and answered. MR. BOIES: Don't think so. THE WITNESS: In this interview I was defending Microsoft in the work we were doing to the reporter. And she was the one who was bringing up Netscape in several of the questions. 163

1 2

The -- you know, the last part there doesn't even seem to be a quote, so I'm not sure what

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

3 I said, actually. 4 Q BY MR. BOIES: When you were talking to 5 the reporter you knew that it was likely that the 6 reporter would publish at least some of what you told 7 the reporter; correct, sir? 8 A Yes. 9 Q When you used the words with this reporter that are set forth here, did you understand that if those words were published it might well affect Netscape's business? A I've already testified I don't remember using those words. So trying to reconstruct my state of mind around using those words when I don't remember using those words is not going to be possible. Q Let me be sure I understand your testimony. It's your testimony that you do not remember making this statement to the reporter? That's your testimony? A That's right. Q Do you have any reason to doubt that you made this statement to the reporter? 164

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A Well, it seems like we're going over this again and again. I think there were a series of questions from her about -- you know, that Netscape -- that Microsoft might not have the future because of what was going on in the Internet. And although I don't remember my specific answer, I do remember her asking a lot of questions along those lines. Q My question now, sir, is not what the reporter asked you, my question is whether you have any reason to doubt that you said the words that the reporter attributes to you. A Do you mean the ones in quotes? Q Let's begin with the ones in quotes, sir. Do you have any doubt or any reason to doubt that you told this reporter in words or in substance that Microsoft's business model works even if all Internet software is free because you were still selling operating systems? A I don't remember saying that. Q Do you have any reason to doubt that you said that in words or in substance to this reporter in 1996? 165

1 2 3

A I'd want to go back and look at the transcript to find out if I did or not. Q My question is whether sitting here you

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

have any reason to doubt that you said these words. A I don't remember saying those words. Q I know that that's what you've said. Now I'm asking you a different question, which is whether you have any reason to doubt that you said these words. And if you don't understand the question, you can simply tell me you don't understand the question. A I'm not sure what my memory can hold except for knowing whether I remember if I said it or not. I don't remember not saying it. That's kind of unusual memory to have. But I think that's what you're saying: Is there a specific memory in my head when I go look up my memory where it says, "I never said these words." And I don't have a memory of that either. Q Do you have a memory of stating the substance of what is attributed to you even if you don't remember saying the exact words? A No. Q Do you have any reason to doubt that 166

1 you said the substance of what is attributed to you? 2 A I have no recollection of saying what 3 is in the substance of that quote. 4 Q Is what is in the substance of this 5 paragraph inconsistent with what you told people 6 publicly in 1996? 7 A I'm not sure what -- you're asking me 8 to recall everything I said during that year and 9 compare it for consistency with this particular sentence here? MR. BOIES: Move to strike the answer as nonresponsive. MR. HEINER: Well, I had an objection along the same lines. But I guess in this case the witness stated the objection. Vague and ambiguous. MR. BOIES: That's not a reason not to answer the question. MR. HEINER: No, that's fine. I'm just saying -THE WITNESS: And I did answer, which is -MR. BOIES: Read the question back, please. (The following question was read: 167

1 2 3 4

"Q Is what is in the substance of this paragraph inconsistent with what you told people publicly in 1996?")

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5 THE WITNESS: I think you're asking me 6 for -- to check for consistency with all the 7 statements I gave during that 12-month period, and 8 I'm not able to do that. 9 Q BY MR. BOIES: Is what is stated in this paragraph, the second paragraph on page 3 of Exhibit 355, consistent with what you said publicly in 1996? MR. HEINER: Objection. THE WITNESS: Well, you'd have to understand the context of what her question -- what she defined the word "Internet software" to be when she was asking these questions. And sitting here right now, I don't know when she was asking her questions how she defined "Internet software." I'm sure I would have asked her what she meant by it in order to respond. Q BY MR. BOIES: But you don't remember what you said; is that what your testimony is? A I don't remember what the -- in this context she had -- she had defined what the term 168

1 "Internet software" meant. 2 Q Is it your testimony that at the 3 present time you simply don't know what this 4 paragraph means, it's unclear to you? 5 A I think to understand -- to decide if 6 that sentence taken out of the context of the 7 interview, if it's -- to understand what it means you 8 have to decide what you mean by the term "Internet 9 software." So if you want to tell me a definition of "Internet software," then I can say to you, yes, this seems correct to me or, no, it doesn't seem correct to me. Q My question to you, sir is: As you sit here now, you don't have any knowledge of what is meant by the term "Internet software" in this quotation; is that what you're telling me? A I'm not sure what it was meant during -- what was meant by it during the interview. There are many definitions you could have for that term "Internet software." Q And as you look at this paragraph which says, quote, "'Our business model works even if all Internet software is free,' close quote, says 169

1 2 3 4 5

Mr. Gates. Quote, "'We are still selling operating systems,' close quote. Netscape, in contrast, is dependent on its Internet software for profits he points out."

6

Now, it's your testimony that in

that

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

7 context you do not know what is meant by "Internet 8 software"? 9 A Well, to give this statement internal consistency, it must have been in this interview I wasn't including operating systems in the term "Internet software," so the interviewer must have defined it that way, and I was including some products that Netscape was working on in that definition. Q Browsers perhaps, do you think? A Well, if you want to ask me about browser revenue, I'll be glad to. I can't comment on whether browse -- how browsers relate to this interview that I don't remember. I'll be glad to answer any question about browsers. Q Well, let me ask a question about browsers, sir. Do you have any doubt in your mind that the reference to Internet software in this paragraph 170

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

is a reference to browsers? A Internet software -- I can't think of a definition of it that would be specifically just browsers. Q Would it include browsers? A Most definitions of it would, yes. Q Would it be clear to you, sir, that the reference to Internet software here in this paragraph includes browsers? A Well, when you talk about browsers, you have to think of different revenue streams. And it's not clear if in this interview that distinction had been drawn between the different potential revenue streams generated by a browser. Q When you say "this interview," you mean the interview of you? A That's right. Q Right. Let me try to put my question in a way that maybe it will be more understandable. Is it clear to you from the context that's here that when a reference is made to Internet software, that reference includes browsers? A Well, outside of the quotes if you look what the author wrote, she seems to have a very broad 171

1 2 3 4 5

definition of "Internet software." She seems to be including electronic mail and groupware, perhaps even database -- looks like database is included in her definition. MR. BOIES: Move to strike the answer

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

6 as nonresponsive. 7 Q Mr. Gates, with respect to the 8 quotation that is attributed to you, do you have any 9 doubt that Internet software, as used there, includes browsers? A If the distinction had been made about the revenue streams, then, yes, it probably does. Q Probably does include browsers? A If the distinction had been made about the different revenue streams. Q If the distinction had been made in this interview of you you're saying? A That's right. Q And it's your testimony that you just don't remember whether or not that distinction was made? Is that your testimony? A That's right. Q Let me ask you to look at another exhibit, the one that I have just marked 364. (The document referred to was marked by 172

1 the court reporter as Government's Exhibit 364 for 2 identification and is attached hereto.) 3 Q BY MR. BOIES: Do you have Exhibit 364 4 in front of you, sir? 5 Exhibit 355 that we were just talking 6 about is a July 3, 1996 Financial Times article. 7 Exhibit 364 is a June 10, 1996 Financial Times 8 article. And I'd like you to look on the fourth 9 page, the first paragraph, and you can read as much of the document as you need to to put this in context. But the paragraph that I'm interested in is at the top of the page, and it says, quote, "'Our business model works even if all Internet software is free,' close quote, says Mr. Gates. Quote, 'We are still selling operating systems. What does Netscape's business model look like if that happens, not very good,'" close quote. Did you say those words to this reporter, Mr. Gates? A Well, just understand we're covering exactly the same ground. I didn't give two interviews. This is all the same reporter, the same 173

1 2 3 4 5 6

interview. So we can go through all of that exactly like we did. Louise Kehoe is Louise Kehoe, I gave one interview. Q Of course the June 10, 1996 article is written by two reporters; correct, sir? A And I've never met or given an

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

interview to Hugo Dixon as far as I can recall. Q Well, let's see if looking at this article in any way refreshes your recollection. Did you say to a Financial Times reporter in 1996, quote: "'Our business model works even if all Internet software is free. We are still selling operating systems. What does Netscape's business model look like if that happens? Not very good.'" Did you say those words -A I don't remember. Q -- to a Financial Times reporter, Mr. Gates? A I said I don't remember. Q Did you communicate the substance of those words to a Financial Times reporter in 1996? MR. HEINER: Asked and answered three 174

1 2 3 4 5 6 7 8 9 awfully

or four times just in the past 30 minutes. MR. BOIES: This is the first time that we've dealt with this paragraph or this statement. MR. HEINER: The testimony is that it's the same interview and the quotation's an exact quote from the other one. MR. BOIES: It's not an exact quote from the other one. MR. HEINER: Let's compare. They look close. MR. BOIES: They do look very close. And it seems, if you believe these reporters, to be saying very similar things. But they are not the same. THE WITNESS: Where do you see the difference? One just seems to have more words in it. Maybe my reading skills aren't working today. Q BY MR. BOIES: Well, one of things that is different is in the one we're looking at right now, Exhibit 364, it says as part of the quote, "'What does Netscape's business model look like if that happens? Not very good.'" That quotation wasn't in the prior article. Now, maybe you don't remember saying 175

1 2 3 4 5 6 7

that either, Mr. Gates, but I think your counsel will agree that I'm entitled to ask you whether you remember saying that. MR. HEINER: Well, the testimony was he doesn't remember saying these words in this interview. MR. BOIES: And what I then asked him

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

was whether he remembered communicating the substance of what is stated here. THE WITNESS: Even when you add the extra words on there in terms of my recollection of the specifics or the substance, I'd say the same thing I said before when we were talking about the same quote but without those extra words not included in this article. Q BY MR. BOIES: So your testimony today about the quotation in Exhibit 355 would be applicable to what is attributed to you in Exhibit 364 as well? A That's correct. Q Okay. Do you have any reason to believe that there would have been any reason for this reporter to have made up these quotations? A Didn't you already ask that? 176

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q I asked that with respect to the Business Week reporter. I'm now asking it with respect to The Financial Times reporter. A Same answer. Q You do have to give it for the record, sir. What I'm asking you is whether you have any reason to believe that The Financial Times reporter would have made up or had any reason to make up the quotations that are attributed to you here. A I don't think they're infallible, but I have no reason to suspect in this case that they made it up. Q Okay. Without regard to any particular article, in 1996 did you tell people publicly that Microsoft would do fine if Internet software or browsers were free but that Netscape would not do fine if Internet software or browsers were free? A What do you mean by "Internet software"? Q What I mean is what you refer to as Internet software in these various quotations. A I'm afraid we're not going to be able to know what my state of mind was when I gave that interview. If you want to define it, I'll be glad to 177

1 2 3 4 5 6 7 8

answer the question. Q Do I take it that your testimony is that you simply have no recollection whatsoever as to what you meant by these words in 1996? A No. It wasn't what I meant. I responded to a reporter's question, and I've already said to you that she must have given me a reason to understand what she meant in her questions in order

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

for me to be able to answer them. Q Do you remember asking her what she meant by those terms? A I feel pretty sure I wouldn't have used the term unless there was some understanding of what she understood the term to mean. Q Why is that, sir? A I'm just saying it's not typical for me to use a term with a reporter where it's a very open unended term that can be used in a lot of different ways without any understanding between myself and the reporter of -- in that context, in that series of questions, what's being referred to. Q Well, I'd like to draw a distinction, if I could, between having any understanding at all, which could come from a variety of sources, and asking the reporter for a definition. 178

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Did you ask the reporter for a definition of what was meant by "Internet software"? A All I can say, not recalling the specifics in the interview, is that it's very unlikely I would make a statement like that without some common understanding between myself and the reporter of what that term, which out of context is incredibly ambiguous, what it meant in the context of her series of questions. Q And just to be sure I understand it. What you're saying is that you don't remember what the definition was and you don't even remember that there was a definition, but you believe there must have been a definition or you wouldn't have been using these words. Is that fair? A There must have been a common understanding, I wouldn't say a definition. Q How would that common understanding have been arrived at other than through a definition? A Well, somebody can give examples. I'm just saying it doesn't have to be a formal definition for two people to have a context in a conversation of what a word means. That is neither one has to say, "I define the word as follows." So maybe I 179

1 2 3 4 5 6 7 8 9

interpreted your use of the word "definition" too strictly. Q Okay. A So if you define "definition" for this conversation in a loose way, then I'll understand what you mean. Q That is, what you need in order to understand the question is to have me define what is meant by "definition"?

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A At least loosely. Q What I mean by definition is what you meant by definition when you said that you wouldn't have answered this question unless you had a definition of the word. A "Common understanding" -- I used the word "common understanding," and I'll stick with that. Q In 1996 was there a common understanding of what was meant by "Internet software"? A In a context-free sense, absolutely not. Q Was there a common understanding of what was meant by an Internet browser? A The whole notion of what the browser -180

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10

what features it would contain or what it would mean or all that was very uncertain in 1996. Q Let me ask you a different question. Do you believe that the publication of this article and, in particular, the publication of a statement attributed to you, whether accurately attributed to you or not, that quote, "'Our business model works even if all Internet software is free,' close quote, says Mr. Gates. Quote, 'We are still selling operating systems. What does Netscape's business model look like if that happens? Not very good," close quote. Do you believe that the publication of that statement affected Netscape? A I know when people have been quoted in the press, competitors, saying how -- what trouble Microsoft is in and how much better their products are, that it's rarely had a direct effect on our business. I think somehow people rely on more analytical observers. MR. BOIES: I'll move to strike the answer as nonresponsive. 181

1 Would you read the question again, 2 please? 3 (The following question was read: 4 "Q Do you believe that the 5 publication of that statement 6 affected Netscape?") 7 THE WITNESS: What do you mean 8 "affected Netscape"? 9 Q BY MR. BOIES: Are you telling me that you don't understand the question, sir?

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A Q

Yes, that's what I'm saying to you. Okay. By "affected Netscape," I mean adversely affected Netscape. A Like hurt their feelings, somebody cried, or somebody in reading the article smiled? Q Are you saying that you don't understand what I mean by "adversely affected Netscape"? A No, I don't know what your criteria is. I think it's likely somebody may have read it and disagreed with it. Q Do you think it adversely affected Netscape's business prospects? A I think the general work that we were 182

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11

doing to do strong Internet software had an effect on Netscape, but I don't think quotations like that had any direct effect. Q Now, you putting in the word "direct effect," and I know that you're a very precise person from the statement you've already made today. So I'm going to ask you what you mean by the use of the word "direct" there that you put in the answer that wasn't in the question. What do you mean by "direct"? A Well, I said earlier that there are analytical observers like analysts, and they tend to look at technology companies and deliver pronouncements about them. And, you know, some of them will be positive about a company, and some will be negative about a company. It's possible in looking at the general activities of Microsoft, one of those analysts formed a certain conclusion about Netscape and published that conclusion and that that might have had an effect. And so you could say that analysts may have had an effect. And analysts look at what Microsoft does, primarily in the products, not as much what we say is what we do in shipping our products. Q What I'm asking you about, of course, right now is the effect of what you were saying or 183

1 what was attributed to you. And I do want to come to 2 the effect that your products had on Netscape as 3 well. But right now I want to talk about the effect 4 of what was attributed to you. 5 And what I'm asking you is whether you 6 believe that the publication of statements like this 7 attributed to you adversely affected Netscape's 8 business prospects. 9 A I'm not aware of any specific effect. And my general experience is that when competitors have made statements about us, that doesn't have an

12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12

effect, rather that the people who do analysis or the actual products get shipped are what cause effects on our business. Q Do you think that the effect on Microsoft's business of competitors saying things about Microsoft is comparable to the effect on Netscape's business of Microsoft saying things like this about Netscape? A Are we now talking about what was published or what was said? Q Well, we're talking about what was published here. A Okay. Well, then, stick to that. Q That's what I am, sir, because I 184

1 understand that your testimony is that you just don't 2 remember saying any of these quotations that these 3 publications have attributed to you. 4 A No. 5 Q That's why I'm asking about what is 6 written here because there's no doubt -- you have no 7 doubt that this was actually published, do you, sir? 8 A I believe it was published. 9 Q Okay. So at least we know that The Financial Times published, quote, "'Our business model works even if all Internet software is free,' close quote, says Mr. Gates. Quote, 'We are still selling operating systems. What does Netscape's business model look like if that happens? Not very good,'" close quote. Now, I asked you whether you thought that the publication of that adversely affected Netscape's business prospects. And you then gave me an answer that talked about the effect on Microsoft of criticism of Microsoft. Do you recall that? A Well, that wasn't all that I said. We 185

1 can read back what I said. 2 Q If you would like to have it read back, 3 it's okay with me. I don't need to have it read 4 back. But if -- I've got as much time as I need to 5 finish the examination, sir, and I'm prepared to 6 spend as many days here as I have to to do that. I 7 think the record is quite clear as to what your 8 answer was, and I think it is quite clear that you 9 kept going back to Microsoft's experience, and that's the only point I'm trying to get you to focus on. Now, do you recall that enough to answer the question, or do we need to go back?

13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13

Either way's okay with me. A Go ahead and ask a question, and then I'll decide. Q Do you think -- because you're the one that brought up the effect on Microsoft criticism. Do you think that the effect on Microsoft of criticism of it is comparable to the effect on Netscape of a publication of statements attributed to you like, quote, "'Our business model works even if all Internet software is free,' close quote, says Mr. Gates. Quote, 'We are still selling 186

1 operating systems. What does 2 Netscape's business model look like 3 if that happens? Not very good,'" 4 close quote. 5 A So you're supposing a case where I 6 personally criticized Microsoft? 7 Q I'm not supposing anything at all, sir. 8 A That's what you suggested. 9 Q No. Sir, let me try to be clear. And perhaps I'm not being clear. A Who's doing the criticism in your hypothetical? Q Well, I think the only person that has mentioned the word "criticism" today is you; that I think it came out of your answer when you were talking about criticism of Microsoft. Now, if I've misremembered your testimony about that, I will stand corrected by the record. But my recollection is that I asked you whether you thought the publication of statements like this would adversely affect Netscape's business prospects. And my recollection is that you gave me an answer, a substantial portion of which included a statement that it had been your experience that criticism of Microsoft didn't really affect your 187

1 business. 2 A No, I didn't say that. I said 3 statements by competitors, whether critical or 4 otherwise, I didn't think explained what happened to 5 our business but, rather, other factors could explain 6 what happened to our business. 7 Q Okay. Let me use "statements." And if 8 I misremembered the word "criticism," I apologize. 9 Do you think that the effect on Microsoft's business of statements about Microsoft by its competitors is comparable to the effect on Netscape's business of the publication of statements like, quote,

14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

"'Our business model works even if all Internet software is free,' close quote, says Mr. Gates. Quote, 'We are still selling operating systems. What does Netscape's business model look like if that happens? Not very good,'" close quote. MR. NEUKOM: If you read that one more time -- that's seven times. Come on. MR. BOIES: I wish this question had been answered simply. I think it could have been. 188

1 THE WITNESS: I gave you a very simple 2 answer that I was not aware of any effect on their 3 business by the publication. 4 Q BY MR. BOIES: And that may have 5 answered my question, sir. But because I know that 6 you're a person that uses words very precisely, I 7 need to be sure that we haven't missed something 8 between the question and the answer. My question was 9 whether you believed that this publication affected Netscape's business prospects. You said you didn't know of any effect. And I just wanted to be sure that your answer was meant to apply to the full breadth of my question. A The full breadth of your question? Q Yes, sir. And if that's confusing to you, as I say, I will put the question as many times as I need to to be sure that I get it clear to you. My question -- and unfortunately, I'm going to have to quote it again. MR. HEINER: There's no need. There's really no need. Q BY MR. BOIES: But my question, sir, is whether you believe that the publication of statements like the statement in The Financial Times that, quote, "'Our business model works even if all 189

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Internet software it free,' close quote, says Mr. Gates. Quote, 'We are still selling operating systems. What does Netscape's business model look like if that happens? Not very good,'" close quote, adversely affects Netscape's business prospects. A I told you, I'm not aware of any effects on Netscape by the publication of that statement. Q Have you finished your answer? A Yes. Q Do you believe that the publication of that statement adversely affects Netscape's business prospects, whether you are aware of precisely what those effects are or not?

15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15

A Well, I'm not absolutely sure, but I did explain to you that in the analogous situation the effect has not come from that but from other factors. Q And what is the analogous situation that you refer to? A Statements by competitors about Microsoft. Q And do you believe that statements by competitors about Microsoft are analogous in terms of their effect on Microsoft to statements like this 190

1 about Netscape? 2 A I'm not absolutely sure what you mean 3 by "like this," but in general, yes. 4 Q By "like this" I mean the quotation in 5 The Financial Times article. 6 A I don't know what it means to be "like" 7 that. 8 Q Is that because you don't understand 9 the word "like" or because you don't understand what it means to be like something? A Neither. Q What is it then? A I stated in quite a broad way that statements by competitors about us have not been a factor to explain future developments in our business prospect, but rather other factors explain any changes in our business prospects. And I'll say that broadly about competitive statements by competitors. Q Statements by competitors about Microsoft? A That's right. Q Now, what I'm asking about is not statements about Microsoft by competitors. But I'm asking about statements about Netscape. And the question that I most recently asked that I thought 191

1 was simpler than it is turning out to be is whether 2 you believed that statements about Microsoft by its 3 competitors would have an analogous effect on 4 Microsoft to statements like the one published in The 5 Financial Times in 1996 in June that we've been 6 looking at. 7 MR. HEINER: Object to the question. 8 It's just hopelessly vague and ambiguous. 9 Are you referring to other kinds of statements? MR. BOIES: Okay. I'll go back. I was trying to avoid quoting the darn thing again. But if I have to be precise, I'll be precise. MR. HEINER: Mr. Boies, it's the other side of the quote. It's the other kinds of quotes

16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16

about other companies. MR. BOIES: Okay. Let me try to put it as precisely as I can. MR. HEINER: Before you do the recitation, I would just like to say that we're ready for a break when you come to a logical stopping point. I'm not sure there will be a logical stopping point any time soon since it's been two hours on this point. MR. BOIES: I don't know if it's been 192

1 two hours. I just started 50 minutes ago. 2 MR. HEINER: No. But I'm including 3 Mr. Houck's segment. 4 MR. BOIES: Let me see if I can bring 5 it to a close because I don't think this should be as 6 difficult as it appears to have become. And let me 7 see if I can identify what I think we're in agreement 8 on. 9 Q This statement was published in The Financial Times; correct? A I think it was. Q You have said that statements that have been published about Microsoft by its competitors do not, in your view, adversely affect Microsoft's business; correct? A Yeah. I've said that other factors like what happens with products or other observers less directly involved in my view explain whatever change in our business prospects happen. Q Now, my question is whether you believe that that is true for Netscape as well; that is, that statements about Netscape by its competitors, including Microsoft, do not affect Netscape's business prospects. A Well, I think it's pretty hard -- you 193

1 know, you don't have a world where you can say hold 2 everything else the same: the analysts' comments, 3 what happens with products and just take out one 4 thing. So your whole notion here that I'm supposed 5 to ascribe to you as certain cause-and-effect 6 relationships is really quite absurd. 7 Q Well, let me ask you a question, 8 Mr. Gates: Do you have any doubt that the 9 publication of this statement attributed to you in The Financial Times adversely affected Netscape's business prospects? A In the world I live in people look to unbiased observers to judge things about products and financial prospects and things of that nature. But we're not going to be able to run the experiment of keeping everything the same and having the world with

17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17

some statement and the world without some statement and determine the ultimate cause and effect. Q Would you read the question back, please. (The following question was read: "Q Do you have any doubt that the publication of this statement attributed to you in The Financial Times adversely affected 194

1 Netscape's business prospects?") 2 Q BY MR. BOIES: May I have an answer to 3 that question, please, sir? 4 A I told you before I'm not aware of any 5 effect on Netscape's business prospects by that 6 statement. 7 Q My question right now is whether you 8 have any doubt that there were such effects; that is, 9 do you have any doubt that regardless of whether you can identify them as you sit here now and tell me what they are, do you have any doubt that your being said to have said these words hurt Netscape's business prospects? A I think while we can't run the experiment that held everything else the same, that is, the comments of analysts, the quality of the products, all those things going on, and didn't have that comment published, that their business prospects would have been the same. That's my belief, but we don't get to run that experiment. Q Do you believe that the publication of statements like this by you or statements like this attributed to you affected what analysts wrote about Netscape? A Analysts do their own thinking and come 195

1 to their own conclusions. They might look at 2 statements in order to consider various hypotheses. 3 But they're particularly good at ignoring statements 4 made about one company who's competing with another 5 company. 6 Q Does that mean that it's your testimony 7 that you believe that analysts analyzing Netscape 8 would have ignored this statement attributed to you? 9 A No. I didn't say that. I said it might get them to consider. I said the opposite. In fact, I said it might get to consider certain hypotheses, but they would do their own thinking and come to their own conclusions based on factors completely independent of that. They're in the business of talking about objective analysis. Q Is one of the objective analysis that they're in the prospect or business of doing -- is

18 19 20 21 22 23 24 25

figuring out what the effect on Netscape is going to be if certain actions that Microsoft takes? A A financial analyst who's assigned to Netscape would have that as one of the things they would do. Q And did you in 1996 make a conscious effort to try to affect what financial analysts analyzing Netscape did and thought? 196

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18

A I personally didn't, no. Q Did Microsoft? A Microsoft, I'm sure, made analysts aware of what we were doing with our products including the innovative work we were doing. And I'm sure that had an effect. Q Did you or others at Microsoft, to your knowledge, do things with the purpose of affecting what analysts analyzing Netscape wrote or thought? A Well, our primary focus is going out and talking about our products and what they do for customers. If the customer or the analyst asks us a question about Netscape or asks for a comparison, it's not unusual to give them an answer. Q Did you or, to your knowledge, others at Microsoft do things for the purpose of affecting what analysts analyzing Netscape wrote or thought? A We certainly let people know about the good work we were doing. The primary purpose of that wasn't to affect Netscape, but certainly one of its effects would have been to affect how they viewed the competition between Microsoft and Netscape. Q In addition to talking about your good works, was one of the purposes of talking about giving away Internet software for free to affect the 197

1 way analysts looked at Netscape? 2 A Well, I doubt you can ascribe too much 3 effect purely to the talking about it. 4 Q I would certainly agree that the fact 5 that you did it and talked about it was a lot more 6 effective than just talking about it. But right now 7 I am focusing on the talking about it. 8 A That's again one of these experiments 9 we can't run where you say what if we refuse to answer all questions about Netscape but we did what we did. My view is that the work and the products and everything, that the talking is not the key element in how our business prospects or other people's involved. Q Now, you knew that giving it away for free was going to adversely affect Netscape's business, didn't you? MR. HEINER: Objection. Objection.

19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19

THE WITNESS: Well, what are you talking about? Is there -- have you got some antecedent to the word "it"? Q BY MR. BOIES: Is the question unclear to you, sir? A Yes, sir. You never defined what you're talking about. 198

1 Q Okay. If the question is unclear to 2 you, I think that's an answer that I would just as 3 soon have the record have. 4 MR. HEINER: Which it does. Is this a 5 logical stopping point? I objected on that basis, he 6 objected on that basis. So it's crystal clear that 7 the question was unclear because the word "it" was 8 not defined. 9 MR. BOIES: I think what "it" is is pretty well-defined in this litigation. I think the witness knows perfectly well what "it" is. MR. HEINER: No. I would not let a witness answer that question under any circumstances. MR. BOIES: Okay. Q Do you think, Mr. Gates, that Microsoft's giving away of its Internet Explorer browser for free adversely affected Netscape's business? MR. HEINER: Objection. Lack of foundation. THE WITNESS: Well, as I've said earlier, we don't give away all the aspects of the browser. We do let Windows users have the browsing functionality as part of Windows. But we derive significant revenue from things like the Search 199

1 button and the Home Page. 2 Q BY MR. BOIES: Have you told people 3 that Microsoft was going to give the browser away for 4 free and that indeed it would be forever free? 5 A I said that it would be a feature of 6 Windows and available to people who used Windows. In 7 that sense, yes. 8 Q Well, you may have said that. But what 9 I'm now asking you about is whether you also said that Microsoft was going to give the browser away for free and that it would be forever free. Did you say that, sir? A When I was talking about Windows and the future of Windows, I did say that was one of the features that would come in Windows at no extra charge and that it wouldn't become an extra charge feature. Q You may very well have said that, and I accept that you said that. But my question to you,

20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20

sir, is whether you said that Microsoft was going to give the browser away for free and it would be forever free. Did you say that, sir? MR. HEINER: Asked and answered. THE WITNESS: I don't know why -- what 200

1 distinction you're drawing. 2 Q BY MR. BOIES: I'm talking about the 3 statement. 4 A The word "the browser" when I talked 5 about it being free and forever free was talking 6 about the browser functionality of Windows. 7 Q Okay. 8 But when you talked about it, you used 9 the word "browser" not "browser functionality"; correct, sir? A I don't remember the exact words. It's very possible I used that shorthand. Q And you talked about the browser being forever free, did you not, sir? A Are you asking me about exact words? Q Yes. I'm asking you about the exact words. A Or are you asking me to explain what I said? Q I'm asking you about the exact words. Did you say the exact words that the browser was going to be forever free? A If you're asking me about exact words, I don't recall the exact words that were used. Q Is it your testimony that you do not, 201

1 as you sit here now, recall saying that the browser 2 would be forever free? 3 A Those exact words? 4 Q Those exact words. 5 A I would want to see the context and be 6 reminded about that. I don't remember using those 7 exact words. 8 Q Okay. 9 Do you remember using the words "forever free," those exact words? A Those two words? Q Yes. A I'm sure I used those before I was five years old. Q Really? With respect to what? A Forever free. I wanted to be forever free. Q All right. Did you ever use those with respect to the browser?

21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A If you're asking is there a sentence that if you did a string search would have exactly those words in it, I'm not sure. I did say that we would keep -- I did deliver that intent; that is, that the browsing functionality in Windows was not 202

1 something that we intended at some time in the future 2 to charge extra for. 3 Q And what you're telling me is you don't 4 remember whether you just used the words "forever 5 free"? That's what you're saying? 6 A I may have. 7 Q You may have? 8 A The general notion of the Windows 9 browser functionality staying free in the future was certainly communicated by me. Q Okay. Thank you. MR. HEINER: Let's take a break. THE VIDEOGRAPHER: The time is 4:07. We're going off the record. This is the end of Tape 3 of the videotaped deposition of Bill Gates. (Recess.) THE VIDEOGRAPHER: The time is 4:22. We're going back on the record. This is Tape 4 of the videotaped deposition of Bill Gates. Q BY MR. BOIES: Mr. Gates, before the break we were talking about certain statements attributed to you in Exhibits 355, 356, and 364. Did you ever contact any of the publications involved with those exhibits and complain that they had misquoted you in any way? 203

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

A Q

You mean the two quotes? Well, I'm actually talking about three

A

No.

quotes. One is a pure subset of the other;

right?

Q Well, you obviously have a precise view of what you mean by "subset." But let me be absolutely clear of what I'm talking about, okay? And let me go through it chronologically. A Do you want to read it again? Q On June 10, 1996, in a document that had been marked as Exhibit 364, The Financial Times attributed to you a quotation, quote, "'Our business model works even if all Internet software is free,' close quote, says Mr. Gates. 'We're still selling operating systems. What does Netscape's business model look like if that happens? Not very good,'" close quote.

22 23 24 25

Did you ever contact either the reporter for The Financial Times who interviewed you or The Financial Times to assert that they had misquoted you in any way? 204

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22

A No. Q On July 3, 1996 The Financial Times published what I think you refer to as a subset of that quote: Quote, "'Our business model works even if all Internet software is free,' close quote, says Mr. Gates. Quote, 'We are still selling operating systems,'" close quote. And then added not in quotes the statement, "Netscape in contrast is dependent on its Internet software for profits he points out." Did you ever contact either the reporter or The Financial Times to assert that either they had misquoted you or that the textural assertion about what you said was inaccurate in any way? A No. Q The third is Exhibit 356, which is a Business Week publication dated July 15, 1996, that includes the statement, quote, "'One thing to remember about Microsoft,' close quote, says Chairman William H. Gates III, quote, 'We don't need to make any revenue 205

1 2 3 4 5 6 7 8 9 posed a

from Internet software,'" close quote. Did you ever contact either the reporter, who I recognize you say did not interview you, or Business Week to assert that that quote was in any way inaccurate? A Well, I told you I've never talked to that reporter nor did I contact Business Week. Q In 1996 did you believe that Netscape serious threat to Microsoft? A They were one of our competitors. Q Were they a serious competitor in your view, sir? A Yes. Q Did you believe that Netscape's browser was a serious threat to your -- that is Microsoft's -- operating system's business? A Well, you have to think about what work we were going to do to improve our software and then what Netscape and others were going to do to improve their software. You can't just look at it statically. It's more the work than -- the new

23 24 25

things you do than the history. Q Did you believe that by 1996, that Netscape and Netscape's Internet browser was a 206

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

serious alternative platform to the platform represented by Microsoft's Windows operating system? A Well, as was articulated by Marc Andreessen and other people from Netscape, if we didn't do new product work, that was a very likely outcome. Q What was a very likely outcome? A That the value of the Windows platform would be greatly reduced. Q Did you believe that it was in Microsoft's interest to convince financial analysts that Netscape was not going to be financially viable? A I never had a goal to do that, and my only comments about Netscape's business would have come in response to direct questions about that topic from reporters. Q Well, let me ask you to look at what has been previously marked as Exhibit 354, which is a memorandum from you in May of 1996. And the last paragraph begins, quote, "At some point financial minded analysts will begin to consider how much of a revenue stream Netscape will be able to generate," close quote. 207

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Why was that important to you in this internal memorandum which, obviously, is not something which you're merely responding to a reporter's inquiry, but it is something that is involved in your internal deliberations within Microsoft. A Who said it was important? It doesn't say -- I mean, it's one of many sentences in the memo. Q Is it your testimony that this is an unimportant sentence, sir? A I don't think it's any more important than any of the other sentences in here. Q Is it any less important that any of the other sentences? A Yeah. It's not germane to the primary topic of the memo. Q If it wasn't germane to the primary topic of the memo and if it wasn't particularly important, why did you include it, Mr. Gates? A It's merely an observation that I put into this rather extensive memo that talks about our plans in doing innovative products, and it's tacked

24 25

on as the last paragraph. And you didn't read the whole paragraph, but it says "at some point." So it 208

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

seems to be a prediction about that. Q Yes, I agree, it seems to be a prediction. And I think I did read the "at some point." But my point to you is this is a memorandum that you were sending to a number of the top executives of Microsoft; correct, sir? A All product people. Q Well, let's see. We have Mr. Ballmer. A It's not to him. Q He's getting a copy? A That's right. Q Okay. And what was Mr. Ballmer's position in May of 1996? A Executive vice president. Q How many executive vice presidents did Microsoft have at that time? A One, two, three, four. Q And who were the others? A Bob Herbold, Pete Higgins and Paul Maritz -- no, no, no. Maybe -- no, I think it's just four. Q So that this memorandum went to all four of the executive vice presidents; correct, sir? 209

1 A It went to Paul Maritz. It was copied 2 to the other people there. 3 Q It was either addressed or copied to 4 all four of the executive vice presidents? 5 A They're among the recipients, yes. 6 Q Let's go through who the other 7 recipients are. 8 It is addressed to executive vice 9 president Paul Maritz. And below you at this time was executive vice president the highest position in the company? A Yes. Q And beneath executive vice presidents, what was the next level? A Senior vice presidents. Q And how many senior vice presidents were there? A I couldn't tell you. I could -- we could do the range thing if you want. Q Okay. That would be good. A About three to nine. Q Okay. Can you be any more -A I'd say six to nine.

25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q

Let's go through the people who 210

1 got this memo. It's addressed to executive vice 2 president Paul Maritz. 3 A Actually, his name is misspelled, but 4 yes. 5 Q What was Brad Silverberg's position? 6 A I think he was a senior vice president, 7 but he worked for Paul and did a lot of the 8 development of software that went into Windows. 9 Q And he was one of the addressees of this memo? A That's right. It goes Maritz, and then he's the second person on the "To" line. Q And the third person to whom it's addressed is Jim Allchin; is that correct? A That's right. Q What was his position? A Senior vice president of the core Windows development. Q And the next person to whom it's addressed is Brad Chase. And what is his position? A At that time or at this time? Q At that time. A At that time he worked for Brad Silverberg managing our relationships with ISVs broadly defined and some of the marketing activities. 211

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Okay.

Q Did he have a position like vice president? A Oh, I'm sorry. He was a vice president. Q The next person to whom it's addressed is Rich Tong. A He was a vice president with an analogous person to Brad Chase but working for Jim Allchin. Q And the next person is John Ludwig. A He was a -- I'm pretty sure he was a vice president at this time working for Brad Silverberg. Q Now, copies of the memo go to executive vice presidents Ballmer, Herbold and Higgins; is that correct? A If I've got those titles right. Actually, now that I think about it, I think Paul and Pete were actually called group vice presidents. And -- yeah, they're called group vice presidents, which maybe nobody but me knows this, but actually numerically that's one number lower than executive vice president. Q Okay. We'll keep this highly confidential.

212

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

And then it goes to a variety of other people that, I assume, hold at least in the main significant positions in the company; is that fair? A No. Q Okay. Then let's go through them. The copies are Steve Ballmer, he was an executive vice president? A Yeah. If you want, I'll just go through it. Q Okay. That would be great. A Herbold, executive vice president; Jeff Raikes, senior vice president of -- involved in U.S. activities working for Steve; Bernard, who at the time ran some of the sales in Europe working for Steve; Joachim -Q And if you could just give his title? A Bernard actually had an exciting title. He was the chairman of Europe and also senior vice president. But he liked -- on his card he carried the one that said Chairman of Europe. Joachim Kempin, senior vice president; Pete Higgins, group vice president; Nathan -Nathan's also a group vice president at this time, I think. Aaron is a -Q You need to give the full name just for 213

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

the record. A I'm sorry. Aaron Contorer is an assistant; Steve Sinofsky was an assistant. Actually, I don't know which of those was an assistant working for me at the time. And Ben Slivka and Chris Jones were two developers. Q When you say they were assistants, they were assistants to you? A Yeah. Q Is it fair to say that you meant this memorandum to be taken seriously by the people to whom it was sent? A No more seriously than other e-mail and memorandums I sent them, but yes, seriously. Q Well, now, again, because I know that you're very precise in your use of words, you've drawn distinctions before between e-mails and memoranda; correct, sir? A That's right. Q If fact, you did so today several times when you were being questioned; correct, sir? A I drew a distinction between e-mail being called memoranda. Q You didn't like e-mails being called memoranda because you thought e-mails didn't rise to 214

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

the level of memoranda; is that right? A I didn't suggest a hierarchy, I just suggested a distinction. Q Is there a hierarchy in your mind? A No. But there's a distinction. Q Are memoranda more formal and more serious than e-mails? A No. I'd say they're longer and more thoughtful than most e-mail. Q Now, what we're looking at here is one of the longer more thoughtful documents, that is, a memorandum; correct? A Right. Q And in that longer more thoughtful memorandum in the final paragraph you write, "At some point financial minded analysts will begin to consider how much of a revenue stream Netscape will be able to generate." Now, what was the significance of that to you at the time, sir? A It was a fact that I stated in the memo. Q Well, it clearly is a fact that you state in the memo. But my question to you, sir, is: 215

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

What was the significance to you of that fact? A I'm not sure what you mean by that. Q In 1996 at the time that you wrote this memorandum, what was the significance to you of the fact that, quote, "At some point financial minded analysts will begin to consider how much of a revenue stream Netscape will be able to generate"? A I think it must have referred to the fact that Netscape was at this point a public company. Q And can you explain what you mean by that? A Well, usually you don't have financial analysts for private companies. Q I'm not sure I understand your answer. In this memorandum you say, "At some point financial minded analysts will begin to consider how much of a revenue stream Netscape will be able to generate." What is the significance of that fact to you, or what was the significance of that fact to you in 1996? 216

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A Well, I can't reconstruct my state of mind in 1996. But I think it's a fact of almost no significance at all. Q Why would you have put a fact that you say has no significance at all? A I didn't say that. Q What did you say? A I said almost. Q Almost no significance at all. Why would you put a fact that, according to you, had almost no significance at all in what you have described as this longer, more thoughtful memorandum to what looks to me to be like most of the very top executives of your company? A I wrote a memo about our products and some of the good things we were doing in our products. I think you can point to a lot of different sentences in here and try and drill in on it and overstate its -- the significance of an individual sentence. Q And I am, as you say, I'm drilling in on this particular sentence. But what I'm asking you is if this particular sentence has, as you put it, almost no significance at all, why would you put it in this memorandum that you describe as one of the 217

1 longer, more thoughtful type of communications within 2 your company addressed to the very top executives of 3 your company? 4 A I write lots of things that we would 5 call memoranda. And I'm sure we can pick a lot of 6 sentences in a lot of my memoranda, and you can say 7 to me, "Isn't it awful that that sentence doesn't 8 have more significance," and I'll say, "Fine. 9 That -- you know, I don't require that every sentence in every memoranda I write have deep significance." Q Does that complete your answer to my question? A Yes. Q In 1996, regardless of what significance you attribute to this particular sentence, was it significant to you how financial analysts viewed Netscape? A Well, the thing -- that's not what we thought about when we thought about the competition with Netscape or the emerging demands for Internet capabilities coming from our customers. Q My question to you, sir, was: Did it matter to you what financial analysts thought of Netscape? A I'm sure there were people here who 218

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 read what the financial analysts wrote, or some of 2 them, in order to learn more about Netscape. 3 Q Yes. I will accept that that is so. 4 A So we would learn from them. 5 Q Was it significant to you what they 6 thought not for the purpose of learning things from 7 them, but was it significant to you what they thought 8 about Netscape? And just to be clear, because I know 9 you're very precise with words, was it significant to you what financial analysts thought about Netscape? A Well, I'd say the thing -- I'd say if we're trying to say what is -- rank things in terms of significance, I'd say that would be about the most insignificant thing I can think of. Q Did you ever tell anybody within Microsoft that you thought it was important what financial analysts thought about Netscape? A No. I don't think I've ever said anything like that. Q Not in words or in substance? A Well, you keep trying to draw the distinction. I did think it was important for us to learn about Netscape from different sources, and analysts would have been one of those sources. And somehow you've -- you've thrown that away, the fact 219

1 that that was a source of learning. 2 Q I didn't mean to throw it away. I'm 3 simply focusing on a different issue. 4 A How can you separate out the two 5 issues? 6 Q Let me try to be clear. Perhaps my 7 question has not been clear, and I need to be clearer 8 about it. 9 In 1996, did you want, desire, financial analysts to have a poor or pessimistic or negative view about Netscape? A Well, as we, during 1996, were improving our product and demoing our products and talking about what we thought customers were interested in, there were several elements of feedback that we'd get including what customers were saying about our Internet strategy and our Internet products, and the analysts, likewise, were a form of feedback. And so they were saying -- or customers were saying, jeez, we think your efforts aren't what customers want and we think Netscape or some other company has a strong strategy that matches what they want, that would be a piece of feedback to us to go back and work on aspects of our software products. So in that sense we were interested 220

1

because it might help us see where we were in terms

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

of meeting those customer needs. Q Let me try again. My question does not relate to what you wanted to learn from financial analysts, my question is whether you wanted to affect what financial analysts thought to make financial analysts think in a negative or pessimistic way about Netscape. Did you want that, sir, in 1996? A Well, in order to get feedback from customers and analysts, we would show them our products, demonstrate them or show the ones we were shipping. And we felt, you know, showing customers or demonstrating what we were doing to them or analysts was a valuable way to benchmark where we were. And so if their response was, "Wow, that's so incredible, that's the best thing I've seen," then that was a valuable piece of feedback. Or if they said, "That's quite inferior," that was a valuable piece of feedback. And so in that sense it was useful. Q Let me try to see if I can clarify my question because I may not be being clear. First, I'm not talking about customers now, I'm talking about financial analysts. Second, 221

1 I'm not talking about your desire to get feedback 2 about your products. What I'm talking about is 3 whether you wanted to make financial analysts feel 4 negative or pessimistic about Netscape's business 5 prospects. 6 Did you want that in 1996? 7 A I don't have any control over what 8 analysts think. As far as I know, they -- they take 9 the facts about the products and they go out and talk to customers and look at what's going on in order to form their opinions. So it seems like a really bizarre question. They do their own thinking and form their own opinion. They might meet with Microsoft to get our view on what we're doing in products and how customers are responding to that. I personally basically don't meet with financial analysts or talk with financial analysts with the sole exception of the once-a-year analysts day that Microsoft has had. Q My question, sir, is what you wanted to accomplish with financial analysts. It's not about whether you did it personally or whether Microsoft did it with somebody else. It is what you wanted to accomplish. And what I'm asking you is: Did you 222

1 2

want to bring about a state of affairs where financial analysts developed a negative or

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

pessimistic view about Netscape's business prospects? A Our focus was doing great software products. And that focus might have had the indirect effect of influencing those people's opinion. But our focus was building those products and getting feedback to guide us in doing a good job in building those products. Q Now, my question now is not about what your focus was and it's not about indirect effects, it is about what you wanted, it is about your intent, it is about what you were trying to accomplish. Were you in 1996 trying to get financial analysts to develop a more negative and more pessimistic view about Netscape's business prospects? A Except through the indirect effect of them seeing how customers received our products and our product strategies, that was not a goal. Q If that was not a goal, sir, why did you say in substance that the Internet browser would be forever free? A That was a statement made so that customers could understand what our intent was in 223

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

terms of that set of technologies and how it would be a part of Windows and not an extra cost item, and so people would have that information in making their decisions about working with us on Windows. Q Now, is it your testimony that when Microsoft told the world that its browser would be forever free, that the desire to affect financial analysts' view of Netscape played no role in that decision? A I can be very clear with you. The reason we told people that it would be forever free was because that was the truth. That's why we told them that, because it was the truth. Q Now, Mr. Gates, my question to you -A That's the sole reason we told them. Q And my question to you is whether or not the truth was, in part, due to your desire to adversely affect financial analysts' view of Netscape. Did that play any role, sir? A You've been asking me a question several times about why did we say something. We said it because we thought our customers would want to know and because it was the truth. And that explains our saying it completely. Q And what I'm asking you, sir -- and it 224

1 2 3

may be that the answer to my question is, "no, it played no role." But if that's your answer, I want to get it on the record. And my question --

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 A Are you talking about saying it? 5 Q Yes. 6 A Or how we came up with our decision 7 about how to price our products? 8 Q Let's take it each step at a time, one 9 step at a time, so that your counsel doesn't say I'm asking you a compound question, okay? And first let's talk about saying it. I know you're telling me it was the truth. In addition to it being the truth, did the fact that this would, in your view, adversely affect the view of financial analysts of Netscape play any role at all in your decision to announce that your browser would be forever free? A I actually think that came up in response to some questions that people asked in an event we had on December 7, 1995. So it wasn't so much a question of our saying, okay, we're going to go make this a headline, but rather, that there were questions that came up during that including our future pricing plans. Q This was a meeting on December 7 of 225

1 what year? 2 A 1995. 3 Q And was it attended by people outside 4 Microsoft? 5 A It was a press event. 6 Q And prior to attending that press 7 event, had you made a decision that it would be 8 forever free? 9 A Well, if you really want to probe into that, you'll have to get into the different ways that we made Internet technology available. In terms of what we were doing with Windows 95 and its successors, yes. In terms of some of the other ways that we offered the Internet technologies, there was some -- there hadn't been a clear decision about that. Q When you refer to other ways that you offer Internet technologies, would you explain for the record what you mean? A Oh, we created an offering that ran on the Macintosh OS that offered some but not all of the capabilities that we put into Windows and used a common branding for that. And we came up with a package that ran on a previous version of Windows, Windows 3.1, and made an offering of that. 226

1 2 3 4

Subsequently I mean, not on that day, but subsequently. Q And those were charged for; is that what you're saying?

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5 6 7 8 9 that we

A I'm saying that before the December 7th event, it was clear to everyone that in the Windows 95 and its successors, that the browser technology would be free for those users. But it was unclear to people what we were going to do with the other ways packaged up the technologies. Q Would you read the question back,

please? (The following question was read: "Q And those were charged for; is that what you're saying?") THE WITNESS: Well, they weren't available. So if we're talking about December 7, 1995, it's not a meaningful question. Subsequently those products were made available to the customers without charge. But I'm saying that there was some lack of clarity inside Microsoft even up to the event itself about what we were going to do with those other ways we were providing Internet Explorer technology. Q BY MR. BOIES: Uncertainty as to 227

1 whether you would charge for them; is that what 2 you're saying? 3 A That's right. 4 Q Okay. 5 Prior to the December 7, 1995 meeting, 6 had a decision been made to advise the world that not 7 only would the browser be free, but it would be 8 forever free? 9 A Well, it's always been the case that when we put a feature into Windows, that it remains part of Windows and doesn't become an extra cost item. So it would have been kind of a silly thing for anyone to ask including about that particular feature. And by this time, of course, browsing is shipping with Windows 95. Q Exactly sort of the point I wanted to come to, Mr. Gates. When you put things into the operating system generally, you don't announce that they're going to be forever free, do you? A Yes, we do. If anybody -Q You do? A If anybody asks, that's obviously the answer we give. Q Have you finished your answer? 228

1 2 3 4 5

A Q

Yes. Okay. Could you identify for me the products other than browsers that Microsoft has announced that they would be forever free, expressly said, "These

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

6 are going to be forever free"? 7 A As I said to you, I think that actually 8 came up only in response to some questions. So it's 9 not proper to ask me and suggest that we announced it like it was some, you know, press release announcement or something of that nature. Q Well, let me come back to that aspect of it and just ask you for the present. What products has Microsoft said publicly, whether in response to a question or otherwise, that these would explicitly be forever free? A I've said that about the broad feature set that's in Windows. Q When did you say that, sir? A I remember an analyst talking to me about that once at an analyst meeting. Q When was that? A It would have been one of our annual analysts meetings. Q When? 229

1 A Not this year. Either last year or the 2 year before. 3 Q Is there a transcript of that analyst 4 meeting? 5 A Not with the conversation with that 6 analyst, no. 7 Q There are transcripts of analysts 8 meetings, aren't there, Mr. Gates? 9 A Only of the formal Q and A, not of the -- most of the Q and A, which is where people are mixing around with the press and analysts who come to the event. Q And this question that you say happened happened after the transcript stopped being taken; is that what you're saying? A That's my recollection, yes. MR. BOIES: We'd like to be sure that if those transcripts have not been produced, that they be produced. MR. HEINER: Well, serve a document request and we'll respond in the ordinary course. MR. BOIES: Okay. If that's what's required, we'll do that. We'll see if we can get you a request faxed down. I would have thought it would have been easier for you to take that under 230

1 2 3 4 5 6

advisement, but we'll proceed that way. MR. HEINER: It is a nonsensical request because the testimony is that it's a cocktail hour, and at a cocktail hour there's no transcript. That's the testimony. Q BY MR. BOIES: Is that the testimony,

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

this happened in a cocktail hour? A I'm saying, yeah, in the informal Q and A, not the formal Q and A. Q This was at the cocktail hour? A Or a dinner or a lunch. Q Well, which was it? A I'm certain that it was in the informal part of the Q and A. Exactly was it on the way to the bathroom or the cookie table or the dinner or the cocktail hour, I can't say. Q Sir, sometime on the way to the bathroom or cookie table or the cocktail hour -A Or lunch or dinner. Q -- or lunch or dinner, some analyst, whose name you do not recall, asked you a question. Is that what your testimony is? A Yes. Q And what was that question? A They asked about were there parts of 231

1 2 3 4 5 6 7 8 9 free?

Windows that would become separate products and we'd charge separately for in the future. Q And what did you say? A I said, "No." Q Other than this conversation that you say took place on the way to the bathroom or the cookie table or a cocktail party or lunch or dinner, was there ever any other time that Microsoft publicly explicitly asserted that something would be forever

A I'm sure that if anybody ever asked about an operating system feature, we would have made that clear to them. I don't -- beyond the one I've talked about, I don't -- I don't recall that. Then, again, you know, in the case of the browser you have the case where another company had -- it had been free and so, you know, the fact that people were asking about that feature in some ways is not surprising. Q Well, you say another company had a browser that had been free. What company was that, sir? A Well, certainly Mosaic was free. And there are a number of other free browsers. The Netscape browser in its early days was also free. 232

1 2 3 4 5 6 7

Q In 1996 was the Netscape browser free? A I'm not sure of the exact chronology. But I'm pretty sure that in 1996 anybody who wanted to use the Netscape browser could download and use it in any way they would want without Netscape coming and asking them to pay them. Q Mr. Gates, in 1996 what was Mosaic's

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

market share? A I don't know. Q Approximately? A I really don't know. Q Can you give me any estimate or range? A By 1996, probably under 10 percent. Q Under 5 percent? A Well, now you're going to have to answer what the word "Mosaic" means. For example, if you get low enough, get really low, we're going to get into Internet Explorer. Internet Explorer, until we shipped IE3, actually had quite a bit of code in it that derived from Mosaic; that is, the code went from University of Illinois to Spyglass to our development team who used some of that code in creating both IE1 and IE2. So if you get low enough, I'll have to ask you do you consider IE1 or IE2 a form of Mosaic? 233

1 Q Not for purposes of this question, if 2 it will help you. 3 A Okay. Then you can get down below 5. 4 Q Okay. 5 In 1996 Netscape was charging OEMs who 6 it licensed to distribute its browser; correct, sir? 7 A I don't know that. 8 Q Do you know one way or the other? 9 A I think they were charging some, but I'm not sure they were charging all. Q Did you ever try to find out? A I know we were always unclear what the nature of those deals were. Q Okay. Did you ever try to find out how much of Netscape's revenue came from charging for the browser? A Well, we, from time to time, looked at the revenue of broad sets of competitors. And so I'm sure at some point when we did -- the people in the company, not me, but when people did analysis of Netscape, that's one of the issues they would have looked at. Q Did anyone ever inform you of approximately how much of Netscape's revenue was 234

1 2 3 4 5 6 7 8

accounted for charging for the browser? A I'm sure I was present in a presentation where that was one of hundreds of facts presented to me. Q Do you recall it? A The number? No. Q Or approximately how much of Netscape's revenue was accounted for by charging for the

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

browser. A When we say "charge" -- well, I don't remember the number, so I won't plague you with the question that I always have to ask about that, which is: Which revenue source are you talking about? But even if you tell me, I won't remember the specific number. Q I'm going to ask you whether you remember approximately what the range of the number is. And to be absolutely clear, what I'm talking about is charging for the browser. I'm not talking about advertising revenue, you know, or revenue from the Search button or the Home Page. A But that's charging for the browser. I mean, it's like saying NBC has no revenue. Q No. It's not like saying it has no revenue. It's like saying NBC doesn't charge for its 235

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

programs to the public. It may charge advertisers, and I'm not saying that there might not be advertising revenue. But what I'm talking about is charging for the use of the product, charging OEMs or charging end users who buy it at retail or download it, although I understand that your position is it's downloaded for free. But I'm trying to distinguish between charging for the product and whatever advertising revenue they get. A Okay. Q Now, with respect to charging for the product, charging for the use of the browser, do you have any idea, any approximation or range, of how much of Netscape's revenue was attributed to that? A If you give me a time period, I can narrow it down from the zero to 100 percent range. Q 1996. A Around 20 to 50. Q Today. A Today the advertising revenue from browsers -Q No, not advertising. We're talking about the revenue from the use of the browser, not the advertising. We're just talking about -A I know, that's right. But let me 236

1 2 3 4 5 6 7 8 9

complete my sentence. Q Okay. A Today the -- what you would call nonuser revenue sources are very substantial, and, you know, more than cover what people are doing with browser. So that's become the primary revenue source that you get specifically related to the browser. Q Indeed today the amount of Netscape's revenue that's attributed to charging people for the

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10

use of the browser is zero; right, sir? A I don't know that. Q Because they don't charge for the browser; right? You know that, don't you? A No, I don't know if, you know, they had some commitment contracts with various people and you can do special things with browsers. And understand, they -- you know, they do lots of different deals that include various special things. And so I don't think it's fair for me to sit here and tell you what Netscape's revenue are from a particular source. If you want to ask me about Microsoft, that would be a different thing. But I'm not an expert on Netscape revenue. Q And so you just don't know, is your answer, as you sit here now? 237

1 A Yeah. It may have dropped down to 2 zero. I don't know. 3 Q Okay. 4 Was it part of your intent in taking 5 the actions that Microsoft took to drive that down to 6 zero? 7 MR. HEINER: Objection. 8 THE WITNESS: We price our product, 9 Windows. That's the only thing we do relative to pricing. The most important thing we do is we create the features of the product including improved versions. Q BY MR. BOIES: Let me be sure my question is clear. Was any part of Microsoft's actions with respect to its browser or, as you sometimes refer to it, browser technology, motivated by desire to drive Netscape's revenues from users of Netscape's browser down to zero? A Well, I think you're getting a little bit psychological there. Q No. I'm asking what you intended. What was the purpose of what you were doing? A My purpose was to make Windows a better product and maintain and increase the popularity of 238

1 Windows. 2 Q Was that the only purpose? 3 A That was the purpose on which the 4 decision was made. 5 Q I just want to be clear. 6 It's your testimony that an intent to 7 deprive Netscape of revenue played no role in any of 8 the decisions that Microsoft made with respect to 9 browsers or browsing technology? Is that your testimony?

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A Well, our decision to have the browser be a feature of Windows was in no way motivated by something to do with Netscape. We had chosen that that was a logical evolution of the Windows feature set before Netscape was a factor at all. Q Mr. Gates, if your answer is that it played no role, that is your answer. But I need to get on the record what your answer is. And my question is whether an intent to deprive Netscape of revenue played any role in any of the decisions that Microsoft made with respect to its browser or browsing technology. A We decided that it was a logical improvement of Windows to put the browser into Windows before we had much awareness of there even 239

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11

being a Netscape. So the decision that that would be a feature -- and as I've said, when we make something a feature of Windows, that means that it's available along with all the other features and the license fee, that decision had been made very early on. We also had a very early recognition of the potential revenue sources from things like the Search button and the Home Page and that those would become quite substantial. MR. HEINER: Mr. Boies, we're prepared to go right through to 6:00, but we would like to have one more brief break when you come to a logical stopping point. I'm having trouble seeing when the stopping points are. But if you could have one come up soon, I'd appreciate it. MR. BOIES: Okay. Let me just try to get this question answered, and then we'll take a break. Can I have the question back? (The following question was read: "Q Mr. Gates, if your answer is that it played no role, that is your answer. But I need to get on the record what your answer is. 240

1 "And my question is whether 2 an intent to deprive Netscape of 3 revenue played any role in any of the 4 decisions that Microsoft made with 5 respect to its browser or browsing 6 technology.") 7 Q BY MR. BOIES: If your answer's "no," 8 we'll simply go on. If your answer is "yes," then 9 I'm going to ask what role it was. But I'm just trying as a predicate to find out whether it played any role in any of your decisions.

12 13 14 15 16 17 18 19 20 21 22 23 24 25

A I don't know what you mean "any of our decisions." Now, that is the vaguest thing I've ever heard. Q Okay. Any of your decisions with respect to the browser or what you have referred to as your browsing technology. A Wait a minute. Have you completely changed the question? Q I don't think so. But let's go back and reread the question. And when you read it this time, type it into the record again so it appears so that a reader of the transcript doesn't have to go back and find it. 241

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12

(The following question was read: "Q Mr. Gates, if your answer is that it played no role, that is your answer. But I need to get on the record what your answer is. "And my question is whether an intent to deprive Netscape of revenue played any role in any of the decisions that Microsoft made with respect to its browser or browsing technology.") MR. HEINER: Object to the question as vague and ambiguous on several counts. THE WITNESS: Yeah. It's pretty vague. Let's say we decide -MR. BOIES: This is the same question that we've gone through three times. MR. HEINER: Yeah, I know. I'm only making the objection now. MR. BOIES: Okay. THE WITNESS: Let's say we decide to put a new feature in, is that included in what you're asking about? Q BY MR. BOIES: A new feature in what? 242

1 A In our Internet browser technology. 2 Q If the purpose is to deprive Netscape 3 of revenue, if that's why you put it in, yes, it is 4 included, sir. 5 And if you don't understand the 6 question, if my question is not clear, I will 7 rephrase it. You can tell me the answer is "yes," 8 you can say the answer is "no," you can say the 9 answer is "I don't recall," you can say "Your question is so confusing to me, I can't answer it." But all I'm trying to do is find out what your answer is.

13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Do you have the question in mind? A I think it's quite a vague question. Let me just give you a hypothetical to understand. Let's say we think users want a feature, and it can be a feature that we're doing first or it's a feature that Netscape has done first. When we decide to put that feature in, our primary goal is to make Windows more popular and build momentum for Windows. But certainly there is -let's say it's a feature that Netscape's done first, then we are thinking, okay, will users be interested in our browser? If it's a feature we've done first, we're thinking will users be interested in our 243

1 browser? 2 So you can't say that, you know, as you 3 get into 1996 that we're unaware of Netscape. And 4 even though what we're primarily doing is related to 5 making better experiences for customers and all that, 6 the fact that we'll be compared with them in terms of 7 how people chose browsers, we're aware of that. 8 Q I didn't mean my question to suggest 9 that you might have been unaware of Netscape in 1996, Mr. Gates. I assume that you were aware of Netscape in 1996. My question is whether an intent to deprive Netscape of revenue played any role in any of the decisions that you made about browsers or browsing technology. I'm not talking about a decision where you say, "I understand this would have an effect on Netscape but I don't care, I'm going to do it anyway." I'm talking about a situation in which, at least in part, you take an action with the intended purpose of depriving Netscape revenue. Did you do that? A Well, the original decision to include the browser into Windows as a feature of Windows was not taken in response to some thinking about Netscape. But once you get out into a period where 244

1 2 3 4 5 6 7 8 9 10 11 12 13

we're looking at Netscape as one of our competitors, it's very hard to say, you know, did that influence our decisions or not. To me that's a very vague question. It's one of the facts we are aware of. Our primary goal, of course, is to make Windows better for customers. And we were doing a lot of great stuff there and were actually very successful once we got past a certain point in doing a product that people did decide to choose. But, you know, how can you -- how can you say, you know, when every person at Microsoft makes any decision -- you know, we don't get to run it where there's no thought about Netscape and there

14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14

is a thought about Netscape. So you're asking me to reach into people's minds and do something that I think is strange. MR. BOIES: Would you read back my question one more time and again incorporate it? (The following question was read: "Q Mr. Gates, if your answer is that it played no role, that is your answer. But I need to get on the record what your answer is. "And my question is whether 245

1 an intent to deprive Netscape of 2 revenue played any role in any of the 3 decisions that Microsoft made with 4 respect to its browser or browsing 5 technology.") 6 Q BY MR. BOIES: Have you answered that 7 question now to the fullest extent that you can, 8 Mr. Gates? Because if you can't, we'll just stop. 9 A I find the question unclear enough, that I'm afraid I won't be able to do any better than I already have. MR. BOIES: Okay. We can take a break now. THE VIDEOGRAPHER: The time is 5:22. We're going off the record. (Recess.) THE VIDEOGRAPHER: The time is 5:36 P.M. We are going back on the record. Q BY MR. BOIES: Mr. Gates, before the break you said that Microsoft recognized early that there would be browser revenue from advertising revenue from the Search button and the Home Page. Do you recall that? A That's right. Q When did Microsoft first project what 246

1 its revenue would be from browser advertising from 2 the Search button and/or Home Page? 3 A Well, we actually didn't have enough 4 share with IE1 or IE2 that we built that much value 5 at all because we just didn't have much traffic. 6 When it came to IE3 we had a discussion 7 about how we would take that asset and what we would 8 do with that traffic. And we actually chose at that 9 stage instead of charging for it, to build some partnerships by working with people who we directed traffic to. And I don't know if anybody had done -I know there was discussions, I don't know if there's a formal document, but we discussed the notion of

15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15

licensing that out versus just using it to build partnerships. In terms of actually having people pay us large amounts of money, that's really gotten big in the last year. MR. BOIES: Would you read the question back, please? (The following question was read: "Q When did Microsoft first project what its revenue would be 247

1 from browser advertising from the 2 Search button and/or Home Page?") 3 Q BY MR. BOIES: Do you understand the 4 question, Mr. Gates? 5 A Yeah. And the answer is: Probably as 6 part of that decision what to do with the IE3 traffic 7 we would have looked at the choice of charging or 8 using it in partnerships. 9 Q Could you tell me, just for the record, when you're talking about? A Oh, during the planning cycle for IE3. Q Which was when? A That would have been sometime in '96. Q Okay. So at some time in '96, according to your testimony, Microsoft made a projection of how much money it could expect to receive from browser advertising from the Search button and/or the Home Page; is that what you're saying? A Advertising in the very broad sense. The principle that there would be that revenue predated that. That was an insight we had quite a bit before that. But the first time we looked at, okay, what should we do with this traffic would have been 248

1 when we were thinking that IE3 would garner 2 significant traffic. 3 Q When you say "the first time we looked 4 at what we would do about the traffic," I want to be 5 sure again that the question and answer is meeting 6 because I know you use words very precisely. 7 What my question is is: When did you 8 first make a projection, when did Microsoft first 9 make a projection, of how much money Microsoft would receive from advertising revenue in connection with the browser? MR. HEINER: Certainly asked and answered. MR. BOIES: You may be right. But because he keeps changing the language he uses, and I

16 17 18 19 20 21 22 23 24 25

know from prior answers that usually when he changes the words, he means something by it, I need to have it tied down. MR. HEINER: Okay. And I think he does mean something by his use of words. I'm just saying that you asked the question and you got the answer. Q BY MR. BOIES: Okay. What's the answer? A We looked at charging as part of the IE3 planning during 1996. 249

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16

Q I'm not asking when you looked at charging. I'm asking when did Microsoft first make an estimate or projection of how much money it would receive. A Oh, when we looked at the issue of whether we -- it was a better idea to charge or not as part of the IE3 planning. Q And that would have been in 1996; is that correct? A Uh-huh. Q You have to say "yes" or "no" for the

record. A

Yes. You don't get "uh-huh's"? Q She does, but it doesn't always come out exactly the way you think. And who made that estimate or projection? A I know there was discussion with Pete Higgins and Peter Neupert and myself about that, and each of us would have hazard some view of the value there. Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 250

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted

17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17

Confidential Confidential Confidential Confidential Confidential Confidential Confidential Confidential Confidential

Material Material Material Material Material Material Material Material Material

Redacted Redacted Redacted Redacted Redacted Redacted Redacted Redacted Redacted 251

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 252

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted

18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18

Confidential Confidential Confidential Confidential Confidential Confidential Confidential Confidential

Material Material Material Material Material Material Material Material

Redacted Redacted Redacted Redacted Redacted Redacted Redacted Redacted 253

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 254

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted

19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19

Confidential Confidential Confidential Confidential Confidential Confidential Confidential

Material Material Material Material Material Material Material

Redacted Redacted Redacted Redacted Redacted Redacted Redacted 255

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 256

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted

20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20

Confidential Confidential Confidential Confidential Confidential Confidential

Material Material Material Material Material Material

Redacted Redacted Redacted Redacted Redacted Redacted 257

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 258

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted

21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21

Confidential Confidential Confidential Confidential Confidential

Material Material Material Material Material

Redacted Redacted Redacted Redacted Redacted 259

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 260

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted

22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22

Confidential Confidential Confidential Confidential

Material Material Material Material

Redacted Redacted Redacted Redacted 261

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 262

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted

23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23

Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 263

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 264

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 You were asked some questions earlier about a June 21, 1995 meeting with Netscape. And that's a meeting you did not attend; am I correct? A I've never met with Netscape. Q And did you know that Microsoft people were meeting with Netscape before they actually met? A I don't recall knowing in advance. Q You did know after the fact because you got the e-mails that we saw; correct? A Yeah. That's right. I recall getting those e-mails, at least the Thomas Reardon/Silverberg one. MR. HEINER: Mr. Boies, it's 6:00 now, it's been a pretty full day. If this is a relatively short line of questioning, why don't you finish it

24 25

up, we'll go to about 6:15. MR. BOIES: Okay. 265

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. HEINER: Okay. Q BY MR. BOIES: You are aware that it has been asserted that at that meeting there was an attempt to allocate markets between Netscape and Microsoft; correct, sir? A My only knowledge of that is that there was an article in the Wall Street Journal very recently that said something along those lines. Otherwise, no. Q Is it your testimony that the first time that you were aware that there was an assertion that there had been a market allocation meeting or an attempt to allocate markets at a meeting between representatives of Microsoft and Netscape was a recent Wall Street Journal article? A I'm not sure how to characterize it. The first I heard anything about that meeting and somebody trying to characterize it in some negative way was an Andreessen quote that was in the Wall Street Journal very recently. And it surprised me. Q Are you aware of any instances in which representatives of Microsoft have met with competitors in an attempt to allocate markets? MR. HEINER: Objection. THE WITNESS: I'm not aware of any such 266

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

thing. And I know it's very much against the way we operate. Q BY MR. BOIES: It would be against company policy to do that? A That's right. Q Now, subsequent to being apprised that Mr. Andreessen, at least, was asserting that this had happened, did you make any effort to find out what had actually happened at that meeting? A Well, first of all, I don't want to be involved in characterizing what Mr. Andreessen said because I -- I -- all I know is something about a quote about a dead horse head or something like that. That was what I recall from the Wall Street Journal article. I did, after the Wall Street Journal article, see some e-mail that Andreessen had sent our people after the meeting saying it was a great meeting, and I did see the Reardon mail that I deleted but somebody gave back to me and some Reardon notes from the meeting. Now, I think we're talking about the same meeting. I think there may have been more than one. But in any case, I think we're talking about

25

the same meeting. 267

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 2 3 4 5 6 7 8 9 May is

Q I think the record may show that there was a meeting before the June 21 meeting. A That sounds right. Q But the meeting that I was particularly asking about was the June 21 meeting. And I think that that probably was what was in the Wall Street Journal. A No. You can't really say because the Wall Street Journal talked about a May meeting, and not June, not by a long shot. Q You're right. May is not June. I agree that May is not June. And maybe there were two such meetings. A Well, I'm not aware of any meeting between us and Netscape in May. So that seems very strange. And that confused me about that Wall Street Journal article. Q Let me ask you: Did you -- when you saw the Wall Street Journal article that talked about a May meeting in terms of allegedly market dividing conduct, did you try to find out whether there had been a May meeting between representatives of Microsoft and representatives of Netscape? A Well, again, I wouldn't characterize the article in that way. When I read the article, 268

1 what it said interested me enough and concerned me 2 enough, I did seek to find out if there was a May 3 meeting. But I don't think the article is what 4 you're suggest -- said what you're suggesting. I 5 mean, we should get a copy of the article. I don't 6 remember it that way. I remember Andreessen talking 7 about how he had been in fear that Don Coerleone had 8 come to see him. And, you know, once I realized that 9 there was no meeting in May and that it wasn't -- you know, that he after the meeting said he enjoyed the meeting and that it was, you know, just a group of our guys down there trying to talk about if there was any areas of cooperation, it seemed -- the whole thing seemed very strange to me. Q Did you talk to people to find out whether there was a May meeting? A Yes. Q Who did you talk to? A I consulted with my lawyers. Q Other than consulting with your lawyers, did you try to find out whether there was a May meeting? A Well, my lawyers then talked to all the people that might have met with Netscape, and I made sure they did that pretty broadly.

269

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q And you were informed that there was no May meeting; is that your testimony? A That's the understanding I was given, yes. And then I was given some of the other information that I've already mentioned. Q But all that information came from your lawyers not from nonlawyer employees of Microsoft; is that what you're saying? A It came to me through my lawyers. Q Did you ever have a conversation with anyone in the last 12 months other than your lawyers concerning whether there were meetings in May or June of 1995 with Netscape, and if so, what happened at those meetings? A Well, there might have been a point after I got all the data from the lawyers where I said to some of the PR people what an outrageous slander that article had been and how unfair I felt it was. And so I may have mentioned that to them. Q Did you have any conversations in the last 12 months with any person who was dealing with Netscape in 1995 about whether there were May or June meetings and if so, what happened at those meetings? A No. I relied on the lawyers to go and meet with those people and gather the facts and 270

1 educate me about was there a May meeting and what was 2 the agenda or what was Andreessen's state of mind 3 after the meeting, what did the notes look like. But 4 that's all very recent. That is after the Journal 5 article. 6 Q Now, have you ever read the complaint 7 in this case? 8 A No. 9 Q Have you ever received a summary of the complaint in this case? A I wouldn't say I've received a summary, no. I've talked to my lawyers about the case but not really the complaint. Q Do you know whether in the complaint there is an assertion -- I'm not talking about the Wall Street Journal article, I'm talking about the complaint that was filed last May. Do you know whether in that complaint there are allegations concerning a 1995 meeting between Netscape and Microsoft representatives relating to alleged market division discussions? A I haven't read the complaint so I don't know for sure. But I think somebody said that that is in there. Q Did you find that out before or after 271

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

the Wall Street Journal article? A The first time I knew about these allegations was the Wall Street Journal article. Q That is, that article preceded any knowledge that you had or didn't have related to the complaint? A That's right. MR. BOIES: Okay. That completes that line of questioning. MR. HEINER: Okay. Pick up tomorrow at 8:30? MR. BOIES: That would be good. THE WITNESS: Yeah. The 4:00 deadline tomorrow is unfortunately not a movable deadline. THE VIDEOGRAPHER: This is the end of the deposition. The time is 6:12. This is the end of Tape 4 of the videotaped deposition of Bill Gates to be continued tomorrow morning at 8:30 A.M. which is August 28th. * * *

272

1 I hereby declare, under penalty of 2 perjury, that the foregoing answers are true and 3 correct to the best of my knowledge and belief. 4 EXECUTED AT _________________, CALIFORNIA, 5 this ______day of _________________, 1998. 6 7 _________________________ 8 Bill Gates 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 273

1

10 11 12 13 14 15 16 17 18 19 20 21 22 23

STATE OF CALIFORNIA ) ss. COUNTY OF LOS ANGELES

)

2 ) 3 4 I, Katherine Gale, CSR 9793, a Certified 5 Shorthand Reporter in and for the State of 6 California, do hereby certify: 7 That prior to being examined, the witness named 8 in the foregoing deposition was by me duly sworn to 9 testify the truth, the whole truth, and nothing but the truth; That said deposition was taken before me at the time and place named therein and was thereafter reduced to typewriting under my supervision; that this transcript is a true record of the testimony given by the witness and contains a full, true and correct report of the proceedings which took place at the time and place set forth in the caption hereto as shown by my original stenographic notes. I further certify that I have no interest in the event of the action. EXECUTED this 28th day of August, 1998.

____________________________ Katherine Gale, CSR #9793

24 25

274

1

10 11 12 13 14 15 16 17 18 19 20 21 22 23

STATE OF CALIFORNIA ) ss. COUNTY OF LOS ANGELES

)

2 ) 3 4 I, Kathleen Barney, CSR 5698, a Certified 5 Shorthand Reporter in and for the State of 6 California, do hereby certify: 7 That prior to being examined, the witness named 8 in the foregoing deposition was by me duly sworn to 9 testify the truth, the whole truth, and nothing but the truth; That said deposition was taken before me at the time and place named therein and was thereafter reduced to typewriting under my supervision; that this transcript is a true record of the testimony given by the witness and contains a full, true and correct report of the proceedings which took place at the time and place set forth in the caption hereto as shown by my original stenographic notes. I further certify that I have no interest in the event of the action. EXECUTED this 28th day of August, 1998.

____________________________

24 25

Kathleen Barney, CSR #5698 275

Released Pursuant to 15 U.S.C. §30

Go to Trial Documents listing

Deposition of Bill Gates by David Boies (August 28, 1998)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 the 15 at 16 17 18 19 20 21 22 23

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA, ) ) Plaintiff, ) ) vs. ) No. CIV 98-1232(TPJ) ) MICROSOFT CORPORATION, ) VOLUME II ) (Morning Session) Defendant. ) ) CONFIDENTIAL )

CONTINUATION OF THE DEPOSITION OF BILL GATES, a witness herein, taken on behalf of plaintiffs at 9:09 a.m., Friday, August 28, 1998, One Microsoft Way, Redmond, Washington, before Kathleen E. Barney, CSR, pursuant to Subpoena.

REPORTED BY: Kathleen E. Barney, BARNEY, UNGERMANN & ASSOCIATES 24 CSR No. 5698 Our File No. 1-49006 25 1 2 3 4

APPEARANCES OF COUNSEL: FOR THE UNITED STATES OF AMERICA: UNITED STATES DEPARTMENT OF JUSTICE BY PHILLIP R. MALONE KARMA M. GIULIANELLI 450 Golden Gate Avenue

5 6

Box 36046 San Francisco, California (415) 436-6660

94102

7

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

BOIES & SCHILLER LLP BY DAVID BOIES 8 80 Business Park Drive Armonk, New York 10504-1710 9 (914) 273-9800 FOR MICROSOFT CORPORATION: MICROSOFT CORPORATION LAW AND CORPORATE AFFAIRS BY DAVID A. HEINER WILLIAM H. NEUKOM One Microsoft Way Redmond, Washington 98052 (425) 936-3103 SULLIVAN & CROMWELL BY RICHARD J. UROWSKY 125 Broad Street New York, New York 10004 (212) 558-3546 FOR THE PLAINTIFF STATES: STATE OF NEW YORK OFFICE OF ATTORNEY GENERAL BY STEPHEN D. HOUCK GAIL P. CLEARY THEODORE ZANG 120 Broadway New York, New York 10271-0332 (212) 416-8275 ALSO PRESENT: PRISCILLA ALVAREZ, Paralegal MICHEL CARTER, Video Operator

25

1 2 3 WITNESS PAGE 4 Bill Gates 5 6

I N D E X EXAMINATION BY Mr. Boies 279

7 8

GOVERNMENT EXHIBITS: 365 E-mail from Bill Gates to Paul Maritz

299

9 10 11

366 E-mail from Don Bradford to Ben 310 Waldman 367 E-mail from Ben Waldman to Greg 315 Maffei

12 13 14 15 16

368 E-mail from Bill Gates to Ben 316 Waldman 369 Series of e-mails, the first of 327 which is from Joachim Kempin to Bill Gates 370 E-mail from Don Bradford to various 350 people

17 18

371 Series of e-mails, the first of 354 which is from Paul Maritz to Bill Gates and Bob Muglia

19 20 21 22 23 24 25

1 2 deposed 3 4 5 6 7 8 9 10 11 12

BILL GATES, a witness herein, having been duly sworn, was and testified further as follows: EXAMINATION (Continued) BY MR. BOIES: Q. Good morning, Mr. Gates. Are you going to be a witness at the trial of this matter? MR. HEINER: Objection. THE WITNESS: I don't know. Q. BY MR. BOIES: Do you intend to be a

13 14 15 16 17 18 You 19 20 him 21 22 23 24 25

witness at the trial of this matter? MR. HEINER: Objection to this line of questioning. The witness list comes out next week and there is a court order in place on this. MR. BOIES: I'm entitled to ask the witness whether he intends to appear at trial. people have certainly done that with witnesses. think it is a common question. If you instruct

I

not to answer, you can instruct him not to answer. MR. HEINER: I haven't done that. I've posed an objection. Q. BY MR. BOIES: Do you intend to be a witness at trial? 279

1 A. I don't know. 2 Q. All right. 3 MR. BOIES: And the purpose, obviously, 4 was because if we knew whether he was going to be a 5 witness at trial, that might shorten and change the 6 examination. It's a common question. I don't know 7 why you object to it. 8 Q. Mr. Gates, when did you first become 9 concerned about the competitive threat that Netscape 10 posed to Microsoft? 11 A. I know by late '95 we were thinking of 12 Netscape as one of our many competitors, so I think 13 it would have been around then. 14 Q. When did you first become concerned 15 about the competitive threat that Java posed to 16 Microsoft? 17 A. Well, Java as a computer language does 18 not pose a competitive threat to Microsoft. There is

19 are 20 21 22 23 24 25

some runtime work that various people, companies doing with different APIs, including Sun, that represent platform competition. So you have to be careful about how you talk about Java. Q. Do you talk about Java as a competitive threat to Microsoft, Mr. Gates? A. There's a lot of documents and 280

1 understanding inside Microsoft that Java the 2 language, which if you take the term Java on the face 3 of it and then in some context that it refers to, 4 that that is not a competitive threat. In fact, we 5 are the leading vendor of Java language development 6 tools. Sometimes in the right context when people 7 use that term, they're talking about various runtime 8 activities. But, you know, you have to look pretty 9 carefully at the context. 10 Q. My question right now doesn't go to 11 what various people within Microsoft have said or 12 believe. My question goes to what you have said. Do 13 you refer -- have you referred to Java as a 14 competitive threat to Microsoft? 15 A. The Java runtime activities are a 16 competitive threat to Microsoft. Java itself is not. 17 So if I use the term Java that way, I'm careful to 18 make sure people know I'm talking about the runtime 19 piece. 20 Q. Have you sometimes as a shorthand 21 referred to Java, as opposed to what you now say as

22 the Java runtime activities, as a competitive threat 23 to Microsoft? 24 A. I may have if I made it clear what I 25 meant. 281

1 Q. And by making it clear what you meant, 2 can you explain what you mean by that? 3 A. To draw the distinction between Java 4 the language and the runtime activities around Java, 5 the APIs being created there by various companies. 6 Q. Have you received e-mail from people 7 that described Java as a competitive threat to 8 Microsoft? 9 A. Well, inside Microsoft the context of 10 the various pieces of Java, including in a lot more 11 detail than I've had a chance to explain to you so 12 far, is well understood. And so we use a lot of 13 shorthands for a lot of things that confuse people 14 who just look at the e-mails. 15 MR. BOIES: Can I have the question 16 read back, please. 17 (Record read.) 18 THE WITNESS: Under the scenario I 19 described, it's possible that people would do that in 20 e-mail. 21 Q. BY MR. BOIES: When you say "under the 22 scenario that I described," what scenario are you 23 talking about? 24 A. The scenario is people inside Microsoft 25 who have an understanding of the various pieces of 282

1 2 3

Java who are communicating with each other. Q. Let me try to be clear. My question does not encompass any scenario. My question

is 4 simply have you received e-mail from people within 5 Microsoft that described Java as a competitive threat 6 or assert that Java is a competitive threat to 7 Microsoft? 8 MR. HEINER: Objection. You have a 9 very full answer, precise and clear, to that 10 question. The witness may answer again. 11 THE WITNESS: Yeah, I've described the 12 circumstances under which it's possible I've gotten 13 an e-mail like that. 14 Q. BY MR. BOIES: My question is not what 15 are the circumstances under which it is possible that 16 that happened. My question is have you received 17 e-mail from people in Microsoft that assert that Java 18 is a competitive threat to Microsoft? 19 A. It's possible there is someone who, 20 having the right context about the pieces that are 21 entailed in Java, may have used that as a shorthand 22 for the piece we consider a competitive threat. 23 Q. My question is not what is possible but 24 what you recall. If you don't recall ever receiving 25 an e-mail in which somebody from Microsoft asserted 283

1 answer 2 don't 3 4

that Java was a competitive threat, that's an to my question.

You can say "Yes," "No," "I

recall," but -A. I don't recall a specific piece of

5 mail. I think there is a good chance I've received 6 mail where somebody used that kind of shorthand. 7 Q. Now, have you used that kind of 8 shorthand, that is, have you personally asserted that 9 Java is a competitive threat to Microsoft? 10 A. Well, I always object to -- you're 11 acting like the assertion stands by itself. There is 12 a shorthand that I've told you about, so no, I've 13 never asserted that statement. We use the term Java 14 in a variety of contexts and if you want to show me a 15 context, I'll answer. But the assertion on the face 16 of it is wrong unless somebody is using the term Java 17 in a very special way. 18 Q. What I'm asking you, Mr. Gates, is 19 whether you have used Java in what you described as 20 the very special way to refer, as a shorthand, to 21 whatever it is that you believe constitutes a 22 competitive threat to Microsoft? 23 A. I don't remember a specific document 24 where I did, but I think it's quite likely that with 25 certain people I used that shorthand. 284

1 Q. Okay. When you use Java as a shorthand 2 in describing Java as a competitive threat to 3 Microsoft, am I to understand that what you mean in 4 that context is to refer to what you have described 5 here as the Java runtime activities?

6

A.

If you want to get into what we mean

by 7 the shorthand, you'll have to show me a specific 8 context because sometimes it might mean EJB, 9 sometimes it might just mean the VM, sometimes it 10 might mean AWT, sometimes it might mean JFC. I mean 11 I'll be glad to clarify any particular case. You 12 have to have the context. 13 Q. If necessary we'll go through each one 14 context by context, although that's obviously a 15 lengthy procedure, but let me see if I can try to get 16 some general principles. 17 When you refer to Java as a competitive 18 threat to Microsoft, what do you mean? 19 A. I've told you it depends on the 20 context. 21 Q. Why don't you list each of the 22 different things that you mean when you describe Java 23 as a competitive threat to Microsoft. 24 A. I don't know what you mean. You're 25 asking me to recall every context where I might have 285

1 ever used that shorthand? 2 Q. Well, I'm asking you to tell me every 3 context that you do recall. 4 A. I've told you I don't recall any 5 specific document where I've used the shorthand. I 6 can give you several contexts where it's very likely 7 that I have. 8 Q. If that's the best you can do, let's 9 start with that. 10 A. Well, there's the context of server

11 middleware APIs and EJB discussion. And people who 12 write three-tier applications, what APIs are they 13 likely to develop their applications against. 14 Q. And why does Java, in your view, 15 represent a competitive threat to Microsoft with 16 respect to server middleware or EJBs? 17 A. I've told you that Java itself is not 18 the competitive threat. I'm telling you the thing 19 that is the competitive threat, so when you rephrase 20 it to say Java is the competitive threat, that's just 21 the shorthand term. The competitive threat is the 22 APIs and the EJB and the other middleware layers that 23 people are putting together. 24 Q. Well, Mr. Gates, in your view does Java 25 play, itself, any role in what you view as a 286

1 competitive threat to Microsoft? 2 A. Java the language? 3 Q. Yes, let's start with Java the 4 language. 5 A. No. 6 Q. When you refer to Java as a competitive 7 threat, why do you use the word Java as shorthand for 8 what you now say doesn't relate to Java? 9 MR. HEINER: Objection. 10 THE WITNESS: I didn't say that. It 11 certainly relates to Java. Java runtime relates to 12 Java. I mean give me a break. 13 MR. BOIES: Move to strike the answer 14 as nonresponsive. 15 MR. HEINER: Objection to the question 16 as grossly misstating the prior testimony. 17 MR. BOIES: You can object all you 18 want, but if your object is to get this deposition

19 over with, I would suggest that you make your 20 objections before the question and not as a speech to 21 try to support the witness after the witness begins 22 to engage in that kind of colloquy. 23 MR. HEINER: It certainly was a short 24 speech, wasn't it? 25 Q. BY MR. BOIES: Mr. Gates, you know 287

1 perfectly well that you and lots of other people 2 within Microsoft describe Java, J-a-v-a, without 3 talking about runtimes or EJBs or server middleware, 4 but Java, J-a-v-a, as a competitive threat. You know 5 that, don't you? 6 A. I've told you that when we talk about 7 the Java runtime threat, we often use Java as a 8 shorthand for that. We haven't come up with another 9 term for the Java runtime competitive threat in its 10 various forms. 11 Q. When did you first become concerned 12 about the Java runtime threat to Microsoft? 13 A. Well, there have been a lot of changes 14 in the strategies of Sun and various people. I know 15 there was talk about Java in the second half of '95 16 but, you know, I don't think we really understood 17 what the various people around were doing. Sometime 18 in '96 when Sun was doing its promotion of writing 19 applications strictly to the Java runtime, to their

20 they 21 as 22 it 23 24 25

Java runtime, which is one of them, and in fact have multiple, then we would have looked at that something we needed to understand and decide how affected our strategy. Q. My question is not when you decided you needed to look at Java to decide something. My 288

1 question is when did you first conclude that what you 2 have referred to as the Java runtime threat was a 3 competitive threat to Microsoft? 4 MR. HEINER: Objection. 5 THE WITNESS: Well, it gets a little 6 complicated because there's some even runtime pieces 7 of Java that we support, but there are some things 8 that people are doing in those runtimes that we have 9 a different approach. But that's all, you know, more 10 recent in terms of understanding how -- what our 11 products are going to do. 12 Q. BY MR. BOIES: My question is when did 13 you first conclude that what you have described as 14 the Java runtime threat was a competitive threat to 15 Microsoft? 16 A. I think there was a lot of discussion 17 about what to do with Java and Java runtime things 18 and there was a part of what Sun was doing that by 19 late '96 we had decided not -- there were some 20 extensions they were doing in late '96 that we 21 thought of as competitive. 22 Q. Do I understand that last answer to be 23 that it would not have been until late 1996 that you

24 considered what you have described as the Java 25 runtime threat as a competitive threat to Microsoft? 289

1

A.

Well, you use the word "conclude"

and 2 there's a long period of time where there is a lot of 3 thinking about Java runtime inside Microsoft where 4 people are going back and forth. And some people 5 will say hey, this is fine, it's not competitive and 6 then somebody would say hey, maybe it is competitive. 7 So there's a lot of going back and forth. So when 8 you use the term "conclude," I assume you're talking 9 about a point at which there is a clear opinion and 10 not just a lot of debate, you know, even -- you know, 11 my view being established. And so then I think 12 you've got to go as late as late '96 before there's 13 much clarity at all. 14 Q. I think you may have answered the 15 question, but I want to be sure because my question 16 relates not to what other people were saying within 17 Microsoft but what you believed. And what I'm trying 18 to find out is when you, Bill Gates, first believed 19 that what you have described as the Java runtime 20 threat was a competitive threat to Microsoft? 21 A. Well, you used the word "conclude" 22 and --

23 24 25

Q. Actually, in this last question I used the word "believe." A. So you're changing the question? 290

1 2 3

Q. Well, if believe and conclude is different for you, I'll ask it both ways. A. Yeah, it's very different. In late

-4 Q. Then let me ask the question so the 5 record is clear what you're answering. 6 A. You don't want to let me answer the 7 last one? 8 Q. If that's what you're going to answer, 9 let's read the question back. 10 Would you reincorporate the question so 11 the record is clear that what follows is intended to 12 be a response to this particular question. 13 (The record was read as follows: 14 "Q. I think you may have answered 15 the question but I want to be sure because my 16 question relates not to what other people were 17 saying within Microsoft but what you believed. 18 And what I'm trying to find out is when you, 19 Bill Gates, first believed that what you have 20 described as the Java runtime threat was a 21 competitive threat to Microsoft?") 22 THE WITNESS: In the first part of '96 23 there were -- I was getting a lot of different 24 opinions about Java runtime and what Sun was doing 25 and what we should do. I wouldn't say that I 291

1 believed firmly that it was a competitive threat 2 because that all depended on what Sun was doing, what

3 other companies were doing, and what we were going to 4 do. By late '96 I think we had -- or I had a view 5 that what Sun was doing was a competitive activity. 6 Q. BY MR. BOIES: When you talk about 7 having a view that what Sun was doing was a 8 competitive activity, do you use the term "activity" 9 to mean the same thing that you meant before when you 10 used the term "threat"? 11 A. You were the one who used the term 12 "threat." I'm not quite sure. It was competitive. 13 Is something that is competitive always a competitive 14 threat? I'm not sure. 15 Q. Mr. Gates, I think the record will 16 show, and if necessary we can go back to it, that you 17 used the term "Java runtime threat." Do you recall 18 doing that? 19 A. Yes. 20 Q. Okay. Now -21 A. That's not the same as competitive 22 threat. 23 Q. Well, when you used the Java runtime 24 threat phrase, what did you mean by threat? 25 A. I meant that it was competitive. 292

1 Q. And so you were using, in that context, 2 threat and competitive to mean the same thing? 3 A. Yes. 4 Q. Okay. Now, using threat in the same 5 sense that you were using it to mean competitive, I

6 want to ask what you said was the different question 7 from what you believed. When did you conclude that 8 the Java runtime threat was a competitive threat to 9 Microsoft? 10 A. By late '96 I thought of it as 11 competitive. 12 Q. And when you use the word "thought" 13 there, are you using it to mean what you have said 14 you meant by believe as well as what you said you 15 meant by conclude? 16 A. I mean by then it was pretty clear to 17 me it was another thing we had to think of in terms 18 of the list of the competitors, as opposed to earlier 19 where I wasn't sure of that. 20 Q. What did you do to try to respond to 21 what you have described as the Java runtime threat? 22 A. The same thing we always do, just 23 innovate in our products and use the customer 24 feedback to delight them so that they choose to 25 license our products. 293

1 2 runtime 3 4 5 strategy 6 and then 7 can 8 9 10

Q. Did you do anything else to try to respond to what you described as the Java threat? A. Well, we try to understand from customers what they're doing and how our might appeal versus someone else's strategy go back and look at our strategy to see if we make it better. Q. Did you do anything else? A. I'm not sure what you mean. I mean our

11 whole activity here, everything we do really comes 12 under what I just described. 13 Q. Everything Microsoft does comes under 14 what you've described; is that your testimony, sir? 15 A. Uh-huh. 16 Q. Well, sir, does trying to undermine Sun 17 come within the activity that you've just described? 18 MR. HEINER: Objection. 19 THE WITNESS: I don't know what you 20 mean by that. 21 Q. BY MR. BOIES: You don't? 22 A. No. 23 Q. Have you ever had discussions within 24 Microsoft about the desirability of trying to 25 undermine Sun because of what Sun was doing in Java? 294

1

A. I said to you part of our activity

is 2

to go out and work with customers to see what

it 3 takes to have them choose to license our products. 4 And that's in competition with many other companies, 5 including Sun. 6 MR. BOIES: Would you read back the 7 question, please. 8 (Record read.) 9 THE WITNESS: We've certainly had 10 discussions about making our products better than 11 Sun's and other competitors in any area that people 12 might think of them as desirable. 13 MR. BOIES: Would you read the question 14 back, please. 15 (Record read.) 16 MR. HEINER: Mr. Gates, there is no

17 question pending now. Mr. Boies is having the court 18 reporter read back repeatedly the same question, but 19 there is no question actually pending at the moment. 20 MR. BOIES: The question that was read 21 back is pending, Mr. Heiner. 22 THE WITNESS: I answered that question. 23 MR. BOIES: Would you read back the 24 question and the answer. 25 (The record was read as follows: 295

1 2

"Q. Have you ever had discussions within Microsoft about the desirability

3

trying to undermine Sun because of what

of Sun 4 was doing in Java? 5 A. I said to you part of our activity 6 is to go out and work with customers to see 7 what it takes to have them choose to license 8 our products. And that's in competition with 9 many other companies, including Sun.") 10 Q. BY MR. BOIES: I'm not now talking 11 about what you do in competition with other products 12 or other companies. What I'm talking about is 13 whether or not you've had discussions with people 14 within Microsoft in which you talked about the need 15 to undermine Sun, using those words, if that will 16 help you, within Microsoft? 17 A. I don't remember using those words. 18 Q. You don't? 19 A. No. 20 Q. Do you think you did use those words or

21 you just don't know one way or the other? 22 A. I don't know. 23 Q. Would it be consistent with the way you 24 felt about Java for you to have told people that you 25 wanted to undermine Sun? 296

1 A. As I've said, anything about Java 2 you've got to show me a context before I can answer 3 because just the term Java itself can mean different 4 things. 5 Q. Well, let me try to approach it this 6 way, Mr. Gates. Have you ever told anyone, 7 regardless of what you meant by it, that you wanted 8 to undermine Java or undermine Sun or undermine Java 9 because of Sun, any of those? 10 MR. HEINER: And to be completely 11 precise, the actual question is merely whether the 12 witness recalls using that particular word, 13 regardless of meaning, just that word? 14 MR. BOIES: Yes. And if he does 15 recall, I'll ask him what he meant by it. 16 MR. HEINER: I understand. 17 THE WITNESS: I said I don't recall 18 using that word. 19 Q. BY MR. BOIES: Would it have been 20 consistent with the way that you felt about Sun and 21 about Java for you to have used that word? 22 And if you don't understand the 23 question, I'll rephrase it. 24 A. Well, Sun's message to the market and 25 ours aren't the same and so there is, as part of that 297

1 competition, a desire to get people to understand our 2 message and what we're providing versus their message 3 and what they're providing. So in that sense there 4 could have been a discussion around that topic. But 5 I still don't know if the word "undermine" was ever 6 used. 7 Q. Did you have discussions with Apple 8 that were directed towards attempting to reduce or 9 eliminate competition, Mr. Gates? 10 MR. HEINER: Objection. 11 THE WITNESS: No. 12 Q. BY MR. BOIES: Did you have discussions 13 with Apple in which you were trying to get Apple to 14 agree to help you undermine Sun? 15 A. There was some discussion about what 16 runtime APIs Apple would support, whether they would 17 support some of ours or some of Sun's. I don't think 18 I was involved in any discussions myself with Apple 19 about that. 20 Q. Well, let me show you a document and 21 try to probe what you mean by being involved. Let me 22 give you a copy of a document that has been 23 previously marked as Government Exhibit 365. 24 A portion of this document is an e-mail 25 message from you to Paul Maritz and others and the 298

1 you can

portion I'm particularly interested in, and

2 read as much of the three-line e-mail as you wish, is 3 the last sentence, which reads, "Do we have a clear 4 plan on what we want Apple to do to undermine Sun?" 5 Did you send this e-mail, Mr. Gates, 6 on or about August 8, 1997? 7 A. I don't remember sending it. 8 (The document referred to was marked 9 by the court reporter as Government Exhibit 365 for 10 identification and is attached hereto.) 11 Q. BY MR. BOIES: Do you have any doubt 12 that you sent it? 13 A. No. It appears to be an e-mail I sent. 14 Q. You recognize that this is a document 15 produced from Microsoft's files, do you not, sir? 16 A. No. 17 Q. You don't? 18 A. Well, how would I know that? 19 Q. Do you see the document production 20 numbers down at the bottom? 21 A. I have no idea what those numbers are. 22 Q. Do you recognize this as the form in 23 which e-mail has been printed out by Microsoft? 24 A. I don't know what that means. It's -25 all e-mail printed by anyone looks just like this, so 299

1 you any 2 3 4 with 5 document 6 would

the fact that it looks like this doesn't give clue as to who printed it. Q. Let's begin with that, sir. E-mail printed out by other people are not stamped Microsoft confidential stamps and Microsoft production numbers; you would agree with that,

7 8 9

you not? A. That has nothing to do with printing out. Q. Do you understand my question, sir? A. No. Q. Do you see down at the bottom where there are confidential stamps and a stamp that

10 11 12 13 says 14 "Attorneys Only" and document production stamps? Do 15 you see those? 16 A. I see the stamps. I can't characterize 17 whether they're document production stamps. To me 18 they look more like what you'd see on a prisoner's 19 uniform. 20 Q. So that you don't have any knowledge 21 about these stamps; is that your testimony? 22 A. I've never seen a stamp like that. 23 I've used a stamp like that. 24 Q. Haven't you seen stamps like that on 25 every single one of the documents you've been shown 300

1 during this deposition? 2 A. Can you get me all the exhibits? 3 MR. NEUKOM: Is this a good use of 4 time, Counsel? 5 MR. BOIES: Well, when he says he has 6 never seen them before -7 THE WITNESS: You asked about this 8 stamp. 9 MR. BOIES: -- and, you know, that he 10 has never seen the stamp before and he's been shown 11 40 documents -12 MR. NEUKOM: It's just a waste of time. 13 MR. BOIES: It is a waste of time. And 14 I think it's absolutely clear who the witness is 15 MR. NEUKON: Let's get on with it and 16 have a deposition, shall we?

17 MR. BOIES: We're trying to have a 18 deposition. 19 THE WITNESS: Can we look at that one? 20 Q. BY MR. BOIES: Yes. The one that has 21 this document production stamp and the confidential 22 stamp in the bottom right-hand corner; is that the 23 one you mean, Mr. Gates? 24 A. Is that a stamp? To me that's not a 25 stamp. 301

1 MR. HEINER: Let's move on. 2 MR. BOIES: Mr. Heiner, I understand 3 why you want to move on. 4 MR. HEINER: Relax, relax. There must 5 be some way to break through. 6 MR. BOIES: I think there must be. 7 MR. HEINER: Let's try a different 8 question. 9 MR. BOIES: I think there must be, but 10 part of what I want to do is I want to get on the 11 record the way this witness answers questions. I 12 think I'm entitled to do that. 13 MR. HEINER: The witness already 14 testified that this appears to be an e-mail he sent, 15 but he doesn't recall sending it. That's what you 16 need, that's what you have. He's not familiar with 17 the discovery process of some paralegal. That's the 18 testimony right now. And that's not important. 19 MR. BOIES: Part of the testimony was 20 he had never seen the stamp before when he's seen it 21 40 times in this deposition. And I think that goes 22 to this witness's credibility and I think this 23 witness's credibility is an important issue in this 24 case.

25

MR. HEINER:

You don't care about 302

1 stamps. 2 MR. BOIES: I don't care about stamps. 3 What I care about is credibility and whether the 4 witness is being forthright in his answers and I 5 think I'm entitled to test that when he says things 6 that are as remarkable as the fact that he has never 7 seen a document production stamp like this before in 8 this case after how long the case has gone on. 9 MR. HEINER: You're not going to stand 10 up in court and talk about stamps. 11 MR. BOIES: You're probably right about 12 that. 13 Q. Let me go back to the e-mail, 14 Mr. Gates. What did you mean when you asked 15 Mr. Maritz whether or not, "We have a clear plan on 16 what we want Apple to do to undermine Sun"? 17 A. I don't remember. 18 Q. Did you personally participate in any 19 conversations with Apple in 1997 and 1998? 20 A. Of any kind? 21 Q. Let me be a little more specific. Did 22 you participate in any conversations with Apple in 23 1997 or 1998 concerning what Apple would or would not 24 do that would affect Microsoft competitively? 25 A. Well, there were some conversations 303

1 with Steve Jobs about Microsoft Office and some -2 and a relationship we formed around that and some 3 other issues. 4 Q. And did you participate in those 5 conversations? 6 A. I talked to Steve Jobs on the phone 7 I think twice. 8 Q. And what was the nature of your 9 conversations with Mr. Jobs? 10 A. Well, Steve had -- Steve called me up 11 and said that he had become the CEO of Apple, sort 12 of, and that Gil Amelio wasn't the CEO of Apple. And 13 he raised the question of was there some beneficial 14 agreement that we could enter into different than 15 we'd been discussing with Gil. And it wasn't a very 16 long call and the conclusion was that Greg Maffei 17 would go see Steve. 18 Q. What is Mr. Maffei's title? 19 A. At that time? 20 Q. What is his title today? 21 A. His title today is CFO. 22 Q. Of Microsoft? 23 A. Uh-huh. 24 Q. Chief financial officer? 25 A. Uh-huh. 304

1 2 3 4 5 6 7 8

Q. And what was his title at the time? A. I think treasurer. Q. When did Mr. Maffei go to talk to Mr. Jobs? A. I don't recall the date. Q. Approximately? A. Sometime in '97. Q. This was after your conversation

9

Mr. Jobs?

with

10 A. Yes. 11 Q. Did you have any conversation with 12 Mr. Jobs or anyone else at Apple after your 1997 13 conversation with Mr. Jobs? 14 A. I had a brief conversation with him 15 again in '97 the night before a Mac World speech that 16 he was giving where I appeared as part of that 17 speech. But it was about my role in his speech. 18 Q. I'm going to leave that aside. 19 A. Well, it all relates to the agreement 20 with Apple. 21 Q. Okay, then I won't leave it aside. 22 What did you say to him and what did he say to you 23 about the agreement with Apple? 24 A. I said, "It's not signed yet. What are 25 we going to do about this presentation if it doesn't 305

1 get signed?" And he said he hoped it would be 2 signed. And then we talked about the logistics of 3 appearing by video conference in the middle of his 4 speech. 5 Q. Have you completed your answer? 6 A. Yes. 7 Q. Other than the two telephone -- or I 8 guess one telephone conversation and one in person -9 was the brief conversation you've just recounted the 10 one in person? 11 A. No, that was on the phone. He was in 12 Boston, I was in Seattle. That's why I had to do a 13 video conference to be in his speech. 14 Q. So both of your conversations with 15 Mr. Jobs in 1997 were by telephone; is that correct? 16 A. There may have also been some e-mail

17 between Steve and I. I don't think there were any 18 more phone calls, but the two I described were both 19 phone calls. There were no face-to-face meetings 20 that I remember. 21 Q. Other than the two telephone calls and 22 leaving e-mail aside, did you have any conversations 23 either by telephone or in person with any 24 representative of Microsoft in 1997 or 1998? 25 A. Yes. 306

1 2 3 4

MR. HOUCK: You misspoke. You said Microsoft and I think you meant Apple. Q. BY MR. BOIES: Other than the two telephone conversations with Mr. Jobs that you

have 5 already identified, during 1997 or 1998 did you have 6 any conversations by telephone or in person with any 7 representative of Apple? 8 A. I'm trying to think when Heidi Roizen 9 quit Apple. I think she quit by '97, but I'm not 10 sure. Yeah, I'm pretty sure she quit by then, so no, 11 I don't think so. 12 Q. Do I take it from that answer that you 13 had a conversation with Heidi Roizen? 14 A. At some point in time that I can't 15 remember, yes. 16 Q. And do I also take it that at some 17 point Heidi Roizen left Apple? 18 A. That's right. 19 Q. And that your conversation with Heidi 20 Roizen was while she was at Apple? 21 A. Not all of my conversations with her, 22 but the ones that I thought would be responsive to

23 your questions related to the time of her employ at 24 Apple. I've had other conversations with Heidi 25 Roizen both before she worked at Apple and after she 307

1 worked at Apple. 2 Q. Where does she now work? 3 A. She doesn't have a job at this point. 4 Q. Other than your possible conversations 5 during the period with Heidi Roizen and the two 6 telephone conversations in 1997 with Mr. Jobs, did 7 you have any other conversations either by telephone 8 or in person with any representative of Apple in 1997 9 or 1998? 10 A. No, I don't think so. 11 Q. To your knowledge, did any 12 representative of Microsoft have any meetings or 13 telephonic discussions -14 A. Certainly. 15 Q. -- with any representatives of Apple -16 A. Certainly. 17 Q. -- in 1998 concerning competitive 18 issues? 19 A. I don't know what you mean by 20 "competitive issues," but there is an ongoing contact 21 with Apple. We're the largest developer of software 22 for the Apple Macintosh and so there is constant 23 discussion with Apple. 24 Q. And as the largest developer of 25 software for the Macintosh, is what you do important 308

1 2

to Apple? A. Sometimes it doesn't seem like it.

3

always think of it as important, but sometimes

We they 4 don't treat it that way, sometimes they do. 5 Q. You mentioned discussions with respect 6 to Office. Would you explain for the record what 7 you're talking about there. 8 A. Microsoft Office. 9 Q. Microsoft Office for Macintosh? 10 A. Yes. 11 Q. And was it your understanding that 12 Microsoft Office for Macintosh was believed by Apple 13 to be very important to them? 14 A. I really have a hard time testifying 15 about the belief of a corporation. I really don't 16 know what that means. 17 Q. Well, sir, in making the decisions as 18 to what you would ask of Apple, did you believe that 19 what you were offering Apple with respect to 20 Microsoft Office for Macintosh was important enough 21 to Apple so that they ought to give you something for 22 it? 23 A. I have no idea what you're talking 24 about when you say "ask." 25 Q. Well, let me show you a document that 309

1 has been previously marked as Government Exhibit 366. 2 This is a document bearing Microsoft document 3 production stamps MS98 0110952 through 53.

4 (The document referred to was marked 5 by the court reporter as Government Exhibit 366 for 6 identification and is attached hereto.) 7 Q. BY MR. BOIES: The first part of this 8 purports to be a copy of an e-mail from Don Bradford 9 to Ben Waldman with a copy to you, Mr. Maritz and 10 others on the subject of "Java on Macintosh/IE 11 Control." 12 Did you receive a copy of this e-mail 13 on or about February 13, 1998? 14 A. I don't know. 15 Q. Do you have any reason to doubt that 16 you received a copy of this e-mail? 17 A. No. 18 Q. The first paragraph reads, "Apple wants 19 to keep both Netscape and Microsoft developing 20 browsers for Mac -- believing if one drops out, the 21 other will lose interest (and also not really wanting 22 to pick up the development burden.) Getting Apple to 23 do anything that significantly/materially 24 disadvantages Netscape will be tough. Do agree that 25 Apple should be meeting the spirit of our cross 310

1 license agreement and that MacOffice is the perfect 2 club to use on them." 3 Do you have an understanding of what 4 Mr. Bradford means when he refers to MacOffice as 5 "the perfect club to use on Apple"? 6 A. No. 7 Q. The second sentence of that paragraph,

8 the one that reads, "Getting Apple to do anything 9 that significantly/materially disadvantages Netscape 10 will be tough." Was it your understanding in 11 February of 1998 that Microsoft was trying to get 12 Apple to do something to disadvantage Netscape? 13 A. No. 14 Q. Do you know why Mr. Bradford would have 15 written this in February of 1998 and sent a copy to 16 you? 17 A. I'm not sure. 18 Q. Did you ever say to Mr. Bradford in 19 words or substance in February of 1998 or thereafter, 20 "Mr. Bradford, you've got it wrong, we're not out to 21 significantly or materially disadvantage Netscape 22 through Apple"? 23 A. No. 24 Q. Did you ever tell Mr. Bradford or 25 anyone else in February, 1998 or thereafter, that 311

1 they should not be trying to get Apple to do things 2 that would significantly or materially disadvantage 3 Netscape? 4 A. No. 5 Q. What was Mr. Bradford's position in 6 February of 1998? 7 A. I think he had a small group in 8 California that worked -- I'm not sure who he worked 9 for. He probably worked for somebody who worked for 10 Silverberg or -- no. No, I'm not sure who he worked 11 for. 12 Q. Let's begin with what company he worked

13 for. He clearly worked for Microsoft; correct, sir? 14 A. That's right. 15 Q. Do you know what his title was? 16 A. No. 17 Q. Do you know who Mr. Waldman is? 18 A. Yes. 19 Q. What was his title in February of 1998? 20 A. I don't know. 21 Q. What were his responsibilities in 22 February of 1998? 23 A. He was -- he ran a group that was doing 24 Macintosh software. 25 Neither of these guys have a title like 312

1 vice-president. That I can say for sure. They have 2 a title like engineer or software engineer, software 3 engineer manager, but I don't know their titles. 4 They're not executives. 5 Q. In addition to you and Mr. Maritz, 6 copies of this go to David Cole, Dave Reed, Charles 7 Fitzgerald and Jon DeVaan. Do you know what 8 Mr. Cole's position was in 1998? 9 A. Yes. 10 Q. What was it? 11 A. He was the VP -- actually, I don't know 12 VP of what, but he was a VP working for -- I don't 13 know if we reorganized by then. He was in Maritz's 14 organization somewhere. 15 Q. What was Mr. Reed's position at that 16 time? 17 A. I have no familiarity with Mr. Reed. 18 Q. Do you have any familiarity with 19 Mr. Fitzgerald and Mr. DeVaan? 20 A. Yes. 21 Q. What were their positions?

22 23 24 25

A. Charles Fitzgerald was in the evangelism group working for Todd Nielson. Q. And Mr. DeVaan? A. Mr. DeVaan was managing the overall 313

1 Office development. 2 Q. Did you have any conversations with 3 anyone within Microsoft as to what position Microsoft 4 should take with Apple in terms of what Microsoft 5 should ask Apple for in return for Microsoft 6 developing Mac Office? 7 A. What time frame are you in? 8 Q. 1997 or 1998. 9 A. Well, it actually makes a big 10 difference. We reached an agreement with Apple in 11 1997 and there's no -- I'm not aware of any agreement 12 other than the 1997 one. 13 MR. BOIES: Could I have the question 14 read back. 15 (The record was read as follows: 16 "Q. Did you have any conversations 17 with anyone within Microsoft as to what 18 position Microsoft should take with Apple in 19 terms of what Microsoft should ask Apple for 20 in return for Microsoft developing Mac 21 Office?") 22 THE WITNESS: I'm not sure what you're 23 saying about Mac Office. We developed Mac Office 24 because it's a profitable business for us. 25 Q. BY MR. BOIES: Well, you threatened to 314

1 2 3 4

cancel Mac Office, did you not, sir? A. No. Q. You never threatened Apple that you were going to cancel Mac Office; is that your

5 testimony? 6 A. That's right. 7 Q. Did you ever discuss within Microsoft 8 threatening Apple that you were going to cancel Mac 9 Office? 10 A. You wouldn't cancel -- no. 11 Q. Let me show you a copy of a document 12 that we are marking as Government Exhibit 367. This 13 is another document bearing document production 14 numbers from the Microsoft document production. 15 The second item on the first page 16 purports to be an e-mail message from Ben Waldman to 17 you -18 A. No. 19 Q. -- dated June 27, 1997. 20 A. It's not to me. 21 (The document referred to was marked 22 by the court reporter as Government Exhibit 367 for 23 identification and is attached hereto.) 24 Q. BY MR. BOIES: Well, the one I'm 25 looking at says from Ben Waldman, sent February 27, 315

1 1997, 1:56 a.m. to Bill Gates, cc John DeVaan. 2 A. I must be on the wrong page. 3 Q. Very first page, second item. 4 MR. HEINER: We have something 5 different. 6 MR. NEUKOM: There is some confusion. 7 MR. BOIES: Okay. Let me try to be 8 sure we have the right document. I will refer to it 9 by document production numbers so that we're clear. 10 Let me mark as Government Exhibit 368

11 12 13 14 for 15 16 17 18 from 19 20 21 22 23 24 25

a document that bears document production stamp 98 0113394 through 97. (The document referred to was marked by the court reporter as Government Exhibit 368 identification and is attached hereto.) Q. BY MR. BOIES: Now, let me direct your attention to the second item on the first page of this exhibit. And this purports to be an e-mail Mr. Waldman to you dated June 27, 1997; is that correct, sir? A. The second one, uh-huh. Q. You have to answer audibly yes or no, Mr. Gates. A. Yes, the second one. Q. Now, in the second paragraph of this 316

1 e-mail to you, the second sentence reads, "The threat 2 to cancel Mac Office 97 is certainly the strongest 3 bargaining point we have, as doing so will do a great 4 deal of harm to Apple immediately." 5 Do you see that, sir? 6 A. Uh-huh. 7 Q. Do you recall receiving this e-mail in 8 June of 1997? 9 A. Not specifically. 10 Q. Do you have any doubt that you received 11 this e-mail in June of 1997? 12 A. No. 13 Q. Do you know why Mr. Waldman wrote you 14 in June of 1997 that, "The threat to cancel Mac 15 Office 97 is certainly the strongest bargaining point 16 we have, as doing so will do a great deal of harm to 17 Apple immediately"?

18 A. Well, Mr. Waldman was in charge of this 19 update. And the Mac Office product had been shipping 20 for over a decade by now. And there was a financial 21 question of whether to do this update and he felt it 22 made good business sense to do it. Other people, 23 irrespective of the relationship with Apple, had said 24 that it didn't make sense to do the update. And so 25 there was some mail from Ben, including this one, 317

1 where he was saying he thought we should go ahead and 2 finish the product. I'm not sure what he means about 3 the negotiations with Apple. I'm not sure what we 4 were negotiating with Apple at this point. 5 Q. Was this the time that you were 6 negotiating with Apple to try to find out what you 7 could get Apple to do to undermine Sun? 8 A. Well, the only e-mail -- the only thing 9 you've shown me where that term was used is after we 10 reached a Mac Office agreement with Apple. 11 Q. You're referring to your e-mail dated 12 August 8, 1997; is that correct? 13 A. That's right. 14 Q. That has been marked as Exhibit 365; is 15 that correct? 16 A. That's right. That's after. 17 Q. That's August 8, 1997? 18 A. That's right. 19 Q. And it is clear from your August 8, 20 1997 memo that you are still attempting to get Apple

21 22 23 24 25

to do additional things, is it not, sir? A. No. Q. Well, sir, let's read it. It's only three lines. You write, "I want to get as much mileage as possible out of our browser and Java 318

1 relationship here." 2 And when you talk about "here," you're 3 talking about with Apple, are you not, sir? 4 A. I'm not sure. 5 Q. Well, the subject of this is "FW: 6 Post-agreement"; correct, sir? 7 A. Yeah. That's what makes me think this 8 was probably post-agreement. 9 Q. Post-agreement with Apple; right? 10 A. Yes. 11 Q. So the subject is post-agreement with 12 Apple, and the very first sentence is, "I want to get 13 as much mileage as possible out of our browser and 14 Java relationship here." Second sentence says, "In 15 other words, a real advantage against Sun and 16 Netscape." Third line says, "Who should Avie be 17 working with? Do we have a clear plan on what we 18 want Apple to do to undermine Sun?" 19 Now, do you have any doubt that when 20 you talk about, "I want to get as much mileage as 21 possible out of our browser and Java relationship 22 here," you're talking about Apple? 23 A. That's what it appears. 24 Q. Do you have any recollection of any 25 discussions about the subject matter of this email 319

1

in or about August of 1997?

2 3 4 5 6 7 8 9

If the question is confusing, I'd be happy to rephrase it, Mr. Gates. A. Go ahead. Q. Did you send this e-mail? A. It appears I did. Q. Did you discuss this e-mail with anyone? A. I don't remember that. Q. Let me go back to Exhibit 368, which is the June 27, 1997 e-mail from Mr. Waldman to you.

10 11 Do 12 you recall -- and I know you've said you don't recall 13 receiving this e-mail, but do you recall anyone 14 describing the threat to cancel Mac Office 97 as a 15 bargaining point that you had in dealing with Apple 16 in or about June of 1997? 17 A. I remember going to meetings where Paul 18 Maritz took the position that we shouldn't do the 19 update, the Mac Office 97 update. And the main 20 negotiation we had with Apple at that point was a 21 discussion about a patent cross license. And so I 22 said to Paul I wanted to understand better where we 23 were on the patent cross license and understand the 24 state of the Mac Office development. And then it 25 appears that this is an e-mail that is coming after 320

1 those 2 3 the 4 27, 5 telling

that meeting.

I don't remember somebody using

exact words. Q. Whether you remember somebody using exact words that Mr. Waldman uses in his June 1997 e-mail to you, do you remember people

6 you in substance that the threat to cancel Mac Office 7 97 was a strong bargaining point that you had against 8 Apple and that cancelling Mac Office 97 would do a 9 great deal of harm to Apple immediately? 10 A. I know there was the internal debate 11 about whether to do the update. And I know there was 12 the patent discussion going on. And I said that 13 maybe even if it didn't make business sense to do the 14 update, maybe as part of an overall relationship with 15 the patent cross license, that we should go ahead and 16 do it. And so a commitment to do the upgrade was one 17 of the things that we told Apple we might commit to 18 as part of the patent cross license relationship. 19 Q. And did you believe in 1997 that 20 cancelling Mac Office 97 would do a great deal of 21 harm to Apple, as Mr. Waldman writes it would? 22 A. There was a question about whether to 23 do the upgrade and whether it made business sense. I 24 can't really say how much impact it would have on 25 Apple of us doing the upgrade or not. Certainly Ben, 321

1

as the person in charge of the upgrade, was

very 2 dramatic 3 4 whether 5 would do

passionate about its importance and its nature. Q.

My question to you now, sir, is

you believed that cancelling Mac Office 97 a

6 great deal of harm to Apple? 7 A. Well, I know that Apple would prefer 8 that we have a more updated version of Mac Office, 9 that that would be a positive thing for them, and so 10 that's why it was part of the negotiation relative to 11 the patent cross license. 12 Q. And did you believe that cancelling Mac 13 Office 97 would do a great deal of harm to Apple? 14 A. I told you I think it would be better 15 for Apple to have everybody doing major upgrades like 16 this. I doubt -- I can't characterize the level of 17 benefit of the upgrade to Apple, but certainly it's 18 something they wanted us to complete. 19 Q. The next sentence in Mr. Waldman's 20 June 27, 1997 e-mail to you begins, "I also believe 21 that Apple is taking this threat pretty seriously." 22 Did someone tell you in or about June 23 of 1997 that Apple was taking Microsoft's threat to 24 cancel Mac Office 97 seriously or pretty seriously? 25 A. Well, Maritz had taken the position 322

1

that it didn't make business sense to finish

2

upgrade.

this And it's very possible Apple might

have 3 heard about Maritz's opinion there and therefore been 4 worried that we, businesswise, didn't see a reason to 5 complete the upgrade and that they would have the

6 older Mac Office as opposed to this new work that we 7 were part way along on. 8 Q. Mr. Gates, my question is not what 9 position Mr. Maritz did or did not take. My question 10 is whether anyone told you in or about June of 1997 11 that Apple was taking pretty seriously Microsoft's 12 threat to cancel Mac Office 97? 13 A. Apple may have known that senior 14 executives at Microsoft, Maritz in particular, 15 thought that it didn't make business sense to 16 complete that upgrade. 17 Q. Mr. Gates, I'm not asking you what 18 Apple may have known or may not have known. What I'm 19 asking you is whether anybody told you in or about 20 June of 1997 that Apple was taking pretty seriously 21 Microsoft's threat to cancel Mac Office 97? 22 A. Those particular words? 23 Q. Told you that in words or in substance. 24 A. I think I remember hearing that Apple 25 had heard about Maritz's view that it didn't make 323

1 sense to continue the upgrade, but -- and that, you 2 know, they wanted us to continue the upgrade. But 3 I -- I don't remember any of the -- it being phrased 4 at all the way you're phrasing it. 5 Q. Well, the way I'm phrasing it is the 6 way that Mr. Waldman phrased it to you in his e-mail 7 of June 27, 1997; correct, sir? 8 A. Well, in reading it, I see those words, 9 yes. 10 Q. And you don't have any doubt that you

11 received this e-mail, do you, sir? 12 A. I have no reason to doubt it. I don't 13 remember receiving it. I do remember in general 14 sending an e-mail like the one that's at the top 15 there. 16 Q. Do you recall anyone telling you in 17 words or in substance in or about June of 1997 what 18 Mr. Waldman is writing here in this e-mail? 19 MR. HEINER: Objection. 20 THE WITNESS: This is a very long piece 21 of e-mail. Have you read the whole e-mail yourself? 22 MR. BOIES: I think my question was 23 imprecise. I was trying to avoid quoting something 24 for yet another time, but I accept your counsel's 25 view that the question was probably defective. I 324

1 thought it was clear what portion of the email we 2 were talking about, but I will make it clear. 3 Q. Mr. Gates, Mr. Waldman on June 27, 4 1997, sends you an e-mail that says, "The threat to 5 cancel Mac Office 97 is certainly the strongest 6 bargaining point we have, as doing so will do a great 7 deal of harm to Apple immediately. I also believe 8 that Apple is taking this threat pretty seriously." 9 Do you recall anyone -10 A. Do you want to finish the sentence or 11 not? 12 Q. You can if you think it is necessary to 13 answer the question. 14 Do you recall anyone telling you what I 15 have just quoted in words or in substance in or about

16 17 18 19 20 21 22 23 24 25

June, 1997? A. No. MR. HEINER: It's just about 10:00 now. Can we take a break? MR. BOIES: If you wish. MR. HEINER: Yes, thanks. VIDEOTAPE OPERATOR: The time is 9:57. We're going off the record. (Recess.) VIDEOTAPE OPERATOR: The time is 10:21. 325

1 We are going back on the record. 2 Q. BY MR. BOIES: What were the primary 3 goals that you personally had, Mr. Gates, in terms of 4 getting Apple to agree to things? 5 MR. HEINER: Objection. Can you be 6 just a bit more specific on that? 7 MR. BOIES: Sure. 8 Q. In the period of 1996 forward, after 9 you concluded that Java, or as you put it, Java 10 runtime threat and Netscape were competitive threats 11 to Microsoft, what were your goals in terms of 12 dealing with Apple? What were you trying to get 13 Apple to agree to do for Microsoft? 14 A. Well, the main reasons we were having 15 discussions with Apple in this '97 period was that 16 they had asserted that various patents that they had 17 applied to various Microsoft products, and so our 18 primary focus in discussing an agreement with them 19 was to conclude a patent cross license of some kind. 20 Q. I want to be sure that the question and 21 answer are meeting. I asked for a period of 1996 to 22 the present and you answered about 1997. Were your 23 goals in 1996 or after 1997 any different than the

24 25

goals that you've just described in dealing with Apple? 326

1 A. There's only one agreement with Apple, 2 so I don't know what you're talking about. 3 Q. Okay. Do you understand the word goals 4 or objectives? 5 A. You talked about agreeing with Apple -6 there's only one agreement with Apple that I know 7 about that we're discussing and that was one that was 8 concluded in I think late July or early August, 1997 9 and there's no other agreement that I know was even 10 discussed or considered. 11 Q. Okay. Let me ask you to look at a 12 document previously marked as Government Exhibit 369. 13 The second item on the first page of this exhibit 14 purports to be an e-mail from you dated June 23, 1996 15 to Paul Maritz and Brad Silverberg with copies to 16 Messrs. Higgins, Bradford, Waldman and Ludwig on the 17 subject of "Apple meeting." 18 (The document referred to was marked by 19 the court reporter as Government Exhibit 369 for 20 identification and is attached hereto.) 21 Q. BY MR. BOIES: Did you send this 22 e-mail, Mr. Gates, on or about June 23, 1996? 23 A. I don't remember it specifically, but I 24 don't have any reason to doubt that I did. 25 Q. In the second paragraph you say, "I 327

1 have 2 key goals in investing in the Apple 2 relationship - 1) Maintain our applications share on 3 the platform and 2) See if we can get them to embrace 4 Internet Explorer in some way." 5 Do you see that? 6 A. Yeah. 7 Q. Does that refresh your recollection as 8 to what your two key goals were in connection with 9 Apple in June of 1996? 10 A. First of all, June of 1996 is not in 11 the time frame that your previous question related 12 to. And certainly in the e-mail to this group I'm 13 not talking about the patent thing, but believe me, 14 it was our top goal in thinking about Apple for many, 15 many years because of their assertions. 16 Q. My time frame in my question, sir, was 17 a time frame beginning in 1996 when you began to view 18 Netscape or the Java runtime threat as a competitive 19 threat to Microsoft. 20 A. And that was after June of 1996. 21 Q. Is it your testimony that in June of 22 1996 you did not consider Netscape to be a 23 competitive threat to Microsoft? 24 A. Netscape was a competitor, but in terms 25 of Java and all the runtime related issues, we didn't 328

1 2

have a clear view of that at all. Q. So that -- I want to be sure I've

got 3 your testimony accurately. testimony that

It is your

4

in June of 1996 you considered Netscape to be

a 5 competitive threat but you did not consider Java or 6 Java runtime to be a competitive threat; is that your 7 testimony? 8 A. We considered Netscape to be a 9 competitor and I told you earlier that until late '96 10 we were unclear about our position on various Java 11 runtime things and what other companies were doing 12 and what that meant for us competitively. 13 Q. Do you agree that in June of 1996 the 14 two key goals that you had in terms of the Apple 15 relationship were, one, maintain your applications 16 share on the platform, and two, see if you could get 17 Apple to embrace Internet Explorer in some way? 18 A. No. 19 Q. Do you have any explanation for why you 20 would have written to Mr. Maritz and Mr. Silverberg 21 on June 23, 1996 that those were your two key goals 22 in the Apple relationship? 23 A. They weren't involved in the patent 24 issue at all. So when I write to them, I'm focused 25 on the issues that relate to them. I do mention 329

1 primary 2 3 4 5 6 7 8 mail?

patents in here, but that certainly was the goal at this time and in subsequent times. Q. Let me be clear. When you write to Mr. Maritz and Mr. Silverberg, you talk about patents, do you not, sir? A. Where do you see that? Q. Well, did you talk about patents? A. Do you want me to read the entire

9 Q. Have you read it enough to know whether 10 you talk about patents? 11 A. I saw the word "patent" in one place. 12 If I read the whole thing, I can find out if it's in 13 other places as well. 14 Q. You do talk about patent cross license, 15 do you not, in this memo? And if you want to look at 16 the last page, five lines from the bottom. 17 A. Yeah. They weren't involved in the 18 patent issues at all, so it looks like in this mail I 19 just mention that in a summary part, but it was our 20 top goal in our discussions with Apple. 21 Q. When you write to Mr. Maritz and 22 Mr. Silverberg, you don't describe that as your top 23 goal, in fact, you don't even describe it as one of 24 your two or three key goals; correct, sir? 25 A. This piece of e-mail doesn't talk about 330

1 the patent goal as the top goal. It's most likely 2 that's because the people copied on the mail don't 3 have a thing to do with it and I wouldn't distract 4 them with it. 5 Q. I want to be sure I have your testimony 6 correct. In June of 1996, what was Paul Maritz's 7 title? 8 A. He was involved in product development 9 activities. 10 Q. He was involved in product development

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

activities. What was his title? A. I don't know. Systems. Q. Systems? A. Uh-huh. Q. Did he have a title that went with that? A. Senior vice-president systems. I don't know. Q. Senior vice-president systems, I see. Did Mr. Silverberg have a position in June of 1996? A. He worked for Mr. Maritz. Q. Did he have a title? A. I don't know what his title was at the time. He would have been an officer of some kind. 331

1 Q. An officer of some kind. 2 So you're writing a memo to Paul 3 Maritz, a senior vice-president, and Brad Silverberg, 4 an officer of some kind, and you're sending copies to 5 four other people on the subject of the Apple 6 meeting, and you say, "I have 2 key goals in 7 investing in the Apple relationship." 8 A. That's quite distinct than any goals I 9 might have for a deal with Apple. It says, "I have 2 10 key goals in investing in the Apple relationship," 11 not "I have 2 key goals for a deal with Apple." 12 Q. Well, sir, at the bottom you say what 13 you propose in terms of a deal and you talk about 14 what Apple will get out of the deal and what 15 Microsoft will get out of the deal; correct, sir? 16 A. Do you want me to read you the e-mail? 17 I mean I don't know anything more than just what it 18 says in the e-mail. I'm glad to read it to you. 19 Q. Well, sir, does it say at the bottom of 20 the e-mail that you are proposing something with

21 22 get 23 24 25

Apple and you are identifying what Apple would get under your proposed deal and what Microsoft would under your proposed deal? A. Yeah, that's at the bottom of the e-mail. 332

1 2

Q. In fact, the bottom of the e-mail talking about a proposed Apple-Microsoft deal,

you 3 say, "The deal would look like this," and then you've 4 got a column "Apple gets" and a column "Microsoft 5 gets" and a column "Both get"; right, sir? 6 A. I'm reading that. 7 Q. Now, in this e-mail of a page or a page 8 and a half in which you are proposing this deal, you 9 describe your two key goals as maintaining 10 Microsoft's applications share on the platform and 11 getting Apple to embrace Internet Explorer. 12 A. No, that's wrong. 13 Q. That's wrong, okay. 14 A. The word "deal" and the word 15 "relationship" are not the same word. This says, "I 16 have 2 key goals in investing in the Apple 17 relationship." This down here is an agreement which 18 I thought we could reach with Apple. 19 Q. Is it your testimony here today under 20 oath that your two key goals in investing in the 21 Apple relationship, which you mention in the second 22 paragraph of this e-mail, is different than your two 23 key goals in the proposed deal that you describe five 24 paragraphs later?

25

A.

1

I don't see anything in here about the 333

key goals -- two key goals in the deal.

I've

told 2 you that I'm certain that my primary goal in any deal 3 was the patent cross license. 4 Q. Mr. Gates, my question is whether it is 5 your testimony today here under oath that when you 6 talk about your two key goals in investing in the 7 Apple relationship in the second paragraph of this 8 e-mail, that that is different than what your key 9 goals were in the deal that you proposed five 10 paragraphs later? 11 A. That's right. Investing in a 12 relationship is different than the deal. 13 Q. Now, you don't tell Mr. Maritz or 14 Mr. Silverberg that your goals for investing in the 15 Apple relationship are different than your goals in 16 the proposed deal, do you, sir? 17 A. But the goals and the deal are quite 18 different, so obviously they would have known they 19 were quite different. 20 Q. Well, sir, you say the goals and the 21 deal are quite different. One of your two key goals 22 that you talk about in your second paragraph is to 23 get Apple to embrace Internet Explorer in some way. 24 And the very first thing under what Microsoft gets in 25 your proposed deal is, "Apple endorses Microsoft 334

1 Internet Explorer technology." Do you see that, sir? 2 A. Uh-huh. 3 Q. Now, does that refresh your 4 recollection that the deal that you were proposing 5 had some relationship to the two key goals that you 6 were identifying? 7 A. Some relationship, yes, but they aren't 8 the same thing at all. 9 Q. All right, sir. 10 Did you ever prepare any e-mail to 11 anyone, Mr. Maritz or Mr. Silverberg or anyone, in 12 which you said that your primary goal in an Apple 13 deal was obtaining a cross license? 14 A. I don't remember a specific piece of 15 e-mail, but I'm sure I did with at least Mr. Maffei 16 and Mr. Maritz. 17 Q. You're sure you sent them e-mail saying 18 that? 19 A. I'm sure I communicated it to them in 20 some way. 21 Q. Do you believe you sent them anything 22 in writing or an e-mail? 23 A. I think it's likely, but I don't 24 remember a specific document. 25 Q. You certainly haven't seen any such 335

1 document in being prepared for your deposition; is 2 that fair? 3 MR. HEINER: Objection. You're not 4 seeking to intrude on the attorney-client privilege? 5 MR. BOIES: No. I want to know if he

6 has seen any such document, this document he says he 7 thinks exists that wasn't produced in document 8 production. I want to see if he has ever seen it, if 9 he recalls ever seeing it now or any other time. 10 THE WITNESS: I didn't say anything 11 about what may or may not exist at this point. I 12 said I'm sure I communicated to Mr. Maritz and 13 Mr. Maffei that our primary goal in doing the deal 14 with Apple was the patent cross license. 15 Q. BY MR. BOIES: And I had thought, and 16 perhaps I misunderstood, I thought that you had said 17 that you believed that you actually communicated that 18 not merely orally but by e-mail or in writing. 19 A. I think it's likely that I communicated 20 it in e-mail. 21 Q. And if you had communicated it in 22 e-mail, would that e-mail have been preserved? 23 A. Not necessarily. 24 Q. A lot of these e-mails were preserved 25 because we now have copies of them; right? 336

1 A. That's right. 2 Q. How did Microsoft decide what emails 3 would be preserved and what e-mails would not be 4 preserved? 5 A. Individuals get e-mail into their 6 mailbox and they decide. 7 Q. Do you have any explanation as to why 8 people would have decided to keep the e-mail that 9 described your two key goals in the Apple 10 relationship as being what they are stated to be here

11 and not have preserved your e-mail that you say you 12 sent saying you had a primary goal of a cross 13 license? 14 MR. HEINER: Objection. Lack of 15 foundation. 16 THE WITNESS: You're missing -17 MR. HEINER: Hold it. Objection. 18 Those facts are not established. There could be 100 19 e-mails that talk about a patent cross license and 20 you may have them or you may not have them or they 21 may not have been called for. There is a range of 22 possibilities. That question is unfair and I object. 23 MR. BOIES: Okay, you've made your 24 objection. The witness will now answer the question. 25 MR. HEINER: Let's have it read back. 337

1 2 3

MR. BOIES: And if you come up with those hundred e-mails, we will read them with interest. I don't think you're going to and

you 4 5 6 7 8 9

10 11 find 12 with 13 14 15 the 16 17

don't think you're going to either. MR. HEINER: I disagree with that. MR. BOIES: Okay. Q. I'll restate the question to just be absolutely certain that it's a fair question, Mr. Gates. If it were the case that neither your counsel nor myself, after diligent search, can an e-mail that says your primary goal in dealing Apple was a patent cross license, do you have any explanation as to why that e-mail that you say you think exists would not have been saved, whereas e-mail that describes one of your two key goals as getting Apple to embrace Internet Explorer was

18 preserved? 19 MR. HEINER: Objection. It's not a 20 sensible question. You asked a hypothetical. How 21 can the witness explain what the facts might be in 22 your hypothetical? 23 MR. BOIES: He is not being asked to 24 explain what the facts are in a hypothetical, I think 25 that's clear. If the witness tells me he cannot 338

1 answer the question, he can do so and we will go on 2 and take that up with everything else we'll take up 3 at a subsequent time. 4 THE WITNESS: When you say "dealing 5 with Apple," there were a lot of things we were 6 dealing with Apple on. I've told you in terms of the 7 deal, the deal I was involved in discussing in '96 8 and under another management at Apple in '97, there's 9 no doubt the primary goal was the patent cross 10 license. 11 Q. BY MR. BOIES: And by "the primary 12 goal," what you mean is the primary goal that you, 13 Mr. Gates, had; is that correct? 14 A. I don't think I'm the only one who had 15 it, but certainly yes, that was the primary goal of 16 myself and for the company. 17 Q. And when you said in your June 23, 1996 18 e-mail, "I have 2 key goals in investing in the Apple 19 relationship," you were talking about yourself 20 personally; is that correct? 21 A. Yeah. When I say "investing in the 22 Apple relationship," that means spending time with 23 Apple and growing the relationship.

24 Q. And when in describing the deal five 25 paragraphs later the very first thing that Microsoft 339

1 gets is, "Apple endorses Microsoft Internet Explorer 2 technology," did that indicate to you that that was 3 an important part of what you were getting in terms 4 of the deal? 5 A. No such deal was ever struck, so I'm 6 not sure what you're saying. 7 Q. Was that an important part of the deal 8 that you were trying to get, sir? 9 A. We never got as far as trying to get 10 that deal, unfortunately. 11 Q. You never got as far as trying to get 12 that deal; is that what you're saying? 13 A. No. Well, in this time frame Gil 14 Amelio's total focus was on his new OS strategy, so 15 what I outlined here we never got them to consider. 16 Q. Well, sir, your e-mail begins, "Last 17 Tuesday night I went down to address the top Apple 18 executives;" correct, sir? 19 A. That's right. 20 Q. And down at the bottom when you're 21 introducing the deal, you say, "I proposed." Now, 22 you're referring to what you proposed to the Apple 23 top executives, are you not, sir? 24 A. Yes. 25 Q. Okay. And what you proposed was 340

1 "the deal" that you then describe at the bottom of

2 the first page and the top of the second page; 3 correct, sir? 4 A. That's right. 5 Q. And that was a deal that you proposed 6 the Tuesday night before June 23, 1996 to what you 7 describe as the top Apple executives; correct, sir? 8 A. I put forward some of those points. 9 Q. Well, you put them forward and you 10 describe them as proposing a deal, correct, sir? 11 A. That's how I describe it here, yes. 12 Q. All right, sir. Now, you'd said that 13 the deal that you were talking about never got done. 14 Did you ever get Apple to endorse Microsoft Internet 15 Explorer technology? 16 A. You're trying to just read part of 17 that? 18 Q. I'm actually -- what I'm doing is 19 asking a question right now, sir. I'm asking whether 20 in 1996 or otherwise, at any time did you get Apple 21 to endorse Microsoft Internet Explorer technology? 22 A. Well, you can get a copy of the 23 agreement we reached with Apple and decide if in 24 reading that you think it meets that criteria or not. 25 Q. Sir, I'm asking you, as the chief 341

1 executive officer of Microsoft, I'm asking you 2 whether you believe that you achieved that objective? 3 A. We did not get some exclusive 4 endorsement. We did get some -- there's some part of 5 the deal that has to do with Internet Explorer 6 technology.

7

Q.

Do you know what that part of the

deal 8 is? 9 A. Not really. It has something to do with they will at least ship it along with other browsers. Q. Does the deal prohibit them from shipping Netscape's browser without also shipping Internet Explorer? A. I'd have to look at the deal to understand. Q. It is your testimony sitting here today under oath that you simply don't know one way or

10 11 12 13 14 15 16 17 18 the 19 other whether Apple is today free to ship Netscape's 20 browser without also shipping Internet Explorer? 21 A. That's right. 22 Q. When you identify things as key goals, 23 do you typically tend to follow up and see to what 24 extent those goals have been achieved? 25 A. In a very general sense, yes. 342

1 Q. Did you ever follow up to see whether 2 one of the two key goals that you identify in your 3 1996 e-mail to Mr. Maritz and Mr. Silverberg and 4 others of getting Apple to embrace Internet Explorer 5 technology in some way had been achieved? 6 A. Well, certainly what I said here, 7 "I have 2 key goals in investing in the Apple 8 relationship," that -- those weren't achieved because 9 the investments I made were with Gil Amelio, who was 10 fired from Apple very soon thereafter. 11 Q. Was there something about Mr. Amelio

12 getting fired that changed what your goals were for 13 the Apple relationship? 14 A. I said, "I have 2 key goals in 15 investing in the Apple relationship." The form that 16 investment took was spending time with Gil Amelio. 17 That turned out to be wasted time because he was 18 fired from Apple rather abruptly within about, oh, 19 eight months of this. 20 Q. When he was fired, did that change what 21 goals you had for the Apple relationship, Mr. Gates? 22 A. It was basically a complete restart 23 because we had to understand what the new management, 24 what they were going to do with Apple and where they 25 were going. 343

1 2

Q. A.

Did your goals change? Goals for what? For investing in

the 3 4

relationship? Q. You say in this e-mail you have two

5

goals for investing in the Apple relationship.

key One 6 of -7 A. In investing in the Apple relationship. 8 Q. One of them is to get Apple to embrace 9 Internet Explorer technology in some way. What I'm 10 asking you is whether that changed after this person 11 got fired? 12 A. We re-evaluated all of our thoughts 13 about working with Apple based on what the new

14 management was going to do, whether they were going 15 to target the machines, what they were going to do 16 with their machines. Since they continued to say we 17 were in violation of their patents, it continued to 18 be our top goal to get some type of patent cross 19 license. 20 MR. BOIES: Would you read the question 21 back, please. 22 (The record was read as follows: 23 "Q. One of them is to get Apple to 24 embrace Internet Explorer technology in some 25 way. What I'm asking you is whether that 344

1 2 3

changed after this person got fired?") MR. BOIES: Better read the whole question. And then again reincorporate it so

that 4 5 6 7 8 9

it's clear for the record. (The record was read as follows: "Q. You say in this e-mail you have two key goals for investing in the Apple relationship. One of -A. In investing in the Apple 10 relationship. 11 Q. One of them is to get Apple to 12 embrace Internet Explorer technology in some 13 way. What I'm asking you is whether that 14 changed after this person got fired?") 15 The WITNESS: You keep, either 16 intentionally or unintentionally, trying to confuse 17 my goals for investing in the relationship with the 18 goals we had overall for various dealings with Apple. 19 Certainly the goals I had for investing in the 20 relationship, that I had to start over and rethink

21 CEO 22 23 24 of 25 now,

because the investment was to spend time with the who had been fired. Q. Mr. Gates, neither in this e-mail nor in any other document that either of us is aware do you make that distinction that you're making 345

1 2 3 4 5 6

correct? MR. HEINER: Objection. Q. BY MR. BOIES: Do you understand the question I'm asking? A. This document does not say that my goals for dealing -- does not state my goals

for 7 dealing with Apple up here. It states my goals in 8 investing in the Apple relationship, so there is a 9 clear distinction right there in that document. 10 Q. Mr. Gates, this document deals with a 11 proposed deal that you made to top Apple executives; 12 correct? 13 A. That's only one part of what is in the 14 document. There's a part where it talks about -you 15 never mentioned it, but the first goal is "Maintain 16 our applications share on the platform." That's 17 something I'm doing in investing in the Apple 18 relationship and that's not related to the deal 19 that's given -- the proposed deal discussed below in 20 the e-mail, so those are clearly two separate things. 21 Related, but separate. 22 Q. What I think I've done is I think I 23 have mentioned the first goal a number of times.

24 25

A. Q.

1

I don't think so. I think it's been read about three 346

times in the record and the record will show

it. 2 3 4

A. Q.

Okay. It's a point of disagreement. Okay. MR. HEINER: But not an important

one. 5

MR. NEUKOM:

But a time consuming

one. 6 MR. BOIES: Exactly the point that I 7 was making, which is why the witness makes those 8 kinds of statements. The -9 MR. HEINER: It took two to tango just 10 there. 11 MR. BOIES: Yes, it did. And actually 12 it took four of us, three on that side of the table 13 and me. 14 Q. My question, Mr. Gates, has to do with 15 what your goals were, what your stated goals were. 16 Now, you say here, "I have two key goals in investing 17 in the Apple relationship, one of which is to get 18 Apple to embrace Internet Explorer technology in some 19 way." 20 Did that continue to be a goal that you 21 had after 1996? 22 A. It wasn't a goal in investing in the 23 Apple relationship in terms -- in the sense I meant 24 it here. It was a goal for our overall dealing with 25 Apple. One of many. 347

1 Q. Okay. Was it a key goal? 2 A. I'm not sure what you mean by key goal. 3 It was a goal. 4 Q. What I mean by key goal is what you 5 meant by key goal in your June 23, 1996 email, 6 Mr. Gates. 7 A. That's about investing in the Apple 8 relationship, which meant spending time with Gill 9 Amelio, so I don't know why you can take the word out 10 of there and apply it to a completely different 11 context. 12 Q. When you say "a completely different 13 context," let's be clear about what we're talking 14 about. The completely different context that you're 15 talking about is the difference between investing in 16 the Apple relationship and doing a deal with Apple; 17 is that what you're saying? 18 A. No. We have goals for our general 19 dealings with Apple, which came to a deal -- we 20 actually reached a deal in either late July, '97 or 21 early August. But there's a separate thing of what 22 was that deal, what we were able to achieve, what we 23 were trying to achieve when we were dealing with the 24 previous management, and what I'm trying to do in 25 terms of spending my time investing in the Apple 348

1 2

relationship. Q. And what you're saying is it is your

3 testimony under oath, although you can't recall 4 actually having sent this e-mail, you're confident 5 when you wrote this and referred to investing in the 6 Apple relationship, you meant only what you expected 7 to get out of spending time with the Apple 8 executives; is that your testimony? 9 A. Yeah. I was explaining why I was 10 spending time with Gill Amelio. 11 Q. And that's all you meant to be saying 12 here is your testimony? 13 A. That's what -- in reading this, that's 14 what I believe I was trying to communicate to the 15 recipients of the e-mail. 16 Q. All right, sir. 17 Let me ask you to look at a document 18 previously marked as Government Exhibit 370. This 19 purports to be an e-mail, and the second item on the 20 e-mail is an e-mail from John Ludwig to Don Bradford 21 dated August 21, 1997. And the subject is 22 "Conversations with BillG last night." 23 And the BillG referred to there is you; 24 correct, sir? 25 A. Yes. 349

1 2 370 for 3 4 at 5 6 the 7 8

(The document referred to was marked by the court reporter as Government Exhibit identification and is attached hereto.) Q. BY MR. BOIES: And it begins, "I was the exec staff meeting last night." Can you explain for the record what exec staff meeting was? A. He is referring to a regular

9 get-together four times a year of the Microsoft 10 executive staff. 11 Q. And he goes on to say that, "There were 12 three interesting exchanges with Bill and the whole 13 group about Apple." Do you see that? 14 A. I see it. 15 Q. And No. 1 is, "Bill's top priority is 16 for us to get the browser in the October OS release 17 from Apple. We should do whatever it takes to make 18 this happen. If we are getting shut out, we should 19 escalate to Bill. You should make sure that we are 20 engaging deeply with Apple on this one and resolving 21 any and all issues." 22 Do you recall conveying to your 23 executive staff in or about August of 1997 that your 24 top priority was to get Microsoft's browser in the 25 October OS release from Apple? 350

1 A. No, I don't recall that. 2 Q. The top e-mail, which is from Don 3 Bradford to a number of people dated August 21, 1997 4 and is also on the subject of "conversations with 5 BillG last night," says that Mr. Bradford and someone 6 else, Mohan Thomas, "will take the lead on working 7 out the Apple bundle deal." Do you see that? 8 A. Yes. 9 Q. Did you instruct your executive staff 10 in or about August of 1997 to work out an "Apple

11 bundle deal"? 12 A. Well, I think this is post the August 13 agreement, late July or early August agreement we 14 reached with Apple. And I think there were some 15 circumstances under which they would include or 16 bundle IE with some of their shipments. I think 17 that's what that's referring to. 18 Q. And is that what your present 19 recollection is that you told your executive staff in 20 August of 1997? 21 A. Well, I don't recall specifically what 22 I said to the executive staff about Apple, but it 23 appears Ludwig took out of that that he was supposed 24 to make sure that whatever outs that Apple had under 25 the previous agreement for not shipping our 351

1 technology, that we avoided those being a problem 2 that prevented them from shipping our technology. 3 Q. Well, Apple wasn't prohibited from 4 shipping your technology in August of 1997, was it, 5 sir? 6 A. No, I actually think if we -- I don't 7 know the Apple agreement, I haven't read it, but I 8 think there is something in there that if we got 9 certain things done and if there were no problems and 10 it passed tests and we were ready in time, that they 11 would actually affirmatively include some of our 12 technology in various OS releases. And this appears

13 to be a discussion about whether or not we're going 14 to be able to meet the requirements on us related to 15 that. 16 Q. It is clear that getting the browser in 17 the October OS release from Apple was something that 18 you, Bill Gates, and Microsoft wanted; correct, sir? 19 A. Yes, that's something that we wanted. 20 Q. The last sentence of the second 21 paragraph says, "Bill was clear that his whole goal 22 here is to keep Apple and Sun split. He doesn't care 23 that much about being aligned with Apple, he just 24 wants them split from other potential allies." 25 And that relates to Java, does it not, 352

1 2

sir? A.

I don't have a direct recollection,

but 3 if you read the sentence in front of it, that 4 paragraph seems to relate to Java runtime. 5 Q. Do you have a recollection of telling 6 your executive staff in or about August 21 that your 7 whole goal with respect to Apple related to Java 8 runtime was to keep Apple and Sun split? 9 A. No. 10 Q. Who was at this executive staff 11 meeting? 12 A. Probably members of the executive 13 staff. 14 Q. And who were they? 15 A. It's about 40 to 50 people. I doubt 16 you want to take the time for me to guess. We

17 generally get about 70 percent attendance. Looking 18 at this document, I think it's very likely that I was 19 there and John Ludwig was there, but as to the rest 20 of the executive staff, I'd just be guessing. It's 21 very rare for us to have non-executive staff members 22 at those meetings, although sometimes it happens. 23 Q. Is Mr. Ludwig somebody who you believe 24 is an honest and competent person? 25 A. In general, yes. 353

1

Q.

Do you have any reason to believe

that 2 he would make up anything about what your statements 3 were? 4 A. No. 5 Q. Let me ask you to look at a document 6 that has been previously marked as Government 7 Exhibit 371. The portion I'm particularly interested 8 in is in the second e-mail that is in this exhibit, 9 which is on the first page. And it is an email from 10 you to Paul Maritz and others dated January 22, 1998. 11 (The document referred to was marked 12 by the court reporter as Government Exhibit 371 for 13 identification and is attached hereto.) 14 Q. BY MR. BOIES: Did you send this e-mail 15 on or about January 22, 1998? 16 A. I don't remember doing so, but I have 17 no reason to doubt that I did. 18 Q. The next to last sentence says, "I

19 we 20 21 22 23 24 25

think we can gain a lot of share with IE on Mac if do some modest things." Why were you interested in January, 1998, in increasing IE's share on Mac, as you describe it? A. I'm not sure what I was thinking in particular when I wrote this mail, but I can -354

1 sitting here now, I can give you some reasons that I 2 think I would have had for saying that. 3 Q. Okay. Would you do so, please. 4 A. Well, the use of IE on Macintosh was 5 beneficial to us in terms of the APIs we had there 6 and the content HTML extensions that we had there. 7 And when you go to people who do content, being able 8 to say to them that those extensions are popular not 9 only with PC users but Mac users, it makes it easier 10 to convince the content person to take unique 11 advantage of the innovations that we had made in HTML 12 as well as some of the innovations we had made in how 13 the browser was structured. 14 Q. I want to be sure I understand your 15 answer. You mentioned APIs and you mentioned the 16 HTML extensions. Are those two different things? 17 A. Yes, sir. 18 Q. Okay. And am I correct that the 19 broader distribution of the APIs is something that 20 makes writing to those APIs more attractive to 21 independent software writers? 22 A. If users are choosing to use the 23 software that those APIs are present in, it makes it

24 easier to convince software vendors to write to those 25 APIs. 355

1

Q.

Let me ask the question this way.

Why 2

were you interested in having Apple distribute

your 3 APIs? 4 MR. HEINER: Objection. 5 THE WITNESS: Well, the key issue 6 wasn't about distribution at all. The key issue was 7 usage share by Mac users of the various browsers that 8 were available on the Macintosh. 9 Q. BY MR. BOIES: Why were you interested 10 in having the usage share of Mac users of your APIs 11 increase? 12 A. You -- that question is nonsensical. 13 Q. Okay. You were asked earlier why you 14 wanted to increase your share of IE on Mac, do you 15 recall that? 16 A. Yes. 17 Q. And am I correct that you said that 18 there were two reasons, one dealt with APIs and one 19 dealt with HTML extensions? 20 A. Yeah. I've thought of a third reason 21 since then, but that's right. 22 MR. HEINER: There was also a third 23 reason at the time. You might not remember it. 24 THE WITNESS: Now there might be three 25 or four. 356

1

Q.

BY MR. BOIES:

Why don't you tell me

2 the one you're thinking of and we'll see if it is the 3 same one Mr. Heiner is thinking of. 4 A. Well, I talked earlier about having 5 traffic out of IE is always of value. 6 Q. So those are the three reasons that you 7 can think of now; is that correct? 8 A. Those are three reasons that are among 9 the good reasons that raising usage share of IE on 10 Macintosh was a positive thing for Microsoft. 11 Q. I'd like to know the other reasons you 12 can think of now, if there are other reasons. 13 A. That's all I can think of right now. 14 Q. Okay. Why does increasing IE share on 15 Mac help you with respect to APIs? 16 A. Because the Mac IE had APIs. 17 Q. And how does having that help 18 Microsoft? 19 A. Because those APIs are in common with 20 some Windows APIs. 21 Q. And why does that help Microsoft? 22 A. If we do things that make our APIs in 23 Windows more attractive, it helps us in increasing 24 the volume of Windows that we license. 25 Q. Are you saying that increasing IE share 357

1 on Mac will help increase the number of Windows that 2 you license? 3 A. Yeah. I went through the chain of 4 logic that explains that to you. I don't know if you 5 misunderstood some part of it. 6 Q. All I'm trying to do is get your 7 answers on the record because if I begin to tell you 8 what I think about your answers, we'll be here all

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

day.

So am I correct that it is your testimony here that increasing your share of IE on Mac will increase the distribution of Windows? A. I don't know what you mean by distribution of Windows. Q. The usage of Windows. A. No. The number of copies that we license. Q. Will that be increased? A. Through the indirect factors that I explained to you, yes, there is a positive effect there. Q. So by increasing your share of IE on Mac, you would expect to increase the number of copies of Windows that you would license? A. Yes, increasing our usage share over 358

1 time we think will help us to increase the number of 2 copies of Windows we will license. 3 Q. Does increasing IE's share on Mac make 4 it more likely that content providers will want to 5 use IE? 6 A. I don't know what you mean by content 7 providers using IE. Content providers use servers, 8 they don't use clients. 9 Q. Do you know what content providers are? 10 A. Yes. 11 Q. Give me an example of a content 12 provider. 13 Disney? 14 A. Disney. 15 Q. Disney would be a content provider. 16 Disney is an important content provider; correct, 17 sir?

18 19 20 21 an 22 23 24 25

A. Now you're going to have to give me some context. Q. Without me giving you some context, you can't answer the question as to whether Disney is important content provider; is that your testimony under oath? A. Important in what sense? Q. Important in the everyday, common usage 359

1 sense of what important means. 2 MR. HEINER: Mr. Boies, you're going 3 down one of those trails that you really don't need 4 to. If you go back to -- let me finish the point. 5 If you go back to the original question and answer, 6 Mr. Gates stated what part of the question he thought 7 he needed some clarification on, and it wasn't this 8 part. 9 MR. BOIES: I understand that. And I'm 10 trying to walk a balance between doing a number of 11 things, but this is somebody who won't tell me 12 whether he's going to come to trial and if he doesn't 13 come to trial, this is an evidentiary deposition and 14 if it's an evidentiary deposition, part of what I 15 need to do is make explicit on the record what I 16 think the credibility issues are. And so when I 17 think we get into what I will characterize, and 18 without meaning to engender a debate, but something 19 that might be alleged to be word games, I think it is

20 appropriate for me to make explicit what's going on 21 on the record. That's all I'm saying. 22 MR. HEINER: Okay. And I'm just saying 23 there was no question about content providers. The 24 issue was clients and servers and use of IE and can 25 easily be cleared up. 360

1

MR. BOIES:

Okay.

I'll try to do

it. 2 Q. Actually, I think probably the word 3 "content providers" was not used, but the word 4 "content" was used by the witness and I think it was 5 used in the context of answering the question. 6 THE WITNESS: If you're actually 7 interested, it's the "use IE" where you seem to be 8 confused about what content providers do. There is 9 no question about what content provider means. When 10 you say "use IE," it's people who view content who 11 use IE. 12 Q. BY MR. BOIES: Right. And in order for 13 somebody to view content through IE, that content has 14 to be put someplace to begin with; right? 15 A. Yes. 16 Q. And one of the things that Microsoft 17 has tried to do is it has tried to convince content 18 providers to put content places and in a way so that 19 it was more attractive to view that content using IE 20 than with Netscape's browser; correct, sir? 21 A. It's not the places that make it

22 attractive. It's the way they use the HTML. 23 Q. What you've tried to do, what Microsoft 24 has tried to do, is get content providers to display 25 information in a way that would make it more 361

1 attractive to a user to view that content using IE 2 than using Netscape Navigator; correct, sir? 3 A. No. We tried to get them to author it 4 in a way that they exploit our HTML extensions. 5 Author. 6 Q. And is the effect of that to make it 7 more attractive for users to view the content using 8 IE than Netscape Navigator? 9 A. It totally depends on what they do 10 what Netscape Navigator does with HTML extensions and 11 what that content provider does with those HTML 12 extensions. 13 Q. Let me ask what I think is a simple 14 question. Has Microsoft made an effort to get 15 content providers to agree to display information in 16 a way that makes that information more attractive 17 when viewed by the then existing Internet Explorer 18 than if viewed by the then existing Netscape browser? 19 A. Our efforts have been focused in 20 getting them to author so that it looks good in 21 Internet Explorer. These people are authors. They 22 don't do display, they do authoring. 23 Q. Let me try to use your words and maybe 24 that will move it along. 25 Have you tried -- has Microsoft tried 362

1 to get content providers to agree to, in your words, 2 author information and data in a way so that that 3 information and data is more attractive to users when 4 viewed through the then current version of Internet 5 Explorer than when viewed through the then current 6 version of Netscape's browser? 7 A. Our attempts to convince people to 8 author using our extensions is not relative to 9 Netscape. It's just a question of can we convince 10 them to use our extensions. And yes, we have 11 endeavored to convince them to use our extensions, 12 but that doesn't say anything about what they're 13 doing or how that stuff looks in Netscape. 14 Q. Are you saying that your effort to 15 convince content providers to use your extensions was 16 unrelated to what the effect would be on Netscape? 17 A. The effect on Netscape would be 18 indirect. Our intent in doing that was to increase 19 the popularity of our products. 20 Q. Was part of your objective also to 21 decrease the popularity of Netscape products? 22 A. Our intent was to increase the 23 popularity of our products. 24 Q. I'm asking a different question. The 25 answer may be simply no, but I'd like to have an 363

1 answer to my question, which is that in addition to 2 trying, as you say you were trying to, to increase

3 the popularity of your products, were you also trying 4 to decrease the popularity of Netscape products? 5 A. All of our effort was aimed at making 6 our product more popular. There may have been an 7 indirect effort in terms of their people choosing our 8 product over other people's products, but the focus 9 is on making our product more attractive. 10 Q. Did you enter into agreements with 11 content providers that limited the ability of those 12 content providers to make their content more 13 attractive when viewed through Netscape's then 14 current browser? 15 A. I'm not familiar with agreements that 16 we had with content providers. 17 Q. You're not familiar with them at all; 18 is that what you're saying? 19 A. I know that we had some, so I'm 20 familiar with their existence. I've never read one, 21 I've never seen one, I've never negotiated one. 22 Q. Have you ever discussed with anyone the 23 substance of what is in them? 24 A. What I know about them is that they -25 they're related to the efforts to convince people to 364

1

take advantage of extensions we've done that

2 3

those extensions worthwhile to end users. Q. My question now is whether you've

make

ever 4 discussed the substance of what's in those agreements 5 with anyone. And if you have --

6 7 8 9

A. To the degree I just described them, yes. Beyond that, no. Q. With whom did you have those discussions? 10 A. Oh, it would have been in meetings with 11 various people. You know, Brad Chase, Paul Maritz. 12 Brad Silverberg in a certain period of time. 13 Q. And did they ever tell you that these 14 agreements with content providers limited what the 15 content providers could do with Netscape? 16 A. I don't think so. 17 Q. Do you know, as you sit here now, 18 whether any of the agreements that you entered into, 19 Microsoft entered into with content providers over 20 the last three years limited what those content 21 providers could do with Netscape? 22 MR. HEINER: This question now is, 23 perhaps intentionally, quite a bit broader than the 24 original question about extensions and so forth? Or 25 maybe it's not intentional. 365

1 MR. BOIES: It is a different question. 2 And if the witness doesn't understand it, I'll 3 rephrase it. 4 THE WITNESS: I know that when I was 5 going to testify in Washington, D.C. in the Senate, 6 that Netscape or someone was raising these content 7 provider agreements in an effort to create some 8 controversy around them. And so I was given like a 9 paragraph or two summary. And there were about 40 10 issues in general there, but one of the issues was

11 related to those agreements. And so there may have 12 been something in those paragraphs about the 13 agreements beyond what I knew about them earlier. 14 Q. BY MR. BOIES: But you don't recall the 15 substance of that now; is that what you're saying? 16 A. Well, I can tell you there was 17 something about in a period of time a certain class 18 who is on our channel bar, they could appear on 19 competitive channel bars, but if they -- they could 20 only pay us. There was something like that. 21 Q. That's an interesting one for you to 22 focus on. Can you think of any reason why you would 23 want content providers to agree that they would not 24 pay Netscape any money? 25 A. I know that we had hopes that the 366

1

channel bar would get some usage and we wanted

2

work with some content providers to show off

to the 3 channel bar. And I can't give you the reasoning 4 behind any part of the ICP agreement because I wasn't 5 involved in those. 6 Q. But what I'm asking you now is whether 7 you, as you sit here now, can think of any legitimate 8 reason why Microsoft would be getting content 9 providers to agree not to pay Netscape? I'm not 10 talking about getting them to try to use your channel 11 bar. I'm talking about getting them to agree not to

12 pay Netscape. 13 A. You'd have to ask somebody else why 14 they put that in the agreement, unless you're asking 15 me to speculate wildly. 16 Q. Well, I don't know whether it would be 17 wild speculation or not, but I'm asking you whether 18 you, as you sit here now, as the chief executive of 19 Microsoft, can think of any legitimate reason for 20 Microsoft getting content providers to agree not to 21 pay Netscape? 22 MR. HEINER: Object to the question as 23 lacking foundation. 24 THE WITNESS: I'm not aware of any 25 broad prohibition against paying Netscape for 367

1 anything. I think there was something about relative 2 to the channel bar, we wanted some of the premier 3 partners, which is a very small number, to talk about 4 their work with us. And it would have been 5 embarrassing if all those same people were in the 6 same relationship with Netscape in that time period. 7 Q. In your answer in which you said that 8 you thought you recalled some of the things that you 9 were told in preparation for your hearing testimony, 10 you were the one, were you not, just a few minutes 11 ago who said that you recalled that there was some 12 provision that even if the content provider was on 13 another channel bar, they couldn't pay for it? Do 14 you recall saying that just a few minutes ago?

15 A. Uh-huh. 16 Q. You've got to say yes so the 17 reporter -18 A. Yes. 19 Q. Now, that's what I'm asking about. 20 What I'm asking is whether you can think of any 21 legitimate reason why Microsoft would get a content 22 provider to agree not to pay Netscape? 23 A. I can guess about that if you want. 24 Q. What I'm asking is not whether you can 25 guess why you did it because we could all guess maybe 368

1 why you did it. What I'm asking is whether you can 2 think of any legitimate reason that would justify 3 doing that? 4 A. Sure. 5 Q. What? 6 A. Well, someone might have said, gee, it 7 would be embarrassing if all these same people 8 appeared in Netscape's equivalent in that time 9 period, let's have them agree not to appear at all. 10 And then someone else might have said no, let's not 11 be that restrictive, let's just make it less likely 12 they will appear by saying that they won't pay 13 Netscape to appear. 14 Q. But if you're going to let them appear, 15 why would you try to stop them from paying to appear? 16 A. It lowers the probability that they 17 will appear. 18 Q. And why does it do that, sir? 19 A. Because there's lots and lots of

20 content providers. And so in the channel bar, these 21 gold or premier or platinum -- I forget the 22 terminology -- slots, there's only visually, at least 23 in the way we did it, room for about five or six of 24 those. And so if you have a contract that says that 25 they won't take money from Netscpae to appear on 369

1 2

their channel bar, given the broad universe of content providers that are out there, it's

very 3 likely that Netscape will choose to pick people who 4 do pay them to be in their channel bar and therefore 5 you've lowered the probability that all the people 6 who appear in yours also appear in Netscape's. 7 Q. So that precluding people from paying 8 was an indirect way of trying to make sure that they 9 didn't appear on Netscape's channel bar; is that 10 right? 11 A. No. Now you've changed things. I've 12 told you I don't know why the provision was put in 13 there. You asked me if I could think of any set of 14 reasoning behind it, and which I did, and then you 15 changed and asked me a question about the history, 16 which again, I can't talk to you about the history. 17 Q. And I don't mean to be asking just 18 about the history. What I mean to be asking is 19 whether you, as the chief executive officer at

20 Microsoft -- and you testified yesterday about some 21 practices that you thought were consistent and some 22 practices that you thought were inconsistent with 23 company policy. And is it consistent with company 24 policy, let me approach it this way, to get companies 25 like content providers to agree not to pay 370

1 competitors, is that consistent with company policy 2 if that was done? 3 MR. HEINER: Objection. 4 THE WITNESS: Well, our company policy 5 is that when we're doing agreements, we rely on the 6 expertise of our law and corporate affairs department 7 to look at those and make sure that they're 8 appropriate. That's one of the things that's done in 9 agreements like that. 10 Q. BY MR. BOIES: Well, other than 11 whatever your lawyers tell you that you can do, which 12 I don't want to ask about because I think they will 13 probably object that it's privileged, do you have a 14 company policy that addresses the issue of whether it 15 is appropriate for Microsoft people to enter into 16 agreements that limit companies from doing business 17 with Microsoft's competitors? 18 A. There is no general policy that covers 19 that area. As I said, the very competent staff we 20 have is involved in reviewing agreements we reach. 21 Q. Did you ever have any conversations

22 with anyone about whether or not they could deal with 23 a competitor of Microsoft? 24 A. That's open ended enough that I'm not 25 sure what you mean at all. 371

1 Q. I mean to keep it open ended as an 2 initial question and then if you say no, I don't have 3 to go through it, but if you say yes, then I go 4 through who you met with and what you said. 5 MR. HEINER: Let's have the openended 6 question read back, if we could. 7 (The record was read as follows: 8 "Q. Did you ever have any conversations with 9 anyone about whether or not they could deal 10 with a competitor of Microsoft?") 11 THE WITNESS: I'd say the answer is 12 probably yes because, for example -13 Q. BY MR. BOIES: If the answer is yes, 14 then -15 A. No, I want to make -- I think I should 16 give an example so you understand how I've 17 interpreted your question. 18 Q. Could you give me a specific example? 19 A. Yes. IBM is a competitor of ours and 20 people have said to me should we fly out and meet 21 with IBM on this topic. And I've said in some cases 22 yes, we should and in some cases no, we shouldn't. 23 So that's a case where I was giving people advice on 24 whether they should deal with a competitor of 25 Microsoft. 372

1 Q. Were these people within Microsoft? 2 A. People -- yes. 3 Q. Now, have you ever had any personal 4 conversations with anyone other than a Microsoft 5 employee as to whether that person's company could or 6 should deal with a competitor of Microsoft? 7 A. Well, in terms of should, I might have 8 said to somebody that -9 Q. No, no. I'm not asking what you might 10 have said. What I'm asking is what you remember 11 doing. I'm trying to move this along. I'm trying to 12 stay as concrete as I can and I'm not asking you to 13 speculate about what you might have done. 14 A. Okay. I know -15 Q. I'm asking you what you remember doing. 16 A. I know concrete cases where I've told 17 customers that I think picking our product as opposed 18 to a competitor's product is in their best interests 19 and so they should pick our product. And in that 20 sense, yes. 21 Q. Have you told people that if they pick 22 your product, they can't use a competitor's product? 23 A. If there's a technical issue about how 24 things won't work together, possibly. But otherwise, 25 no. 373

1 2 3 4

Q. Intuit? A. Q.

Do you know a Mr. Poole who works at No. You do not?

5 6

A. Q.

No. I think you're confused. You may be right, but all I need to

do 7 is get your testimony down and then people can judge 8 for themselves. 9 So it is your testimony that you do not 10 know anyone who works at Intuit who is named 11 Mr. Poole. Do you know somebody at Microsoft who 12 deals with Intuit who is named Mr. Poole? 13 A. Yes. It's quite distinct. 14 Q. Yes. The distinction actually is at 15 the heart of what I'm going at, sir. 16 What is Mr. Poole's first name? 17 A. Will. That's at least what he goes by. 18 Q. And what has Mr. -- what is Mr. Will 19 Poole's title? 20 A. I have no idea. 21 Q. You have dealt directly and personally 22 with Mr. Poole, have you not, sir? 23 A. Not until very recently. 24 Q. When was the first time that you dealt 25 directly and personally with Mr. Poole? 374

1 A. Well, if you mean was he ever on an 2 e-mail that I went back and forth on, that probably 3 goes back -- that could be any time in the last few 4 years. In terms of actually being in a meeting that 5 Will was in, I think that's quite recent. 6 Q. When? 7 A. Which? 8 Q. Both. 9 A. I said in terms of e-mail, that would 10 be the last couple years. How can I be more concrete 11 than that? I answered the question.

12 Q. Can you be more concrete than the last 13 couple years? 14 A. No. 15 Q. Okay. Now, when with respect to the 16 meeting? 17 A. I don't think I was in a meeting that 18 he was in until maybe two or three months ago. 19 Q. Did you ever have a discussion with 20 Mr. Poole, either orally or through an e-mail, in 21 which you told Mr. Poole what the conditions were 22 pursuant to which Microsoft would give Intuit access 23 to a position on the Active Desktop? 24 A. There may have been mail on that 25 general topic, but I don't remember any specific 375

1 2 3 4 5

mail. Q. Did you have any discussions with Mr. Poole, apart from e-mail? A. No. Q. Did you tell Mr. Poole in words or

in 6 substance that Intuit could get access to a position 7 on the Active Desktop only if it would agree not to 8 deal with Netscape? 9 A. There may have been some discussion 10 about whose browser technology Intuit chooses to 11 integrate its products with. There certainly wasn't 12 anything broadly about dealing with Netscape. 13 Q. Let me try to be as precise as I can. 14 Did you tell Mr. Poole in words or in substance that 15 if Intuit wanted to have access to a position on the 16 Active Desktop, Intuit would have to agree to use 17 Microsoft's browser technology and not use Netscape's 18 browser technology?

19 20 21 22 the 23 24 25

A. I don't remember that specifically, but I do know that we were, in various time periods, endeavoring to get Intuit to choose the component ties to IE technology as the way that Quicken -default way that Quicken would bring up a browser. In fact, they've always supported both browsers at all times. 376

1

Q.

My question to you is whether you

told 2

Mr. Poole either orally or through e-mail that

in 3 order for Intuit to get access to a position on the 4 Active Desktop, Intuit would have to agree not to use 5 the Netscape browser technology? Did you tell 6 Mr. Poole that orally or through e-mail? 7 A. I know we were talking with Intuit 8 about using IE as the default browser because of our 9 technology. So in that sense of being a default, we 10 were trying to get them to favor IE. But I don't 11 remember any specific thing beyond that. 12 Q. So is it your testimony that you do not 13 remember telling Mr. Poole in words or in substance 14 that if Intuit was to have access to a position on 15 the Active Desktop, Intuit would have to agree not to 16 use the Netscape browser technology? 17 A. Intuit has supported the Netscape 18 browser technology at all times and I never thought 19 there was any chance of avoiding them supporting the 20 Netscape browser technology. I did think there was a 21 chance that we would become the default and I was

22 hoping we could convince them that it made sense for 23 them to make us the default. 24 Q. Default browser? 25 A. That's right. 377

1 Q. I understand that's what you said and I 2 do want to explore that, but I want to first be clear 3 that it is your testimony that you never told -- or 4 at least you don't recall ever telling Mr. Poole in 5 words or in substance that in order to get access to 6 a position on the Active Desktop, Intuit would have 7 to agree not to deal with Netscape or not to use the 8 Netscape browser technology? 9 A. I don't remember using those exact 10 words. 11 Q. How about substance? 12 A. In terms of substance, my desire to get 13 us to be the default did imply a favorable position 14 for us relative to other browsers. 15 Q. Is it fair to say that your position 16 with respect to wanting to become the default browser 17 for Intuit meant that the Microsoft browser would 18 have a more favorable position, but it would not 19 preclude Intuit from dealing with Netscape; is that 20 correct? 21 A. That's right. 22 Q. Now, I want to follow up on that issue, 23 but before I do, I want to be absolutely certain that 24 I have your testimony now clear. And that is,

25

leaving aside the issue of becoming the default 378

1 browser, did you ever tell Mr. Poole in words or in 2 substance that in order for Intuit to have access to 3 a position on the Active Desktop, Intuit would have 4 to agree not to deal with Netscape or not to use the 5 Netscape browser technology? Did you ever 6 communicate that to Mr. Poole in words or in 7 substance? 8 A. You can't leave out the idea of the 9 default browser. It's nonsensical to say did you do 10 that but leaving out the notion of the default 11 browser. The substance of us being the default 12 browser is that that's a favorable position for our 13 browser. So what you've just asked me is 14 nonsensical. 15 Q. Does making Internet Explorer the 16 default browser preclude Intuit from dealing with 17 Netscape? 18 A. In a specific way, yes. 19 Q. In what way? 20 A. Any deal that relates to them being the 21 default browser. 22 Q. Other than a deal that involves them 23 becoming the default browser, does it preclude Intuit 24 from dealing with Netscape? 25 A. Not necessarily. 379

1 2 with

Q. So that Intuit could make Internet Explorer its default browser but still deal

3 Netscape with respect to Netscape's browser, correct? 4 A. Intuit at all times has supported the 5 Netscape browser. 6 Q. Now, I think it has to be clear from 7 what you just said that it is your view that becoming 8 the default browser does not preclude Intuit from 9 dealing with Netscape completely in terms of 10 browsers; is that fair? 11 A. Well, it was the issue that would have 12 been of the most interest to us. 13 Q. I'm not asking what the interest was 14 that you had or what the issue was that was of most 15 interest to you. What I'm asking is whether, aside 16 from the issue of the default browser, have you ever 17 told Mr. Poole in words or in substance that in order 18 for Intuit to get access to a position on the Active 19 Desktop, Intuit would have to agree not to deal with 20 Netscape or not to use the Netscape browser 21 technology at all? 22 A. That question doesn't make sense to me. 23 If you say that somebody is not the default, you're 24 certainly affecting how they deal with you on the 25 browser. 380

1 2 3

Q. that? A.

Would you explain what you mean by

4 5

the default browser. Q. And making you the default browser,

We wanted to convince Intuit to make

us

6 does that preclude them from dealing with Netscape at 7 all in terms of browsers? 8 A. Not in every respect, no. 9 Q. Okay, not in every respect. 10 Did you ever tell Mr. Poole in words or 11 in substance that if Intuit was going to obtain 12 access to a position on the Active Desktop, Intuit 13 would have to stop supporting the Netscape browser? 14 A. Well, supporting can mean a lot of 15 different things. I know that -16 Q. I mean what you mean when you said it. 17 A. I never expected at any time that they 18 would not support the Netscape browser in terms of 19 running with it, working with it, supporting it and 20 all those things. In terms of did I use that 21 specific word, no, I don't -- I don't have a 22 recollection. But, you know, support can mean quite 23 a few things. 24 Q. What I'm not doing right now is asking 25 what you meant by support. What I'm asking you is 381

1 whether you told Mr. Poole that. Do you understand 2 the distinction? 3 A. Did I use those words? 4 Q. That you told Mr. Poole -5 A. See, if you're going to ask me did I 6 use the exact words, you can ask me that question. 7 Or if you're going to ask me if I said something like 8 that, that's okay, but then I have to actually 9 understand what the words -- what you mean by the 10 words. 11 Q. Let's take it one step at a time. 12 Did you tell Mr. Poole that if Intuit

13 14 15 16 17 18 19 20 21 22 23 24 25

was to have access to a position on the Active Desktop, Intuit would have to stop "supporting" or could no longer "support" the Netscape browser? A. What does it mean when you keep going in and out of quotes like that? Q. It means you used the word "supporting" or you used the word "support." MR. HEINER: In that case, you should put the document in front of the witness. MR. BOIES: I'm just asking whether he ever communicated that orally or in writing or by e-mail to Mr. Poole. MR. HEINER: I think you twice 382

1 testified in the scope of your questions about things 2 he said. And so if you have a document, at some 3 point, just put it -4 MR. BOIES: I'm just asking him whether 5 he said it. 6 THE WITNESS: Whether I said what? 7 Q. BY MR. BOIES: Well, whether you told 8 Mr. Poole that if Intuit was to have a position on 9 the Active Desktop, that Intuit would have to agree 10 to stop supporting or could no longer support, that 11 is, you used the word "support," the Netscape 12 browser? Did you do that, sir, in e-mail 13 communications or orally or any other form of 14 communications to Mr. Poole? 15 A. I don't remember using those words, if 16 that's the question. 17 Q. Do you remember whether or not you used 18 those words? 19 A. No. 20 Q. Let me turn now to the substance of

21 what you told Mr. Poole. And what I'd like you to 22 describe for me in your own words is what did you 23 tell Mr. Poole, either orally or by any other form of 24 communication, Intuit would have to agree to in order 25 to get access to a position on the Active Desktop? 383

1 MR. HEINER: Objection. I may be 2 mistaken, but I think the question lacks foundation. 3 MR. BOIES: I will rephrase the 4 question. 5 Q. What, if anything, did you tell 6 Mr. Poole -7 A. I'm not sure if I told Mr. Poole or 8 Mr. Chase or Todd Nielson or who, but I'm sure I 9 communicated that the kind of support Intuit had been 10 giving where Netscape was the default browser, that I 11 didn't see that as consistent with agreeing with 12 them -- for them to be featured on the active channel 13 bar. 14 Q. I think that goes to what you were 15 saying before, which is that you wanted Microsoft's 16 browser to become the default browser? 17 A. That's right. 18 Q. Now, what I'm trying to do is ask 19 whether you went beyond that in talking to Mr. Poole. 20 Did you say to Mr. Poole that if Intuit is going to 21 get access to a position on the Active Desktop, 22 Intuit had to do something more than simply make IE 23 the default browser? 24 A. That was my goal there, which of course

25

would imply a change in how they'd been supporting 384

1 Netscape as the default browser. 2 Q. I understand that you said you wanted 3 IE to be the default browser and that inevitably 4 means that Netscape can't be the default browser 5 because you can only have one default browser; right? 6 A. Right. 7 Q. What I'm now asking is did you go 8 beyond that and say to Mr. Poole that if Intuit was 9 going to get access to a position on the Active 10 Desktop, Intuit would have to do something more than 11 simply make IE the default browser? 12 A. I don't think so. 13 Q. Did you ever say that to Mr. Chase or 14 to anyone else? 15 A. I don't think so. 16 Q. Or communicate it in e-mail or some 17 other communication? 18 A. I included that. So no, I don't think 19 so. 20 Q. I thought you might have included it, 21 but I wasn't sure, so I wanted to be clear. 22 MR. HEINER: If we've come to a logical 23 stopping point within this small subset of this 24 point, let's break for lunch. 25 MR. BOIES: Okay. 385

1 2 3

MR. HEINER: Okay. VIDEOTAPE OPERATOR: The time is 11:54. We're going off the record.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 (Lunch recess.) 5 * * * 6 7 8 9 I hereby declare, under penalty of perjury, that the foregoing answers are true and correct to the best of my knowledge and belief. EXECUTED AT_____________, WASHINGTON, this_________day of________________, 1998. ________________________________ BILL GATES

386

1

STATE OF CALIFORNIA ) ss. COUNTY OF LOS ANGELES

)

2 ) 3 4 I, Kathleen E. Barney, CSR 5698, a 5 Certified Shorthand Reporter in and for the State of 6 California, do hereby certify: 7 That, prior to being examined, the 8 witness named in the foregoing deposition was by me 9 duly sworn to testify the truth, the whole truth, and 10 nothing but the truth; 11 That said deposition was taken down by 12 me in shorthand at the time and place named therein 13 and was thereafter reduced to typewriting under my

14 of 15 16 17 in 18 19 20 21 22 23 24 25

supervision; that this transcript is a true record the testimony given by the witness and contains a full, true and correct record of the proceedings which took place at the time and place set forth the caption hereto as shown by my original stenographic notes. I further certify that I have no interest in the event of the action. EXECUTED this_______day of____________, 1998. ______________________________ Kathleen E. Barney, CSR #5698 387

Released Pursuant to 15 U.S.C. §30

1 2 3 4 5 6 7 8 9 10 11 12 BILL 13 14 at 15 16 17

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA, ) ) No. CIV 98-1232(TPJ) Plaintiff,) ) VOLUME II vs. ) (Afternoon Session) ) MICROSOFT CORPORATION, ) CONFIDENTIAL ) Defendant. ) )

CONTINUATION OF THE DEPOSITION OF GATES, a witness herein, taken on behalf of the plaintiffs at 12:35 p.m., Friday, August 28, 1998, One Microsoft Way, Redmond, Washington, before Katherine Gale, CSR, pursuant to Subpoena.

18 19 20 21 22 23 REPORTED BY: Katherine Gale 24 CSR No. 9793 Our File No. 1-49006 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

APPEARANCES OF COUNSEL: FOR THE UNITED STATES OF AMERICA: UNITED STATES DEPARTMENT OF JUSTICE BY PHILLIP R. MALONE KARMA M. GIULIANELLI 450 Golden Gate Avenue Box 36046 San Francisco, California 94102 (415) 436-6660 BOIES & SCHILLER LLP BY DAVID BOIES 80 Business Park Drive Armonk, New York 10504-1710 (914) 273-9800 FOR MICROSOFT CORPORATION: MICROSOFT CORPORATION LAW AND CORPORATE AFFAIRS BY DAVID A. HEINER WILLIAM H. NEUKOM One Microsoft Way Redmond, Washington 98052 (425) 936-3103 SULLIVAN & CROMWELL BY RICHARD J. UROWSKY 125 Broad Street New York, New York 10004 (212) 558-3546 FOR THE PLAINTIFF STATES:

19 20 21

STATE OF NEW YORK OFFICE OF ATTORNEY GENERAL BY STEPHEN D. HOUCK GAIL P. CLEARY

22 23 24 25

THEODORE ZANG 120 Broadway New York, New York 10271-0332 (212) 416-8275 ALSO PRESENT: PRISCILLA ALVAREZ, Paralegal MICHEL CARTER, Video Operator

1 I N D E X 2 3 WITNESS EXAMINATION BY PAGE 4 Bill Gates Mr. Boies 391 5 6 GOVERNMENT EXHIBITS: 7 372 E-mail dated 4/14/97 399 8 373 E-mail dated 7/1/97 404 9 374 E-mail dated 8/25/97 441 10 375 E-mail dated 10/12/97

469

376 E-mail dated 4/17/97

393

11 12 377 E-mail dated 6/12/97 453 13 with Attachment "How to Get To 30% 14 Share In 12 Months" 15 378 E-mail dated 5/14/97 449 16 379 E-mail dated 6/18/97 496 17 18 19 20 21 22 23 24 25

1 BILL GATES, 2 a witness herein, having been previously duly sworn, 3 was deposed and testified as follows: 4 5 THE VIDEOGRAPHER: The time is 12:35. 6 We're going back on the record. This is Tape 3 of 7 the videotaped deposition of Bill Gates on August 28. 8 9 EXAMINATION (Continued) 10 BY MR. BOIES: 11 Q In connection with Intuit, Mr. Gates, 12 insofar as you were aware, was there any effort to 13 get Intuit to agree that Intuit would not promote 14 Netscape's browser? 15 A I'm not aware of any -- anything 16 specifically related to promotion. As I said, I 17 didn't deal with them directly. You could say 18 that -- ask them not to support Netscape as their 19 standard supported browser. It's a change in their 20 promotion of Netscape. 21 Q Yes. I take that point. Let me make 22 the question a little more precise. 23 Other than an attempt to get Intuit to 24 make Internet Explorer into its default browser, did 25 Microsoft make any effort, that you're aware of, to 391

1 get Intuit not to support or advertise Netscape's 2 browser? 3 A It's kind of a strange question because

4 Intuit never would have specifically advertised 5 someone's browser. So I don't know what -what do 6 you mean by promotion when you give that example? 7 Q Well, I'm really just asking for what 8 Microsoft did. And if you don't understand the 9 question, Mr. Gates, you can tell me and I will 10 rephrase the question. 11 A Isn't that what I just did? 12 Q Saying that you didn't understand the 13 question? 14 A Uh-huh. 15 Q Okay. Let me put another question to 16 you. 17 Did Microsoft, insofar as you are 18 aware, try to get Intuit to agree not to enter into 19 any kind of marketing or promotion agreements with 20 Netscape? 21 A I don't know. 22 Q Did you have discussions with anyone 23 concerning what Microsoft was trying to get from 24 Intuit? 25 A I might have sent e-mail about it at 392

1 2

some point. Q

Do you remember the content of

that 3 4 5 about 6 7 e-mail

e-mail? A Q

No. Do you remember anything at all

the content of that e-mail? A Well, I don't know that it's an

8

either.

I said I might have sent e-mail.

It

may 9 have been many e-mails. So no, I don't remember 10 anything beyond the fact that there may have been 11 e-mail about this, and I may have made my views about 12 the subject known. 13 Q Let me ask you to look at a document 14 that has been previously marked as Government Exhibit 15 376. 16 This purports to be an e-mail dated 17 April 17, 1997 from Brad Chase to you and some other 18 people which is forwarding on an e-mail of earlier in 19 the day on April 17 from Mr. Will Poole to Brad 20 Chase. The subject of both e-mails is Intuit Terms 21 Agreed. 22 (The document referred to was marked as 23 Government Exhibit 376 for identification and is 24 attached hereto.) 25 Q BY MR. BOIES: Do you see that? 393

1 A Well, it's just a forward, yeah. 2 Q Do you recall receiving this email? 3 A No. 4 Q Do you have any doubt that you received 5 a copy of this e-mail? 6 A No. 7 Q There are -8 A I don't have any reason to doubt. I 9 don't know that I received the e-mail. I don't have 10 any reason to doubt it. But since I don't remember

11 it -12 Q Did you ever see this e-mail before? 13 A I don't remember ever seeing it. 14 Q Under the heading "Intuit obligations" 15 it says, "Bundle IE3 (Quicken) and IE4 (other 16 products)." 17 Do you see that? 18 A Uh-huh. 19 Q Were you told in April 1997 that Intuit 20 had agreed to bundle IE3 and IE4 with its products? 21 A I don't remember that specifically. 22 Q Farther down on under "Intuit 23 obligations," there is an obligation that reads, 24 quote, 25 "Not enter into marketing or 394

1 promotion agreements with Other 2 Browser manufacturers for 3 distribution or promotion of Intuit 4 content." 5 Do you see that? 6 A Uh-huh. 7 Q Were you told in words or in substance 8 in or about April of 1997 that Intuit had agreed not 9 to enter into marketing or promotion agreements with 10 other browser manufacturers for distribution or 11 promotion of Intuit content? 12 A I don't remember being told that. 13 Q Do you have any reason to doubt that 14 you were told that? 15 A In the sense that one of the e-mails 16 that may have come into my mailbox might have related 17 to that, I don't -- I don't doubt it. Certainly 18 wasn't something that could have been very

19 significant to me because I don't have a recollection 20 of it. 21 Q The last Intuit obligation that is 22 listed here is, quote, 23 "Create 'differentiated 24 content' area for Intuit Channel that 25 is available only to IE users," close 395

1 quote. 2 Do you see that? 3 A Uh-huh. 4 Q Were you told in words or in substance 5 in or about April of 1997 that Intuit had agreed with 6 Microsoft that Intuit would create a differentiated 7 content area for Intuit's channel that would be 8 available only to IE users? 9 A I don't remember being told that nor do 10 I understand what it means. 11 Q Have you ever had any discussions with 12 anyone within Microsoft about the possibility of 13 content providers creating content area that would 14 only be available to IE users? 15 A I don't -- no. I don't understand 16 that. I mean, it -- if the URL was there, you can 17 get to it. 18 Q So what you're saying is that this 19 obligation that Intuit said to have taken on is an 20 obligation that you don't understand at all what it 21 means; is that what you're telling me? 22 A No. I'm saying these words that are on 23 this piece of paper, I don't understand what they

24 25

mean. Q Do you understand the concept? 396

1 2 3

A Q

I don't know what it means. Okay. Did you ever ask Mr. Poole what

A Q

Nope. Did you ever ask Mr. Chase what

it 4 5 6

meant?

it 7 meant? 8 A No. 9 Q Did you ever ask anybody what it meant? 10 A Those words, no. 11 Q Or the concept that is described by 12 those words? 13 A I don't understand those words. So 14 it's hard for me to relate to the concept. I don't 15 understand the words. 16 Q Let me be sure that I understand what 17 you don't understand. 18 Are you telling me that you don't 19 understand what it would mean for Intuit to create a 20 differentiated content area? 21 A That's in quotes. 22 Q Yes. For the Intuit Channel that would 23 be available only to IE users? 24 A I'm not sure what they mean by that. 25 Q Do you have any idea what they mean by 397

1 2 3

that? A Q

No. It's confusing to me. All right, sir.

4 When did Microsoft enter into an 5 agreement with Intuit to make IE Intuit's default 6 browser? 7 A I don't know the date of our agreement 8 with Intuit. 9 Q Do you know approximately? 10 A Well, before you showed me this email, 11 I would have said, no. Looking in this e-mail it 12 suggests that it was sometime before April 17, 1997. 13 Q Just so you're not misled by the email 14 the e-mail talks about when the terms are agreed, it 15 doesn't say that the agreement has yet been signed; 16 is that correct? 17 A I hadn't thought about that 18 distinction. 19 Q I think the first line you may want to 20 look at it where it says, 21 "We have agreed on all 22 salient terms in our term sheet and 23 are going to contract." 24 A Oh, you're right. You're right. I 25 guess I'd have to get a copy of it to know what date 398

1 it has. I think there was an agreement reached, 2 though. 3 Q Are you aware of any terms in that 4 agreement other than terms that are identified here? 5 A No. 6 Q Let me ask you to look at a document

7 that has been previously marked as Government Exhibit 8 372. 9 This is an e-mail to you from Ben 10 Slivka dated April 14, 1997. And the subject is, 11 quote, "Java review with you," close quote. 12 (The document referred to was marked as 13 Government Exhibit 372 for identification and is 14 attached hereto.) 15 Q BY MR. BOIES: Did you receive this 16 e-mail in or about April of 1997, Mr. Gates? 17 A I don't remember. 18 Q The e-mail begins that the author is 19 working with Paul Maritz to set up a two -- to 20 three-hour review for you on your Java efforts. 21 Do you see that? 22 A On our Java efforts. 23 Q On Microsoft's Java efforts? 24 A No. I think it's Ben Slivka's group. 25 Q And he is a Microsoft group; right? 399

1

A

Yes.

He's part of Microsoft but

not 2 all of Microsoft. 3 Q So you would interpret this that he is 4 working with Paul Maritz to set up a two- to 5 three-hour review for you of part of Microsoft's Java 6 efforts but not all of Microsoft's Java efforts; is 7 that what you're saying? 8 A Yeah. The work his group is doing. 9 Q The work his group is doing on Java; 10 right? 11 A Right. 12 Q Okay.

13 some 14 15 16 17 18 I 19 20 of 21 22 23 24 25

And he lists what he describes as pretty pointed questions that you, Mr. Gates, had about Java. Do you see that? A Well, I'm not sure those are the pointed questions. It says, "I want to make sure understand your issues/concerns." Q Well, that's actually the last part a sentence that begins, quote: "When I met with you last, you had a lot of pretty pointed questions about Java, so I want to make sure I understand your 400

1 issues/concerns." 2 That's what the sentence says; correct, 3 sir? 4 A Right. 5 Q And when Mr. Slivka says "I met with 6 you last," he's talking about you, Mr. Gates; correct 7 sir? 8 A Yes. 9 Q And when he says, "You had a lot of 10 pretty pointed questions about Java," he's again 11 talking about you, Mr. Gates; correct? 12 A Right. 13 Q And then he lists what he refers to as 14 a start: 15 "1. What is our business 16 model for Java? 17 "2. How do we wrest control 18 of Java away from Sun?" 19 Do you see that? 20 A Uh-huh.

21 Q Sometime prior to April 14, 1997, had 22 you conveyed to Mr. Slivka that one of your pointed 23 questions about Java was, quote, "How do we wrest 24 control of Java away from Sun?" 25 A I don't think I would have put it that 401

1 way. Certainly was an issue about the popularity of 2 Sun's runtime APIs versus our runtime APIs. 3 Q Is it your testimony that you didn't 4 raise the question of "How do we wrest control of 5 Java away from Sun?" with Mr. Slivka? 6 A I'll say again, I doubt I used words 7 like that. But there certainly was an issue of the 8 popularity of our runtime APIs versus runtime APIs. 9 Q Just so that the record's clear. I'm 10 not asking you about whether there was a question 11 about the popularity of your runtime APIs or their 12 runtime APIs. What I'm asking is whether you told 13 him in words or in substance that you wanted to know 14 how Microsoft could wrest control or get control of 15 Java away from Sun. 16 MR. HEINER: Objection. Asked and 17 answered twice. 18 MR. BOIES: I think he said he didn't 19 remember using those words. What I now want to try 20 to find out is whether he used those words or 21 conveyed that substance. 22 MR. HEINER: And he doesn't remember 23 using those words. 24 MR. BOIES: And I'm asking him whether 25 he conveyed that in words or in substance.

402

1 2 3

MR. HEINER: substance.

4

But I'm in any event putting the question to

MR. BOIES:

He testified as to I don't believe he

did. the 5 witness. 6 THE WITNESS: I don't remember anything 7 about "control" as a word or in substance. But there 8 was an issue about the popularity of our runtime APIs 9 versus Sun's runtime APIs. 10 Q BY MR. BOIES: I take it you know 11 Mr. Slivka? 12 A Uh-huh. 13 Q You've got to answer "yes" or "no" 14 audibly so the reporter can take it down. 15 A Yes. 16 Q And you believe him to be a person of 17 competence and integrity? 18 A Yes. 19 Q Do you have any reason to believe that 20 he would have misstated what you told him when you 21 met with him last before April 14, 1997? 22 MR. HEINER: Objection. 23 THE WITNESS: In no way does this 24 purport to be a restatement of things I said to Ben 25 Slivka. 403

1

Q

BY MR. BOIES:

Well, Mr. Gates,

what 2 3 last,

this memorandum says is, quote, "When I met with you

4 5

you had a lot of pretty pointed questions about Java, so I want

to 6 make sure I understand your issues 7 and concerns." 8 "Here's a start, can you 9 please add any that I'm missing?" 10 And then he lists six, the second of 11 which is, "How do we wrest control of Java away from 12 Sun?" 13 You see that in the exhibit, do you 14 not, sir? 15 A Uh-huh, yes. 16 Q Let me ask you to look at a document 17 that has been previously marked as Government Exhibit 18 373. It's a one-page exhibit and the second item on 19 the page is a message from you to Paul Maritz dated 20 June 16, 1997, on the subject of, quote, "Java 21 schism," close quote. 22 (The document referred to was marked as 23 Government Exhibit 373 for identification and is 24 attached hereto.) 25 Q BY MR. BOIES: Did you send this 404

1 message, Mr. Gates? 2 A I don't remember it. But I don't have 3 any reason to doubt that I did. 4 Q What did you mean by, quote, "Java 5 schism," close quote? 6 A I think the e-mail speaks for itself.

7

Q

The e-mail may very well speak

for 8 itself. But what I want to know is -9 A I could have written a mail that says, 10 "A point that is important 11 to me is to have PURE JAVA 12 applications that do a lot HAVE to 13 ship a full runtime instead of being 14 able to count on the runtime being 15 shipped with the operating system," 16 and so on. 17 Q Maybe my question wasn't clear. What 18 I'm trying to get you to do is to tell me what you 19 meant by the term "Java schism." 20 A It's a heading for this piece of 21 e-mail. The e-mail is the communication, not the 22 heading. 23 Q I understand that, sir. But what I'm 24 asking is: You chose the heading, did you not, sir? 25 A It appears I typed that. 405

1

Q

Right.

And why did you choose

this 2

heading for this memo?

What were you meaning

to 3 4 message. 5 6 7 8 your 9 10 pure 11 Java 12

convey by the term "Java schism"? A Exactly what I put into the Q

Well, sir, what did you mean by

A Q

It explains that in the message. I'm asking you to explain it in

"schism"?

words what you mean by the word "schism." A I'm drawing a distinction between apps and where they get their runtime bits. Q And is that the schism that you're

13 referring to? 14 A That's what this e-mail is about, and 15 that's -- and I titled it "Java schism" when I wrote 16 that e-mail. And the question is: "How do pure Java 17 applications get their runtime bits?" 18 Q Could you read that answer back, 19 please? 20 (Answer read.) 21 Q BY MR. BOIES: What is on the two sides 22 of the schism, Mr. -23 A The bits you get from the browser, the 24 bits you get elsewhere. And the mail couldn't be 25 clearer. It's asking about two sources of the bits. 406

1

You can get bits from the browser, you can get

bits 2 somewhere else. 3 Q Okay. 4 Now, where else can you get the bits? 5 A They can ship with the application. 6 Q And why was it important to you to have 7 pure Java applications that have the characteristics 8 that you described in here? 9 A I didn't want to have to have the 10 browser get so large that it would have all the 11 runtime bits for all the applications. 12 Q And so where would the bits be? 13 A With the application. 14 Q And what you're saying is that it's 15 important to you that Microsoft develop pure Java

16 that 17 that 18 19 20 21 22 23 24 25

applications that have a lot of bits in them so those bits don't have to be in the browser.

Is

the case? A No. It doesn't say anything about Microsoft developing pure Java applications. Q You're right, it doesn't. A And it's clearly not about that. Q What is it about then, sir? A It's about pure Java applications in general. 407

1 Q Did you believe that it was desirable 2 to have as many pure Java applications as possible? 3 A It has nothing to do with this e-mail. 4 The answer is no. But if you think it has something 5 to do with this e-mail, you're -- that's incorrect. 6 Q Okay. I think that it may or may not 7 be productive for you to speculate as to what I 8 think. What I am trying to do is I'm trying to get 9 your testimony about this e-mail and about your views 10 of Java more generally. 11 A I thought so. 12 Q And first let me ask a general 13 question, and that is: Did you believe that from 14 Microsoft's standpoint it was desirable to have as 15 many pure Java applications as possible? 16 A We weren't focused on that as a goal, 17 no. 18 Q In fact, is it fair to say that you

19 preferred fewer pure Java applications to more pure 20 Java applications? 21 A We preferred more applications that 22 took advantage of our APIs, and so we worked with 23 ISVs to maximize the number that took advantage of 24 our APIs. 25 Q And your APIs were not pure Java APIs; 408

1 correct? 2 A No. Some were, and some weren't. 3 Q Yes, sir, some were, and some weren't. 4 But the APIs that you wanted people to 5 use were APIs that were not pure Java APIs; correct, 6 sir? 7 A No. We were glad to have people use 8 both. 9 Q Were you indifferent as to whether they 10 used your pure Java APIs or your proprietary APIs? 11 MR. HEINER: Objection. 12 THE WITNESS: You've introduced the 13 word proprietary, and that completely changes the 14 question. So help me out, what do you want to know? 15 Q BY MR. BOIES: Is the term "proprietary 16 API" a term that you're familiar with, sir? 17 A I don't know what you mean by it. 18 Q Is it a term you're familiar with in 19 your business? 20 A I really don't know what you mean. You 21 mean an API that you have a patent on? 22 Q Mr. Gates, is the term "proprietary

23 API" a term that is commonly used in your business? 24 A Let me give you -25 Q All I'm trying to do -409

1 A -- the common meanings that those words 2 could have. And then you can pick one of them, and 3 ask me a question about it. 4 Q No. All I need -5 A Just -- you want me to define 6 "proprietary API" or not? 7 Q No, I don't want you to define 8 "proprietary API." I didn't ask you to define 9 proprietary API. I asked you a simple question 10 whether the term "proprietary API" was commonly used 11 in your business. 12 Now, I'm prepared to sit here as long 13 as you want to to answer questions that I haven't 14 asked. But I have a certain number of questions that 15 I'm going to ask at the end of these other answers. 16 Now, this is a simple question. You can say "yes," 17 "no," or "It is used in lots of different ways." But 18 then I can choose what to follow up on. Or you can 19 simply make whatever statements you want, and I'll go 20 back to my question afterwards. 21 MR. HEINER: The witness is simply 22 trying to help you through a difficult subject 23 matter. That's all that's happening. It's not 24 offensive. 25 MR. BOIES: It is not offensive. But

410

1 all I am saying is with due respect, this witness's 2 efforts do not help me clarify difficult subjects. 3 MR. HEINER: They could help. But go 4 ahead and read the question one more time, or state 5 it again and he can answer it. 6 MR. BOIES: Okay. 7 Q Is the term "proprietary API" a term 8 that is commonly used in your business? 9 A I don't know how common it is. It has 10 many different meanings. 11 Q Is it a term that you have used in your 12 business? 13 A Sometimes. 14 Q Okay. Now, is it fair to say that when 15 you use the term "proprietary APIs" sometimes you 16 mean one thing and sometimes you mean something else? 17 A That's right. 18 Q Would you give me the different 19 meanings that you sometimes ascribe to the term 20 "proprietary APIs" when you use that term? 21 A It can mean an API that only happens to 22 be available from one company. It can mean an API 23 that for some reason related to intellectual property 24 can only be available from one company, and, of 25 course, that's never a black and white thing. It can 411

1

mean an API that somebody's chosen not to take

to a 2 standards body. Those are three different things you 3 might mean by it. 4 Q I just want to be sure that the answer 5 is clear. 6 I'm not asking what I might mean by it 7 or what a person might mean by it. What I'm trying 8 to do is get you to tell me meanings that you ascribe 9 to that term when you use it. 10 A I've used all three of those. 11 Q Okay. 12 Are there other meanings that you have 13 ascribed to the term "proprietary API" in your use of 14 that term? 15 A Not that I can think of right now. 16 Q Okay. 17 Now, with respect to the API in 18 Windows, there are both Java APIs and non-Java APIs; 19 is that fair? 20 A I hate to tell you this, but what you 21 mean by "Java" there is subject to massive ambiguity. 22 Q Let me try to put the question this 23 way: In Windows there are pure Java APIs, there are 24 impure Java APIs, and there are APIs that have 25 nothing to do with Java; is that fair? 412

1 MR. HEINER: Objection. I guess at 2 this point I'll have to say that if we're going to

3

talk about pure Java APIs, you'll have to take

4

time to go down that path as well, which I

the know 5 you're happy to do of defining what that term means. 6 MR. BOIES: I mean what the witness 7 meant when he wrote this e-mail on June 16, 1997. 8 MR. HEINER: Fine. 9 THE WITNESS: I don't see anything 10 about APIs. 11 Q BY MR. BOIES: Do you see "PURE 12 JAVA" -13 A Yeah. But I don't see APIs. 14 Q -- in capital letters? 15 And I can spend as much time as we have 16 to on this. I think it shouldn't be necessary, but 17 if we have to, we will. 18 MR. HEINER: Mr. Boies, the difficulty 19 is -- I don't mean to be at all rude, but it's 20 partly -- you know, it's partly the complexity of the 21 subject matter and the difficulty you're having in 22 posing these questions. Java is a complex subject. 23 MR. BOIES: Java is a complex subject. 24 But when somebody talks about pure Java APIs, I don't 25 think that that is something that the witness can't 413

1 2

answer. THE WITNESS:

But you said that

the 3 e-mail talks about pure Java API. And it doesn't. 4 MR. BOIES: No. I said pure Java. 5 THE WITNESS: No. You said APIs.

6 Q BY MR. BOIES: Mr. Gates, let me ask a 7 question. If you can't answer the question, you 8 can't answer the question. 9 Does Windows include pure Java APIs? 10 A There's a -- in some versions of 11 Windows there are some Java runtime APIs which at one 12 time Sun labeled as pure Java APIs. 13 Subsequently they changed in a way that 14 was not upwards compatible, so it's actually kind of 15 confusing. 16 Q Does Windows have any APIs that you 17 would consider to be pure Java APIs? 18 A Today? 19 Q Yes. 20 A Yeah. I guess the AWT 1.1 stuff you 21 might think of that way. 22 Q Anything else? 23 A I don't know what you mean "anything 24 else." Are we enumerating? 25 Q Any other API in Windows that you would 414

1 consider to be pure Java APIs, Mr. Gates? 2 A I know there's more. I don't know the 3 technical names for them. 4 Q And does Microsoft have a version of 5 Java that is not what you refer to in your memo as 6 pure Java? 7 A I have no idea what you mean by that 8 question. 9 Q Okay. 10 Does Windows include APIs that are

11 written in what is described as a form or version of 12 Java but not pure Java? 13 A Are you talking about the language? 14 Q If you don't understand the question, 15 Mr. Gates, you can simply say you don't understand 16 the question. 17 A Okay. I'm sorry. I don't understand 18 the question. 19 Q Good. Okay. That's what I'm trying to 20 do. What I'm trying to do is get on the record what 21 you say you understand and what you say you don't 22 understand. 23 MR. HEINER: Any time that the witness 24 clearly indicates he doesn't understand the question 25 but doesn't preface it with the words "I don't 415

1 2 3

understand the question." If you want that convention -MR. BOIES: I do, because I don't

4

speeches as to what the witness does think if

want he 5 simply doesn't understand the question. 6 THE WITNESS: No. But I was pointing 7 out to you the part of the question that I didn't 8 understand because it was ambiguous. 9 MR. BOIES: Would you read the answer 10 back, please, or the statement. 11 (The following answer was read: 12 "A Are you talking about the language?") 13 MR. BOIES: No. I'm not talking about

14 the 15 we 16 17 18 19 in 20 21 to 22 23 24 25

the language if by "the language," you mean all things that you said about the Java language when were talking about Java yesterday. Now, let me go back to me asking the questions, if I can. Q As part of an effort to take control of Java away from Sun in the terms used by Mr. Slivka his memo with Mr. Gates -- to you dated April 14, 1997, did Microsoft make an effort to get people use a version of Java APIs that was not pure Java APIs? MR. HEINER: Objection. THE WITNESS: That's a very compound -416

1 I don't understand the question. 2 Q BY MR. BOIES: Okay. 3 In an attempt to, in Mr. Slivka's 4 words, wrest control of Java away from Sun, did 5 Microsoft make an effort to get programmers to write 6 to APIs that could be used to run applications on 7 Windows but not on all other operating systems to 8 which a pure Java written program could be run? 9 A I wouldn't say that was part of 10 anything to do with controlling Java. But we do 11 promote the use of the unique Windows APIs. 12 Q And with respect to the unique Windows 13 APIs, are some of those APIs APIs that Microsoft 14 describes as Java APIs or has in the past? 15 A All of our APIs can be called from 16 Java. So now I don't know what you mean by a Java 17 API. Usually somebody would mean something that you

18 can only call from Java or something you can call 19 from Java whether you can call it from other 20 languages or not. 21 Our APIs we make available to a broad 22 set of languages including Java but others as well. 23 Q Mr. Gates, you've been sued by Sun 24 Microsystems over Java, have you not? 25 A There's a lawsuit with Sun. 417

1 Q Well, there's a lawsuit with Sun, and 2 it's a lawsuit with Sun relating to the use of Java; 3 right? 4 A It relates to a very specific contract 5 that we have with Sun. 6 Q And does that very specific contract 7 with Sun relate to Java? 8 A It's a license to various Sun 9 technologies related to Java. 10 Q Now, you're familiar with that lawsuit, 11 are you not, sir? 12 A Not very. 13 Q Not very? 14 Do you know what the contentions in 15 that lawsuit are? 16 A No. 17 Q Never tried to find out? Is that your 18 testimony? 19 A I haven't read the complaint, if that's 20 your question. 21 Q That's not my question. 22 My question is whether you've ever 23 tried to find out the substance of the allegations

24 about Java that Sun is making in its lawsuit against 25 Microsoft. 418

1 A My understanding of their allegations 2 is very limited. 3 Q What is your understanding of their 4 allegations? 5 A I haven't read the contract between 6 Microsoft and Sun. 7 Q I'm asking you about the allegations in 8 the complaint, not whether you've read the contract. 9 I'm asking you for your understanding, which I know 10 you've already said is very limited. But I'm asking 11 for your understanding of what allegations Sun makes 12 in its claim against Microsoft. 13 A I think there's some dispute about they 14 were supposed to make the test cases public and 15 upwards compatible, and they didn't make them public, 16 and they weren't upwards compatible. And that 17 relates to the contract that I haven't read. 18 Q And that's what you think they allege 19 in the complaint? 20 A Well, that -- those are certain things 21 that they were required to do, I believe. 22 Q My question is not about what you 23 believe they were required to do, Mr. Gates. My 24 question is: What is your understanding about the 25 complaint that they make about what you did, about 419

1 what Microsoft did? 2 Do you understand the question? 3 A You're asking me to summarize their 4 lawsuit? 5 Q I'm asking you to tell me what you know 6 about the claims they make in that lawsuit. You said 7 you know something about it, but it's very limited. 8 All I'm trying to do is get you to tell me what it is 9 you know about the claims they make in their lawsuit. 10 A I think they want us to ship JNI. 11 Q Is that all you know about their 12 claims? 13 A I think there was something about a 14 trademark. 15 Q What about the trademark? 16 A Whether we could use the trademark. 17 I'm not sure. 18 Q Don't you know, Mr. Gates, one of the 19 allegations that they make is that you're taking 20 their trademark and applying it to things that it 21 shouldn't be applied to? 22 A Yeah. I think there's a trademark 23 issue. I'm not sure what they're saying about the 24 trademark. 25 Q Do you know anything that they're 420

1 present 2 3 the 4

saying about the trademark according to your testimony? A trademark.

I know there's a dispute about

5

Q

Well, don't you know that one of

the 6 things they're alleging is that Microsoft is taking 7 their trademark and applying it to things that 8 shouldn't be applied to according to them? 9 A I'm not sure that's right. 10 Q You're not sure? 11 A Because I don't think we used their 12 trademark, I'm not sure. I'm kind of confused about 13 that. I've never seen us using their trademark, so 14 I'm a little confused about how that relates to any 15 dispute with Sun. 16 Q Did you ever try to find that out? 17 A What? 18 Q What the claims were more than your 19 present knowledge. 20 A I read something that was on our web 21 site about four days ago. 22 Q About the Sun lawsuit? 23 A Yeah. Bob Muglia had some statements. 24 Q Other than that, did you ever try to 25 find out what Microsoft is being charged with, what 421

1 2 3 lawsuit? 4 5 6 that and 7 8 9 wrest

they're alleged to have done wrong? A I've had discussions with Maritz saying: Do I need to learn about this Do I need to spend a lot of time on it? Q What did he say? A He said, no, he's focused on I can focus on other things. Q Is one of the things that you're focused on trying, in Mr. Slivka's words, to

10 you 11 12 13 get 14 15 16 17 18 when 19 you 20 21 22 you 23 that 24 with 25

control or get control, if wrest is a word that don't like, of Java away from Sun? A No. Q How did you think Microsoft could control of Java away from Sun? MR. HEINER: Objection. THE WITNESS: I honestly don't know what you mean by "control of Java." I know those words are in that e-mail from Mr. Slivka. But you're asking me the question, I don't know what mean "control of Java." Q BY MR. BOIES: Is it your testimony, Mr. Gates, that as you sit here today under oath have no idea what Mr. Slivka meant when he said one of the pointed questions that you had raised him was how to get control of Java away from Sun? 422

1 A I told you, I think it related to our 2 attempt to make our runtime APIs the most popular 3 runtime APIs. 4 Q And not the Java APIs from Sun; is that 5 what you're saying? 6 A Well, let's not label the APIs, not the 7 unique ones that Sun was promoting. 8 Q When you say the unique ones that Sun 9 was promoting, what were the unique ones that Sun was 10 promoting called? 11 A I'm not sure what they're called. I 12 think AWT 1.2 maybe or JDK 1.2.

13 Q And is it your best testimony that 14 that's what you think this would have meant back in 15 April of 1997, sir? 16 A That what meant? 17 Q Getting control of Java away from Sun. 18 The thing we've been talking about here. 19 A Is that the same as "wrest control"? 20 You keep reading me these words from the e-mail. 21 Q Well, I'm trying to get away from the 22 word "rest" because you say you don't remember that 23 exact word. So I'm trying to use a word that's more 24 neutral like get or obtain control. 25 A And I've told you, I can't understand 423

1 what's meant by "control" there. I know that we're 2 trying to make our APIs popular with developers. 3 Q How does making your APIs popular with 4 developers relate to obtaining control of Java, if at 5 all? 6 A I don't know what it means to control 7 Java. How can somebody control Java? What does that 8 mean? 9 Q Is it your testimony that you have no 10 idea what that means? 11 A To control Java? I don't think anyone 12 can control Java. It's like saying controlling Basic 13 or COBOL.

14 15 16 17 18 19 20 21 is 22 23 24 must 25 most

Q Do you really mean that, sir? A Yes. Q And I'm going to press this just another 30 seconds and then I will stop. But I really do want to be sure that I have given you a full and fair opportunity. Is it your testimony that as you sit here today under oath that you have no idea what meant by control of Java as used in this e-mail to you by Mr. Slivka? A I've said several times I think he be referring to our effort to make our APIs the 424

1 popular APIs. But that wouldn't give us control of 2 Java. So I'm having a hard time relating it to these 3 specific words. 4 Q Well, without relating it to the 5 specific words, how would getting people to use your 6 APIs get control of Java? Why do you relate those 7 two in your mind? 8 A Because he probably means the Java 9 runtime, not Java. 10 Q Let's say he means the Java runtime. 11 A Then he's talking about the competition 12 of APIs. 13 Q Is it fair to say, Mr. Gates, that you 14 interpret this as how does Microsoft get, obtain, 15 control of Java runtime? Is that what you're saying? 16 A I think that's the most likely 17 explanation of what he meant. I still don't

18 not 19 20 the 21 22 23 24 25

understand the word "control" there because it's the word I'd use. Q Well, according to Mr. Slivka it is word you used, is it not, sir? MR. HEINER: Objection. THE WITNESS: We've already been through that. Q BY MR. BOIES: But looking at this 425

1

doesn't refresh your recollection about having

2 3 4

that word? A Q

used It does not. Have you ever said in words or

in 5 substance to anyone that you wanted to obtain control 6 over Java or under -- over Java runtimes? 7 A I don't remember using those words. 8 Q Do you remember conveying that concept 9 or conveying that substance? 10 A If by "that concept" you mean conveying 11 the idea that we wanted our runtime APIs to be the 12 most popular, then the answer is yes. 13 Q Why did you want your runtime APIs to 14 be the most popular? 15 A By having our runtime APIs be the most 16 popular it means that people are more likely to 17 license Windows because there's applications that 18 take advantage of the unique innovations that are in 19 the Windows product. 20 Q Why does the fact that their 21 applications that take advantage of the unique APIs

22 23 24 25

that are in the Windows product make people more likely to license Windows? A Because it shows off the unique innovations of Windows. 426

1 Q How does it show off the unique 2 innovations of Windows? 3 A Well, let's say, for example, they call 4 our tasking APIs, then it shows off the unique way 5 that we've done tasking. Let's say they call our 6 clipboard APIs, then it shows off the advances we've 7 made in data exchange which are very advanced. 8 Q Is it your testimony that trying to get 9 applications writers to write to Windows' own APIs 10 was something that you were trying to do only for the 11 reason that you've identified? 12 MR. HEINER: May I have that read back, 13 please? 14 (Question read.) 15 THE WITNESS: I think there's 16 additional reasons as well. 17 Q BY MR. BOIES: Isn't it a fact, 18 Mr. Gates, that one of the reasons that you were 19 trying -- that Microsoft was trying to get control 20 over the Java runtimes or Java, as it's described in 21 Mr. Slivka's memorandum, was to prevent Java or Java 22 runtimes from supporting competition with Windows? 23 MR. HEINER: Objection. 24 THE WITNESS: I don't know what you 25 mean by "control." That means I don't understand the 427

1 2 3 4

question. Q

BY MR. BOIES: Okay. Did you ever participate in any discussions within Microsoft as to the extent

of 5 which Java or Java runtimes posed a threat to 6 Microsoft's position with respect to the Windows 7 platform? 8 A Yeah. I've already told you that there 9 came a point where we viewed Sun's unique Java 10 runtime APIs as a -- as a part of the competitive 11 environment, a competitor. 12 Q Okay. 13 Now, why were the Java APIs from Sun a 14 competitor? 15 A Well, if people just used the least 16 common denominator APIs, then they don't show off the 17 innovations that we're doing in Windows, and it makes 18 it less attractive to people to license Windows or 19 update Windows. 20 Q Now, what I'm trying to do -- and you 21 may think you've answered this question, but I don't 22 think the record makes it clear in any event. 23 What I'm trying to do is distinguish 24 between that reason which you've given me a couple 25 times and any other reason that may exist. 428

1 asking? 2 3 4 in

Do you understand what I'm A Q

No. Okay. Let me try it again. Isn't it true, Mr. Gates, that

5 addition to whatever desire you may have had to show 6 off your Windows capabilities that you say you had, 7 that one of the things that was going on here was 8 your trying, Microsoft's trying, to prevent Java from 9 getting wide enough distribution so that it could 10 support applications programming for platforms other 11 than Windows? 12 A No. 13 Q Not at all, sir? 14 A There's no limitation of distribution. 15 Q Didn't ask whether there was any 16 limitation of distribution. I asked you whether in 17 any way the desire to prevent Java from developing 18 applications that could be used on platforms other 19 than Windows motivated what Microsoft was doing in 20 connection with Java. 21 MR. HEINER: Objection. That's a 22 distinctly different question. 23 THE WITNESS: What does it mean Java 24 developing applications? 25 Q BY MR. BOIES: I actually didn't recall 429

1 2

that I used that phrase. THE WITNESS:

Can you read me

the 3 4 read: 5 6 7 8 than

question? (The following question was "Q I asked you whether in any way the desire to prevent Java from developing applications that could be used on platforms other

9

Windows motivated what Microsoft was doing in connection with Java.") MR. BOIES: Can you answer that question, Mr. Gates. If you can't, I'll rephrase

10 11 12 it. 13 But if you can answer, I'd like an answer. 14 THE WITNESS: I don't know what you 15 mean "Java developing applications." 16 Q BY MR. BOIES: Isn't it a fact, 17 Mr. Gates, that in addition to whatever other reasons 18 you say you had for what you did with Java and 19 Windows APIs, part of what you were trying to do was 20 to prevent Java from having a wide enough 21 distribution so that it could support programs that 22 could be used on platforms other than Windows? 23 A We had no way of preventing Java from 24 being used on other platforms. It is used on other 25 platforms. 430

1

Q

That wasn't my question, sir.

My 2

question is whether or not part of what you

and 3 Microsoft was trying to do was to limit the 4 distribution of Java sufficiently so that you could 5 thereby limit or reduce the extent to which 6 applications were written that could be used on 7 platforms other than Windows. 8 A No. In fact, we sell the most popular 9 Java tools in the market. 10 Q It is your testimony, then, sitting 11 here, that Microsoft was not at all motivated by a 12 desire to limit the extent to which Java could be 13 used to develop applications programming that could

14 be used on platforms other than Microsoft's Windows? 15 Is that your testimony? 16 A Yes. 17 Q All right, sir. 18 Was your concern over Netscape's 19 browser at all related to the fact that Netscape's 20 browser was viewed within Microsoft as a method of 21 distributing Java? 22 MR. HEINER: Objection. At the risk of 23 belaboring the record. 24 Would you care to state the question 25 more precisely and perhaps develop a better record? 431

1 Or do you want to stick with the question you have? 2 MR. BOIES: If the witness tells me he 3 can't understand that question, that's an answer. If 4 he can understand the question, I'd like to have an 5 answer. 6 MR. HEINER: In addition to that 7 there's an objection based on that, so that's a 8 second consideration. 9 THE WITNESS: Well, you have to read 10 the question again. Sorry. 11 (The following question was read: 12 "Q Was your concern over 13 Netscape's browser at all related to 14 the fact that Netscape's browser was 15 viewed within Microsoft as a method 16 of distributing Java?") 17 MR. HEINER: Another objection. 18 Foundation. 19 MR. BOIES: Okay. I think the

20 ask 21 22 23 24 25 as

foundation objection may be well-taken.

Let me

the foundation question. Q Did Microsoft believe that Netscape's browser was a means of distributing Java APIs? A Well, Netscape had some APIs in its browser. I'm not sure if you would refer to them 432

1 Java APIs or not. 2 Q It's not a question whether I would 3 refer to them that way or not, Mr. Gates. What I'm 4 asking you is what you and Microsoft believe. 5 And my question is: Did you and others 6 at Microsoft believe that Netscape's browser was a 7 method for distributing Java APIs? 8 A There were APIs in the Netscape 9 browser. I don't think they were strictly Java APIs 10 or even in a direct sense specifically. 11 Q Have you completed your answer, sir? 12 A Uh-huh. 13 MR. BOIES: Can I have the question 14 read back again? 15 (The following question was read: 16 "Q It's not a question 17 whether I would refer to them that 18 way or not, Mr. Gates. What I'm 19 asking you is what you and Microsoft 20 believe. 21 "And my question is: Did 22 you and others at Microsoft believe 23 that Netscape's browser was a method 24 for distributing Java APIs?") 25 Q BY MR. BOIES: Can you tell me that, 433

1 sir? 2 A There were APIs in Netscape browser 3 some of which under some definition of Java APIs 4 you'd call Java APIs. 5 Q And was there concern within Microsoft 6 that the distribution of these things that you say 7 could be called Java APIs would adversely affect 8 Microsoft? 9 A Our concern is always to get people to 10 develop Windows applications. And to the degree that 11 there's other APIs people to develop to, there's some 12 competition for the attention of developers and 13 focusing on those APIs. But that doesn't relate to 14 distribution. 15 MR. BOIES: Can I have my question read 16 back again, please? 17 (The following question was read: 18 "Q And was there concern 19 within Microsoft that the 20 distribution of these things that you 21 say could be called Java APIs would 22 adversely affect Microsoft?") 23 Q BY MR. BOIES: Could I have an answer 24 to that question, please, sir? 25 A No, not the distribution. 434

1 Q Let me ask you to look at a document 2 that has been previously marked as Government Exhibit 3 349. The first message in this exhibit is an e-mail 4 from Paul Maritz to you and a number of other people 5 dated July 14, 1997; correct, sir? 6 A That's what it appears to be, yes. 7 Q Did you receive this e-mail, sir? 8 A I don't remember it. But I don't have 9 any reason to doubt that I did. 10 Q Mr. Maritz writes to you in the third 11 sentence, quote, 12 "If we look further at 13 Java/JFC being our major threat, then 14 Netscape is the major distribution 15 vehicle." 16 Do you see that, sir? 17 A Uh-huh. 18 Q Do you recall Mr. Maritz telling you in 19 words or in substance that Netscape was the major 20 distribution vehicle for the Java/JFC threat to 21 Microsoft? 22 A No. 23 Q Did you believe in July of 1997 that 24 Java/JFC was a major threat to Microsoft as 25 Mr. Maritz writes here? 435

1

A

It was a significant issue for

his 2 focus 3 4 that

group in terms of how ISVs would choose to their development in the future. Q Did you believe in July of 1997

5 Java/JFC was a major threat to Microsoft? 6 A In the form that it existed as of that 7 day, maybe not. But if we looked at how it might be 8 evolved in the future, we did think of it as 9 something that competed with us for the attention of 10 ISVs in terms of whether or not they would take 11 advantage of the advanced features of Windows. 12 Q Do you have any understanding as to 13 what Mr. Maritz meant when he wrote to you about 14 Java/JFC being a major threat to Microsoft? 15 A Yeah. I just answered that. 16 Q What did you understand Mr. Maritz to 17 mean when he says Java/JFC was Microsoft's major 18 threat? 19 A I just answered that. 20 Q You'll have to give me an answer, 21 Mr. Gates, because if you did answer it, it's not an 22 answer that I can understand how it applies to the 23 particular question I'm asking. 24 A I said we looked at how the various 25 runtime APIs which was always confusing, you know, 436

1

where they were going or what they were doing.

2

"JFC" is just a term for some of those, how

And they 3 might evolve in a way that would take away the focus 4 of developers in terms of writing applications that 5 would take unique advantage of Windows features. 6 Q I understand that you say that that was 7 an issue for you. Why was that a major threat to 8 Microsoft, if you have any understanding?

9 A Well, if people stopped writing 10 applications that took advantage of Windows runtime 11 APIs, that would mean that users wouldn't have access 12 to the innovative features that we were putting into 13 Windows. 14 Q Why was that a major threat to 15 Microsoft? 16 A If ISVs weren't writing applications to 17 take unique advantage of Windows, then it wouldn't 18 show off the Windows innovation and so users wouldn't 19 have much reason to update Windows or to license any 20 new versions of Windows. 21 Q You referred to JFC in a couple answers 22 ago and, of course, that's here in the memo. What 23 does "JFC" stand for as you understand it? 24 A I was always a little confused about 25 that, and it changed over time. It stands for Java 437

1 Foundation Classes. 2 Q Mr. Maritz writes here that Netscape is 3 the major distribution vehicle for Java and Java 4 Foundation Classes. 5 Do you see that? 6 A That's at the end of that sentence? 7 Q Yes. 8 A Uh-huh. 9 Q Do you see that? 10 A Yes. 11 Q Now, in a prior answer you said you 12 didn't understand how the browser was a distribution

13 at 14 was 15 16 17 18 19 20 the 21 22 sir, 23 Java 24 25

vehicle.

Does this refresh your recollection that

least within Microsoft in July of 1997 Netscape viewed as the major distribution vehicle for Java? A Not for Java. And in my view, the browser wasn't a key distribution channel. Maritz may or may not have agreed with that. But you can always ship the runtime with the applications. Q Mr. Maritz here says, "Netscape is major distribution vehicle." Now, it's clear to you, is it not, that he means the major distribution vehicle for and Java Foundation Classes? A He doesn't mean for Java. 438

1 Q Well, sir, he says -2 A I told you many times about the use of 3 the word "Java." And I'm not sure you heard me. 4 When people use the word "Java," they don't mean just 5 Java. 6 Q So when Mr. Maritz here used the word 7 "Java," in this e-mail that you say you don't recall 8 receiving, you're telling me that he meant something 9 other than just Java? 10 A He -- I bet he meant some runtime APIs, 11 not Java. 12 Q Okay. 13 Let's assume that you're right, let's 14 assume that when he talks about Java he means Java

15 is 16 17 Java 18 19 in 20 21 in 22 23 24 25 this

runtime APIs.

Would you then agree that what he

saying here is that Netscape is the major distribution vehicle for Java runtime APIs and Foundation Classes? A That appears to be what he's saying this e-mail. Q

And what was Mr. Maritz's position

July of 1997? MR. HEINER:

Asked and answered too

many times. THE WITNESS:

Yeah.

I've answered

439

1 three times. 2 MR. BOIES: I'm not sure you did as to 3 this particular point in time. And one of the things 4 that you have told me is that the titles changed. 5 And so one of the things I want to be sure the record 6 is clear on is what Mr. Maritz's position was as of 7 the time of this key document. 8 MR. HEINER: You can cut and paste the 9 transcript any way you want in your briefs and in 10 your opening and closing argument. The witness has 11 testified as to his title many times. 12 Q BY MR. BOIES: Mr. Gates, what was 13 Mr. Maritz's title on July 14, 1997? 14 A I think group vice president. 15 Q What was he group vice president of? 16 A I don't know what the title would have

17 said after that. But he managed the group that 18 contained all of our Windows activities. 19 Q Was he group vice president for 20 Platforms? 21 A I'm not sure. I'm sure if it contained 22 the word "Platforms," it didn't just say Platforms, 23 because he's got Office and some other things also. 24 Q But within his responsibilities would 25 have been Windows? 440

1 A That's right. 2 Q Let me ask you to look at a document 3 that has been marked as Government Exhibit 374. This 4 is an e-mail to you from Tod Nielsen dated August 25, 5 1997, with copies to Brad Chase. 6 (The document referred to was marked as 7 Government Exhibit 374 for identification and is 8 attached hereto.) 9 Q BY MR. BOIES: Did you receive this 10 e-mail, sir? 11 A I don't remember receiving it. But I 12 don't have any reason to doubt that I did. 13 Q Let me ask you to look at the seventh 14 paragraph down. That's the third paragraph from the 15 bottom, the last sentence. That says, quote, 16 "So, we are just proactively 17 trying to put obstacles in Sun's path

18 in 19 20 21 22 23 24 25 to

and get anyone that wants to write Java to use J/Direct and target Windows directly," close quote. Do you see that, sir? A Uh-huh. Q Do you recall being told in or about August of 1997 that Microsoft was trying to put obstacles in Sun's path and get anyone that wants 441

1 write in Java to use J/Direct and target Windows 2 directly? 3 A No. 4 Q Do you know why Microsoft was trying to 5 put, quote, "obstacles in Sun's path," close quote? 6 A I don't know what that means. 7 Q Do you know why Microsoft was trying to 8 get anyone that wants to write in Java to use 9 J/Direct? 10 A Yes. 11 Q Why was that? 12 A Because J/Direct allows you to make 13 calls that show off unique innovations in Windows and 14 make -- therefore, make Windows more attractive. 15 Q Was there any reason other than that 16 that Microsoft wanted to get anyone that wants to 17 write in Java to use J/Direct? 18 A Yes. 19 Q What? 20 A Well, there's a benefit to us if people 21 are showing off Windows, and it increases Windows 22 popularity. That helps us with the other 23 applications we write for Windows as well including 24 Microsoft Office.

25

Q How is that so? 442

1 A Because Microsoft Office is targeted to 2 Windows, we get a benefit that goes even beyond 3 increased sales of Windows if we manage to popularize 4 Windows. 5 Q Why is that? 6 A Because they can buy Office. 7 Q They can buy Office and use it on the 8 Mac, too, can't they, since you didn't cancel Mac 9 Office? 10 A We have a much wider set of 11 applications available for the Windows platform than 12 any other platform. And we have more frequent 13 updates of products like Office on the Windows 14 platform. It's a more powerful version, the Windows 15 version, and it -- therefore, our revenue per unit is 16 somewhat higher. 17 Q You mean the version of Office for 18 Windows is more powerful than the version of Office 19 for Mac? Is that what you're saying? 20 A Yes. We have Office Pro. 21 Q What is J/Direct? 22 A J/Direct is a way of allowing Java 23 language code to call native OS functionality. It's 24 a fairly clever thing that we have done. And others 25 now use that term to refer to it when they let their 443

1 OS functionality show through as well. 2 Q You have referred to Java runtimes. 3 Are there J/Direct runtimes? 4 A There's a thunk, but it's -- I don't 5 know if you would call it a runtime or not. It's a 6 thunk. 7 Q Would you define for me what the 8 difference is, in your mind, between a thunk and a 9 runtime? 10 A A thunk is a small piece of runtime 11 that remaps parameters and calling conventions in 12 such a way to be able to pass along an API call to 13 another piece of runtime. 14 Q Does -- or I should say, when was 15 J/Direct developed by Microsoft? 16 A I'm not sure. 17 Q Approximately? 18 A I don't -- I don't know. I mean -19 Q Why was J/Direct developed by 20 Microsoft? 21 A To make is easy for people who choose 22 the Java language to call the unique runtime features 23 in various operating systems including Windows. 24 Q Why do you want people to write in 25 J/Direct as opposed to Java? 444

1 A They are writing in Java. You only use 2 J/Direct if you write in Java. 3 Q Well, what Mr. Nielsen says is that 4 Microsoft is trying to get anyone that wants to write 5 in Java to use J/Direct. 6 Do you see that?

7 A That's right. And that means writing 8 in Java. 9 Q And why do you want to get anyone who 10 wants to write in Java to use J/Direct? 11 A Because that gives them a way of 12 calling unique Windows APIs that allow us to show off 13 the innovative features in Windows. 14 Q Couldn't you do that by having them 15 simply write in Java and you providing the thunk 16 separately? 17 A The name of the thunk is J/Direct. I 18 guess we could have another thunk and call it 19 something other than J/Direct, and that would be 20 another way that they could do it. But we didn't 21 choose to do it twice. 22 Q No, you didn't choose to do it twice. 23 That's not my question, Mr. Gates. 24 My question is why you were trying to 25 get program developers, independent programming 445

1 to get 2 3 4 5 them to 6 the 7 that we 8 9 have to? 10

people, to use J/Direct.

Why were you trying

them to do that? MR. HEINER: Certainly asked and answered. THE WITNESS: Because it allows get at the unique API functionality that's in Windows product and show off the innovations do there. Q A

BY MR. BOIES:

But you didn't

Tell me some other way.

11 Q Well, I'm asking you. If you tell me 12 that that's what you say is the only way that you 13 could think of for them to do it, that's your 14 testimony. I don't get to testify here. If I did, 15 there would have been a lot of things I would have 16 said along the way. But since I don't get to 17 testify, all I get to do is ask you questions. 18 And my question to you is whether there 19 was a way, that you were aware of at the time, to let 20 people see all of what you refer to as the 21 functionality of Windows without getting people to 22 write to what you refer to here to use J/Direct if 23 they wanted to write in Java. 24 A J/Direct is exactly the work we did to 25 make it possible and reasonable for people writing in 446

1 Java to call the unique Windows APIs. 2 Q Have you finished your answer? 3 A Yes. 4 Q Okay. 5 Now, were you aware of other ways of 6 accomplishing the same result that you considered and 7 rejected at the time? 8 A What time is that? 9 Q The time that you developed J/Direct. 10 A We don't know what that time is. 11 Q Well, you may not know the exact year. 12 But do you know that when -- were you aware when 13 J/Direct was being developed within Microsoft? Were 14 you aware of it at the time? 15 A I'm not sure.

16 17 18 the 19 20 21 22 23 you 24 was 25

Q A Q

Did you know it was being developed? I'm not sure. Did you have any discussions about

development of J/Direct? A I was not involved in the design of J/Direct. Q I'm not asking you whether you were involved in the design of J/Direct. I'm asking whether you were aware at the time that J/Direct being developed that it was being developed? 447

1 A I'm not sure. 2 Q Did you ever have any discussions with 3 anyone about the development of J/Direct at or about 4 the time it was being developed? 5 A I don't think so. 6 Q At the time that J/Direct was being 7 developed, did you know that people were trying to 8 develop J/Direct? 9 A It's just a thunk. 10 Q My question is: Did you know that they 11 were trying to develop this thunk? 12 A I doubt it. 13 Q Did you participate at all in any 14 discussions as to what alternatives there were to the 15 development of J/Direct? 16 A Before it was developed? 17 Q Let's start with before it was 18 developed. 19 A No, I don't think so. 20 Q What about during the time it was being 21 developed?

22 23 24 25

A Q A

I don't think so. How about after it was developed? I don't think so. MR. HEINER: We should take a break

448

1 soon. 2 MR. BOIES: Okay. 3 MR. HEINER: Okay. 4 THE VIDEOGRAPHER: The time is 5 2:02 P.M. We're going off the record. This is the 6 end of Tape 3 of the videotaped deposition of Bill 7 Gates. 8 (Recess.) 9 THE VIDEOGRAPHER: The time is 2:16. 10 We're going back on the record. This is Tape 4 of 11 the videotaped deposition of Bill Gates on August 28. 12 Q BY MR. BOIES: Let me show you a 13 document that has been previously marked as 14 Government Exhibit 378. 15 (The document referred to was marked as 16 Government Exhibit 378 for identification and is 17 attached hereto.) 18 Q BY MR. BOIES: In the middle of the 19 first page there is a message dated May 14, 1997, 20 from Ben Slivka to you and others. 21 Did you receive this e-mail on or about 22 May 14, 1997? 23 A I'm not sure. But I have no reason to 24 doubt that I did. 25 Q When Mr. Slivka writes as he does in 449

1 to

the second paragraph, "This summer we're going

2 totally divorce Sun," do you know what he's referring 3 to? 4 A I'm not sure. 5 Q Did you ever ask him what he was 6 referring to? 7 A No. 8 Q In the next to last -- or in the last 9 sentence, actually, in the last sentence of the 10 second paragraph, Mr. Slivka writes that "JDK 1.2 has 11 JFC." And is the JFC there the Java Foundation 12 Classes that you referred to earlier? 13 A It's one of the many JFCs. 14 Q What is one of the many JFCs? 15 A The one in JDK 1.2. 16 Q Is the JFC in JDK 1.2 part of what was 17 described as a major threat to Microsoft? 18 A I have no idea which JFC that sentence 19 written by somebody other than me referred to. 20 Q Well, the sentence written by somebody 21 other than you was written to you; right, sir? 22 A It was sent to me. 23 Q Yes. And it was sent to you by one of 24 your chief -- one of your top executives; correct, 25 sir? 450

1 A In an e-mail. 2 Q Yes. 3 And that's a frequent way that your top 4 executives communicate with you; correct, sir? 5 A Yes. 6 Q Now, Mr. Slivka here says that 7 Microsoft is going to be saying uncomplimentary

8 9

things about JDK 1.2 at every opportunity. Do you see that? A Where's that? Q That is, "JDK 1.2 has JFC, which

10 11 we're 12 going to be pissing on at every opportunity." 13 A I don't know if he's referring to 14 pissing on JFC or pissing on JDK 1.2 nor do I know 15 what he specifically means by "pissing on." 16 Q Well, do you know that generally he 17 means by pissing on he's going to be saying and 18 Microsoft is going to be saying uncomplimentary 19 things. 20 A He might mean that we're going to be 21 clear that we're not involved with it, that we think 22 there's a better approach. 23 Q Well, as you understand it, when 24 Mr. Slivka says he's going to be pissing on JDK 1.2, 25 as you seem to interpret it, at every opportunity, do 451

1 you interpret that as meaning that Microsoft is going 2 to be saying uncomplimentary things about JDK 1.2? 3 A I told you I don't know whether pissing 4 applies to JFC or JDK. 5 Q Well, he's going to be pissing on or 6 Microsoft is going to be pissing on either JDK 1.2 or 7 JFC or both according to Mr. Slivka. 8 Is that at least fair? 9 A That's appears to be what the sentence 10 says. 11 Q Yeah. And as the chief executive 12 officer of Microsoft, when you get these kind of 13 e-mails, would it be fair for me to assume that

14 "pissing on" is not some code word that means saying 15 nice things about you, that has the usual meaning 16 that it would in the vernacular? 17 A I don't know what you mean in this kind 18 of e-mail. 19 Q The kind of e-mail that is sent to you 20 by executives in the course of your business, 21 Mr. Gates. 22 A So all e-mails I get? Ben Slivka's not 23 an executive. 24 Q All the e-mails you get from people 25 telling you that they're going to piss on competitive 452

1 2

products, that's what I'm talking about. A I don't remember mail like that.

It 3 looks like I got one. But believe me, it's not a 4 term that's commonly used. 5 Q But you have no reason to think that he 6 means it in any way other than the normal meaning of 7 that term, do you, sir? 8 A I think it's a term of multiple 9 meanings. In this case I think it means what you've 10 suggested it means. 11 Q I thought it did too, and I hope to 12 avoid asking you going through the actual language. 13 And, Mr. Gates, let me show you a 14 document that has been previously marked as 15 Government Exhibit 377. 16 The second e-mail here refers to what

17 is attached as a final copy of the memo that was sent 18 to you for Think Week in November 1995. 19 (The document referred to was marked as 20 Government Exhibit 377 for identification and is 21 attached hereto.) 22 Q BY MR. BOIES: Do you recall receiving 23 this document, sir? 24 A No. What I recall about this document 25 is that it's already been marked as an exhibit and 453

1 that I spoke with Mr. Houck about it yesterday. 2 Q That may be so. My question to you is: 3 Do you recall receiving this -- let me make it 4 simple. 5 Did you receive this memo in or about 6 November of 1995? 7 A As I said before, for my Think Weeks I 8 get about three cardboard boxes of materials that 9 people put together for me. And in looking at this 10 memo, it's not a memo that I had seen before 11 Mr. Houck's deposition questions put to me yesterday. 12 Q So it's your testimony the first time 13 you saw this document was when Mr. Houck showed it to 14 you yesterday? 15 A That's right. It had a different 16 exhibit number then. 17 Q Let me ask you to go to page 5 of the

18 document which bears in the bottom right-hand corner 19 the Microsoft document production number ending 4683. 20 A Okay. 21 Q Do you see the heading "Shell 22 Integration"? 23 A Yes. 24 Q Do you see the second sentence where it 25 says, "We will bind the shell to the Internet 454

1

Explorer, so that running any other browser is

2 3 4

jolting experience"? A I see that. Q Do you have any understanding as

a

to 5 what was meant by that? 6 A I can guess. 7 Q Well, first, this is in a memo that is 8 entitled "How to Get 30 percent share in 12 Months"; 9 correct? 10 A Let's take a look. Yeah, that's on the 11 first page. 12 Q And is it clear to you that that is 13 referring to getting a 30 percent share of the 14 browser market? 15 A I haven't read the document, but it 16 seems likely that's what it is. 17 Q Okay. 18 Now, do you have an understanding -19 I'm not asking you to guess. But do you have an 20 understanding as to what is meant by the statement, 21 "We will bind the shell to the Internet Explorer, so 22 that running any other browser is a jolting 23 experience"?

24 A I don't know what he meant by it, but I 25 can tell you what it likely means. 455

1 Q Okay. I take it this is really how you 2 would have interpreted this when you received it; is 3 that fair? 4 A I didn't read it, so -5 Q I said if you had received it, this is 6 how you would interpret it? 7 A I said I didn't read it. I actually -8 I would have read the whole memo if I had received 9 it. I wouldn't have turned to that one page and just 10 looked at that one sentence. I would have read the 11 memo from the beginning page by page, and then I 12 probably would have understood it better than I do at 13 this moment. 14 Q If you do not have an understanding of 15 what is meant by it, you can tell me. If you do have 16 an understanding of what is meant by it, I would like 17 to have it. 18 A I don't know what he meant by it, but 19 I'd be glad to guess as to what it might mean. 20 Q I don't want you to guess. But if you 21 as the chief executive officer of Microsoft can tell 22 me how you would, in the ordinary course of your 23 business, interpret this statement, I would like to

24 25 to

have you do so. MR. HEINER:

Mr. Gates was prepared

456

1 do that quite a while ago. That was an unnecessary 2 exchange. 3 Go ahead. You may answer. 4 THE WITNESS: He may be referring to 5 the fact that when you get a separate frame coming up 6 on the win -- on the screen, it's different than 7 having something take place in frame. And part of 8 our shell integration strategy going back all the way 9 to 1990 included the idea that as you navigated or 10 browsed through different media types, you didn't 11 have to have another frame come up because that -12 that's sort of an artifact of having to think about 13 applications instead of objects. 14 And so as he looked at integrating the 15 browser and the shell together, we were going to 16 create a form of navigation optionally but as the 17 default where you don't switch frames as you navigate 18 the links from the shell to what's out on the 19 Internet back to what's in the local store. 20 Q BY MR. BOIES: Did anyone ever tell you 21 independent of this document in words or in substance 22 that Microsoft intended to bind the shell to the 23 Internet Explorer so that running any other browser 24 is a jolting experience? 25 A Well, certainly the idea of integrating 457

1 in a way that made a better browsing experience was 2 something we were talking about quite a bit. Those 3 words, no, I never heard anything along the lines of 4 those words. 5 Q The words that are in this document; is 6 what you're saying? 7 A That's right. 8 Q Okay. 9 Did Microsoft make any effort to 10 discourage Apple from writing in a JDK 1.2? 11 A That never would have come up. Apple 12 is not an application developer. 13 Q Let me -- let me back up. 14 Did Microsoft ever make an effort to 15 get Apple to discourage applications writers for 16 Apple's machines from writing in what you have 17 referred to as Sun's Java or using the Sun Java 18 runtimes? 19 A I'm sure there was discussion with 20 Apple about the fact that their unique operating 21 system capabilities wouldn't show through with the 22 least common denominator pure approach. Whether that 23 related specifically to JDK 1.2 or not, I can't say. 24 Q When you say you're sure there were 25 discussions, are you talking about discussions 458

1 2 3 4 having 5 Apple's 6 JDK 1.2?

between Microsoft representatives and Apple representatives? A Yes. Q What was Microsoft's interest in Apple discourage applications writers for operating system from using Java runtimes or

7

A

We thought they might share the

view 8 that applications showing off unique operating system 9 features was a good thing. But -10 MR. BOIES: Could I have that answer 11 read back? 12 (Answer read.) 13 Q BY MR. BOIES: Was there any other 14 reason, sir? 15 A No. 16 Q Did you have personally any discussions 17 with Apple with regard to trying to agree with Apple 18 as to the extent to which Apple and Microsoft would 19 compete with respect to Apple's QuickTime software? 20 A No. 21 Q Do you know if anyone from Microsoft 22 had such discussions with anyone at Apple? 23 A I know over a course of years we've 24 talked to them about what their plans are for 25 QuickTime, but that's all. 459

1

Q

Does Microsoft have software

that 2 competes with QuickTime? 3 A Since QuickTime's a free runtime, you 4 could answer that either "yes" or "no." It's not a 5 revenue source for Apple. But there is an Apple 6 technology that has some common things with some 7 Microsoft technologies. 8 Q Do you believe that QuickTime software 9 competes with any software distributed by Microsoft?

10 MR. HEINER: Objection. 11 THE WITNESS: Depends on what you mean 12 "compete." 13 Q BY MR. BOIES: Using that in the way 14 that you would ordinarily understand it in the 15 operation of your business, sir. 16 A No. 17 Q Did you make any effort or did 18 Microsoft make any effort to get Apple to agree not 19 to market QuickTime in any respect or to limit the 20 marketing of QuickTime in any respect? 21 A There were discussions about whether we 22 could help them with their QuickTime goals at various 23 points in time. And, in fact, they encouraged us to 24 do something where we'd actually by working with them 25 make QuickTime even more popular than it is. 460

1

MR. BOIES:

Would you read back

my 2 3 4

question, please? (Question read.) Q BY MR. BOIES: Can you answer

that 5 question, sir? 6 MR. HEINER: Objection. 7 THE WITNESS: I'm not aware of anything 8 that was directly aimed at those things, no. 9 Q BY MR. BOIES: Are you aware of 10 anything that was indirectly aimed at those things? 11 A No. 12 Q Did, to your knowledge, any 13 representative of Microsoft try to convince Apple not 14 to sell or promote QuickTime for uses for which

15 Microsoft promotes the use of NetShow? 16 A There was some discussion about the 17 future development of the runtime code and whether we 18 could work together on the Windows side of that 19 runtime code that would enhance their goal and our 20 goals. 21 Q And was there a discussion in that 22 context about Apple agreeing not to sell or promote 23 QuickTime for uses that Microsoft was promoting 24 NetShow to fulfill? 25 A Not that I'm aware of. 461

1 Q Insofar as you're aware, did Microsoft 2 representatives tell Apple representatives that if 3 Apple would agree not to sell or promote QuickTime 4 for uses for which Microsoft offered NetShow, that 5 Microsoft would help Apple in other areas? 6 A Well, the Quick -- as far as I know, 7 the QuickTime runtime is free. So when you say 8 "sell," I don't -- I'm not sure what you mean there. 9 Q I think I said sell or promote, I 10 certainly meant to. But I will use the word 11 "distribute," if that will help. 12 A I think there was a technical 13 discussion about whether a common runtime was 14 achievable which would have enhanced their QuickTime 15 goals. 16 Q When you say "a common runtime," would 17 you explain what you mean by that? 18 A I mean that the Windows media player

19 runtime would combine technology from them and from 20 us that met all of their goals for QuickTime. 21 Q And so there would be a Windows media 22 player that would be distributed, and Apple would 23 stop distributing QuickTime for purposes for which 24 the Windows media player was distributed; is that 25 what you're saying? 462

1 2

anything.

A

No. They wouldn't have to stop There would just be a new runtime

3

might incorporate some of their technology and

that help 4 them with their QuickTime goals. 5 Q Well, when you say there would be a new 6 program that would incorporate or might incorporate 7 some of their technology, would that result in them 8 stopping the distribution of their existing QuickTime 9 technology? 10 A There's no reason it would need to. 11 Q Was that part of the discussions? 12 A I don't think so. But as I told you, I 13 wasn't part of any of those discussions. 14 Q Were you aware of those discussions 15 while they were going on? 16 A I knew that Apple had a -- had the 17 QuickTime runtime for Windows. And there was always 18 a question of whether we could create a Windows 19 runtime that combined what their goals were there and 20 what they had done well there for the work we were 21 doing. And I know we talked to Apple about whether 22 we could help each other in an effort like that.

23 Q When you talk about helping each other, 24 would that result in a single product that would then 25 be distributed in place of both QuickTime and 463

1 NetShow? 2 A No. People could still distribute 3 their old things. But if you create a new thing 4 that's better, some people might use it. 5 Q Well, was the purpose of creating the 6 new Windows media player that you referred to to 7 obsolete QuickTime? 8 A Whatever functionality QuickTime had 9 previously would be unaffected by any such effort. 10 Q That really wasn't my question, 11 Mr. Gates. Maybe I can state it more clearly. 12 Did Microsoft try to convince Apple to 13 take actions which would have resulted in Apple no 14 longer distributing QuickTime to people to whom 15 Microsoft was distributing NetShow or a successor 16 Microsoft product? 17 A I'm not aware of anything that would 18 have stopped them from distributing the QuickTime 19 they had. But it was possible we could come up with 20 something that would be helpful to both companies in 21 terms of a product that took some of their technology 22 and ours and was better for users. 23 Q Did Microsoft offer to have Apple 24 continue to offer a multimedia player for the Mac 25 platform and to assist Apple in that if Apple would

464

1

agree not to distribute that multimedia player

for 2 the Windows platform? 3 A As I said, I don't think there was any 4 discussions about not distributing some old thing, 5 but rather a question that was could something new be 6 created which would be better for both companies. 7 Q Was the idea that once this new thing 8 was created, the old thing that Apple was 9 distributing would no longer be distributed by Apple? 10 A As I said, I don't think that was part 11 of the discussion. 12 Q Have you ever been told anything or 13 have you ever read anything about any contentions 14 that Apple may or may not make concerning these 15 discussions? 16 A No. 17 Q Are you aware of any assertions by 18 Apple representatives that Microsoft representatives 19 tried to get them to agree to divide the market? 20 A No. 21 Q No one's ever told you that; is that 22 your testimony? 23 A That's right. 24 Q And you've never heard that from any 25 source? 465

1 A That's right. 2 Q Do I take it from what you said 3 yesterday that if, in fact, Microsoft representatives

4 5

had attempted to get Apple representatives to participate in a market division, that would

be 6 contrary to Microsoft policy? 7 MR. HEINER: Objection. 8 THE WITNESS: That's right. 9 Q BY MR. BOIES: And I take it that if 10 you found out that people had done that contrary to 11 Microsoft's policy, they would be appropriately dealt 12 with? 13 A Yes. 14 Q Are you a regular reader of the Wall 15 Street Journal? 16 A Some days I read the Wall Street 17 Journal. 18 Q Are you aware of a Wall Street Journal 19 article that discusses assertions by Apple concerning 20 alleged efforts by Microsoft to get Apple to agree to 21 divide markets? 22 A No. 23 MR. HEINER: Mr. Boies? 24 MR. BOIES: Yes. 25 MR. HEINER: Is the antitrust division 466

1

contemplating filing an amended complaint in

this 2 3 4 being 5 in 6 7 8

action? MR. BOIES: No. MR. HEINER: Are these questions asked pursuant to the complaint that was filed this action? MR. BOIES: Yes. MR. HEINER: I think they're outside

9

the scope of that complaint. 10 MR. BOIES: I do not. I think that the 11 pattern of Microsoft in terms of attempts to divide 12 markets and the effect of those attempts on 13 Microsoft's monopoly power and the evidence of 14 Microsoft's monopoly power that comes out of those 15 attempts are all directly relevant to the case. 16 MR. HEINER: You could plead a 17 complaint like that. You haven't yet. 18 MR. BOIES: I think that complaint is 19 clearly so pled. I think this is clearly within the 20 scope of the complaint. 21 MR. HEINER: Let me ask you a different 22 question. 23 Have you prioritized your questions 24 today so that you've asked the ones that are most 25 important to you? 467

1 MR. BOIES: I think that I'm going 2 through the examination in a logical way. It has not 3 been possible to prioritize things completely without 4 simply jumping from topic to topic because of the 5 length of time that it has taken to deal with certain 6 topics. But I do think that the pattern and practice 7 of attempts of market division is a matter of 8 priority. 9 MR. HEINER: I won't cut off the 10 questioning. But note the objection. 11 Q BY MR. BOIES: Let me ask you to go to 12 a different issue of market division or alleged 13 market division. But before I do, let me just refer 14 you to a Wall Street Journal article of July 23, 15 1998, entitled "U.S. Probing Microsoft's Multimedia

16 17 18 19 20 21 22 23 24 it. 25

Role." Does that refresh your recollection as to whether you ever saw a -- a Wall Street Journal article about alleged market division attempts between Microsoft and Apple? MR. HEINER: Do you want to show us the article? MR. BOIES: I have no objection to showing it. And I have no objection to marking MR. HEINER:

I don't care if it's

468

1 marked or not. 2 MR. BOIES: My purpose is just to try 3 to refresh his recollection, to see whether he 4 recalls having ever seen this. 5 THE WITNESS: No. 6 MR. BOIES: Okay. 7 Q In that case, let me show you a 8 document marked as Government Exhibit 375. 9 The second item on the first page is an e-mail 10 message from you to Jim Allchin and others dated 11 October 12, 1997. 12 (The document referred to was marked as 13 Government Exhibit 375 for identification and is 14 attached hereto.) 15 Q BY MR. BOIES: Did you send this email 16 October 12, 1997? 17 A I don't remember it. But I have no 18 reason to doubt that I did. 19 Q In the first paragraph you say, 20 quote, 21 "I have a critical meeting 22 with Intel a week from Wednesday. I 23 want to convince them that they need 24 to stay away from Oracle NCs and work 25 more closely with Microsoft," close 469

1 quote. 2 Do you see that? 3 A Uh-huh. 4 Q Did you have that meeting? 5 A I had a meeting. 6 Q Do you recall having that meeting? 7 A I don't know what you mean "that 8 meeting." 9 Q You say, "I have a critical meeting 10 with Intel a week from Wednesday." Did you have that 11 meeting? 12 A I feel sure I had a meeting with Intel 13 after this piece of e-mail was sent. 14 Q In October of 1997? 15 A Could have been November. You'd have 16 to -- let's see. No. October. 17 Q Let me ask you to look at the last 18 paragraph under the heading "Sun byte codes are bad 19 for them." And you say, quote, 20 "I want them to understand 21 that helping NCs and JAVA will push 22 us to do Windows and other software 23 in SUN byte codes even if we don't 24 rewrite them in JAVA," close quote. 25 Do you see that? 470

1 2 3 4 5 6 7

A Uh-huh. Q When you say "I want them to understand," are you referring to Intel? A I think so. Q Did Microsoft make any effort to convince Intel not to help Sun and Java? A Not that I know of.

8 Q Did you or anyone at Microsoft attempt 9 to convince Intel not to engage in any software 10 activity? 11 MR. HEINER: Objection. 12 THE WITNESS: No. 13 Q BY MR. BOIES: Did you or, to your 14 knowledge, anyone at Microsoft try to convince Intel 15 that it should not engage in any software activity 16 unless Microsoft was involved in that activity? 17 A I'm sure we pointed out sometimes how 18 sometimes a lack of communications between the two 19 companies on various subjects including software 20 development led to unfortunate unreliability and 21 mismatch which led to bad customer experiences. 22 Q And what did that lead you to ask Intel 23 to do? 24 A Oh, in general, to see if we couldn't 25 do a better job communicating with each other so that 471

1

people would have better experiences using the

PC. 2 Q Did you tell or did anyone, insofar as 3 you are aware, from Microsoft tell Intel 4 representatives that you did not want Intel's 5 software engineers interfering with Microsoft's 6 existing domination of the software side of the PC 7 industry? 8 A No. 9 Q Are you aware of an Intel operation 10 referred to as the Intel architecture labs? 11 A Yes.

12 Q Did you tell Intel chief executive 13 officer Andy Grove that you believed that Intel 14 should shut down its Intel architecture labs? 15 A No. 16 Q What did you understand the Intel 17 architecture labs to be doing? 18 A I can't claim to have a lot of 19 expertise on the broad set of things the Intel 20 architecture labs was doing. 21 Q What did you know the Intel 22 architecture labs was doing? 23 A Well, they were doing some plumbing 24 software to try to get some things to run on Windows 25 3.1 at one point. That's one thing I know they were 472

1 doing. But in terms of their breadth of activities, 2 I'm -- the most of it I wouldn't have any familiarity 3 with. 4 Q Did you believe that there was anything 5 about what Intel was doing in the Intel architecture 6 labs that was inconsistent with Microsoft's 7 interests? 8 A Well, the fact that their software 9 didn't run with Windows 95 and would break if the 10 user wanted to move up to Windows 95 was a subject of 11 concern and discussion for us related to an overall 12 set of projects that were sometimes called NSP, 13 although that term had many meanings. 14 Q What does NSP stand for? 15 A Sometimes it means native signal 16 processing.

17 Q And how did what the Intel architecture 18 labs was doing relate to NSP? 19 A That was the plumbing. 20 Q For NSP? 21 A I believe so. 22 Q Did you tell Intel CEO, Mr. Grove, that 23 you believed that what Intel was doing in the Intel 24 architecture labs was contrary to Microsoft's 25 interests? 473

1 A In a broad sense, no. In terms of some 2 specific things that broke software for users I did 3 evidence that concern. 4 Q And you did so personally? 5 A Personally and inpersonally. 6 Q Did you ask Mr. Grove to cancel the 7 Intel architecture labs' work? 8 A No. 9 Q Did you or, insofar as you're aware, 10 anyone else at Microsoft tell people at Intel that 11 they should leave the software side of the PC 12 business entirely to Microsoft? 13 A We were having a hard time coordinating 14 our work with Intel, and we thought the quality of 15 some of their work was very low as well as not 16 working with any of our new Windows work. We may 17 have suggested at some point that the net 18 contribution of their software activities could even 19 be viewed to be negative. 20 Q Did you or insofar as you are aware or 21 anyone else at Microsoft tell representatives of 22 Intel that their software activities were

23 24 25

inconsistent with cooperation between Intel and Microsoft? A The specific work they did that 474

1

completely broke our work I'm sure I indicated

I 2 didn't think that was a good idea for either company. 3 Q Other than the specific software that 4 would not work on Windows 95 that Intel was working 5 on, did you or, insofar as you are aware, anyone else 6 at Microsoft tell Intel representatives that the 7 software work that Intel was doing was inconsistent 8 with cooperation between Intel and Microsoft? 9 A Well, there's some other things that 10 they did that created incompatibilities. 11 Q Incompatibilities between what and 12 what? 13 A Between their software and Windows, 14 that was intended to run on Windows, that created 15 incompatibilities. 16 Q And did you tell them that that 17 software also was not consistent with cooperation 18 between Microsoft and Intel? 19 A I doubt I used those words. I 20 suggested that it wasn't helpful to any of their 21 goals or our goals to have software that had 22 incompatibilities and was low quality and broke. 23 Q Did you tell Intel representatives or 24 did, insofar as you're aware, any Microsoft employee 25 tell Intel representatives that you were concerned 475

1 about Intel support for Netscape? 2 A I don't remember that. 3 Q Do you remember telling Intel 4 representatives that you were concerned that Intel 5 support for Netscape could allow Netscape to grow 6 into a de facto standard? 7 A No. 8 Q Did you tell representatives of Intel 9 that you were concerned that Intel's use of Netscape 10 could set up a positive feedback loop for Netscape 11 that would allow it to grow into a de facto standard? 12 A What do you mean Intel's use of 13 Netscape? 14 Q I'm asking whether you told this to 15 Intel. If you didn't -16 A Given that I don't know what you mean 17 by Intel use of Netscape, if you're not going to 18 clarify what you mean by that -19 Q All I'm asking is whether you told them 20 something, Mr. Gates. And if you tell me, "I didn't 21 tell them that. Not only would I not tell them that 22 because I don't understand what it could be," that's 23 an answer. 24 But what I'm asking you is whether you 25 told them that in words or in substance. And if you 476

1

didn't, you didn't.

2

say you didn't.

Or if you say you didn't,

you your

But all I want to do is get

3 4

answer.

5

clarification of the question is that when you

6

the "in substance" part, then you would need

7 8 9

define the terms. MR. BOIES: Well, let me try to approach it this way. I wouldn't have thought

MR. HEINER:

And the witness's plea

for add to

the 10 term used is quite so ambiguous. 11 Q But, Mr. Gates, did you tell 12 representatives of Intel that Intel using Netscape in 13 a Windows environment would not be a problem so long 14 as Intel did not assist in setting up a positive 15 feedback loop for Netscape that allowed it to grow 16 into a de facto standard? Did you say that or write 17 that or communicate that, those words or words that 18 you recognize to mean the same thing? 19 MR. HEINER: Objection. 20 THE WITNESS: I'm still confused about 21 what you mean Intel's using something. Are you 22 talking about like in their internal IT systems? 23 What's this about? 24 Q BY MR. BOIES: Mr. Gates, either you 25 told that to Netscape or you didn't. If you tell me 477

1 you didn't tell that to Netscape, I'll go on to the 2 next question. 3 A I did not. 4 Q Okay. 5 MR. HEINER: Let's get one point clear. 6 When the witness has some confusion on a question,

7 should he or should he not bring that to your 8 attention? 9 MR. BOIES: I think the witness should 10 tell me that "I don't understand your question." 11 MR. HEINER: That's what he did, and 12 you seemed annoyed. 13 MR. BOIES: I don't think I seemed 14 annoyed. I think that there is, perhaps, given the 15 amount of time that we've spent on defining words 16 that I think have ordinary and clear meanings, I may 17 be anxious to move that along as much as possible. 18 But if the witness simply says "I don't understand 19 the question," I will rephrase it. There may be 20 times when I do become a little annoyed when the 21 witness instead of doing that decides to rephrase the 22 question and answer an entirely different question 23 from the one I've asked. But if the witness simply 24 says -25 MR. HEINER: Which is what just 478

1 happened. 2 MR. BOIES: I don't want to debate it 3 with you, the record will show what happened. But if 4 the witness simply says in response to a question "I 5 don't understand that question," I'll take that for 6 an answer and I'll rephrase it. 7 Q Did you, Mr. Gates, personally ever 8 express concern to Mr. Grove that Intel's software 9 work was beginning to overlap with Microsoft's 10 software work?

11 A Only in the sense that the low quality 12 and incompatibilities were inconsistent with any 13 goals that Intel might have had in doing that work. 14 Q Why was that a concern? 15 A Because Intel was wasting its money by 16 writing low quality software that created 17 incompatibilities for users, and those negative 18 experiences weren't helpful for any goal that Intel 19 had. 20 Q Were they harmful to any goal that 21 Microsoft had? 22 A Only in the sense of hurting PC 23 popularity by creating negative user experiences. 24 Q Is it your testimony that your only 25 concern with what Intel was doing in the software 479

1 area was a concern to avoid negative user 2 experiences? 3 A That's right. Low quality and 4 incompatibilities. 5 Q Which, according to you, would lead to 6 negative user experiences; correct? 7 A That's right. 8 Q Did you or, insofar as you are aware, 9 anybody at Microsoft ever tell Intel representatives 10 in words or in substance that they should stick to 11 hardware and leave the software to Microsoft? 12 MR. HEINER: Objection. 13 THE WITNESS: I'm sure there were times 14 when we were frustrated about the quality and 15 incompatibility problems created about their software 16 where someone might have expressed that sentiment in

17 18 any 19 20 21 22 23 24 25 at

an extreme feeling about how tough it had been for Intel to do quality work that would have advanced Intel goal. Q BY MR. BOIES: Were you aware of any work that Intel was doing relating to Internet software development? A I can't think of any. Q Did you ever express any concern to anyone at Intel, or to your knowledge, did anyone 480

1 Microsoft ever express any concern to anyone at Intel 2 concerning Intel's Internet software work, if any? 3 A I don't think Intel ever did any 4 Internet software work. 5 Q And if they did, I take it it's your 6 testimony no one ever told you about it? 7 A That's right. 8 Q Did you or, to your knowledge, anyone 9 at Microsoft express concern to Intel about the 10 success of Java or what you have referred to in this 11 deposition as Java runtimes? 12 A From time to time we'd have general 13 discussions with Intel about things going on in the 14 industry. And I'm sure our views of the Java runtime 15 competition may have come up in some of those 16 discussions. 17 MR. BOIES: Could I have the question 18 and answer read back please? 19 (The following record was read: 20 "Q Did you or, to your 21 knowledge, anyone at Microsoft

22 23 24 25

express concern to Intel about the success of Java or what you have referred to in this deposition as Java runtimes? 481

1

"A

From time to time

we'd 2 have general discussions with Intel 3 about things going on in the 4 industry. And I'm sure our views of 5 the Java runtime competition may have 6 come up in some of those 7 discussions.") 8 Q BY MR. BOIES: In those discussions, 9 did you or others from Microsoft express concern 10 about Java and Java runtime's popularity to Intel 11 representatives? 12 A I think it's likely in those general 13 discussions. We talked about some of the 14 opportunities and competitive things going on 15 including our view of what was going on in Java 16 runtime. 17 Q Did you tell representatives of Intel 18 or, to your knowledge, anyone from Microsoft tell 19 representatives of Intel that in Microsoft's opinion 20 the wide distribution of Java and Java runtimes were 21 incompatible with interests of both Intel and 22 Microsoft? 23 A Actually, there -- there's one aspect 24 of Java that could have an effect on Intel and would 25 have no effect on Microsoft. So it's completely 482

1 orthogonal. And I pointed out to them what that was. 2 And so I did think there was one thing they ought to 3 think about in terms of where the world of software 4 development was going. But it wasn't an issue that 5 related to Microsoft. 6 Q Irrespective of what you said about 7 that particular issue, did you or others from 8 Microsoft tell Intel in words or in substance that is 9 as a general matter, a general conclusion, the 10 popularity of Java and Java runtimes was not in your 11 joint interest? And joint interest, I mean Microsoft 12 and Intel. 13 A No. There was nothing about it that 14 related to any joint interest. There was one thing 15 about it that related to some of Intel's interests 16 and there were other things about it that related to 17 some of Microsoft's interests. But there's no 18 overlap between those two. 19 Q Let me put the question this way: Did 20 you or, to your knowledge, others from Microsoft tell 21 Intel that for whatever reasons you believed that the 22 widespread distribution of Java and Java runtimes was 23 inconsistent with both interests of Intel and 24 interests of Microsoft? 25 A Well, it's like you're trying to 483

1

rephrase what I said in a more inaccurate way.

I 2 told you there's an aspect of it that I thought they 3 should think about that related to them only, that's 4 the byte code piece. And then there's an aspect of 5 it that relates to us only. So there's no end there, 6 there's just a piece that might have been of interest 7 to them that I articulated, and then there's the part 8 that relates strictly to us. 9 Q Let me take it in two pieces. Did you 10 tell Intel representatives that you believed that 11 there were reasons why the widespread distribution of 12 Java and Java runtimes were not in Intel's interests? 13 A Not in that general sense. I pointed 14 out the very specific aspect of it, the byte code 15 aspect, that I thought they ought to think about that 16 had no effect on us. 17 Q Did you tell Intel representatives that 18 there were things about the wide distribution of Java 19 and Java runtimes that Microsoft believed was not in 20 Microsoft's interest? 21 A It's likely that in the general 22 discussion the notion of some of the new competitive 23 activities including the Java runtime issues would 24 have come up in some discussions with Intel but 25 not -- not related to anything they were doing. 484

1 Q Did you ask Intel to keep you apprised 2 of what software work Intel was doing? 3 A I think I made that request in vein on 4 several occasions, nothing ever came of it. 5 Q Is it your testimony that they refused 6 to keep you apprised of the software work they were 7 doing? 8 A No. I just said to them that if they 9 would -- whatever software work they were doing that 10 was intended to help Windows, they should talk to us 11 about it early on if they wanted to have the highest 12 probability that it would, in fact, achieve that 13 goal. 14 And unfortunately, we never achieved 15 that result; that is, they would do things related to 16 Windows that without talking to us in advance, and 17 then once they had done the work, there would be some 18 incompatibilities between what they had done and 19 Windows itself. 20 Q When is the last time that you asked 21 Intel to keep you apprised of what software work they 22 were doing? 23 A I'm not sure. 24 Q Approximately when? 25 A I don't know. 485

1 2 3 years? 4

Q A Q

Was it within the last year? I don't know. Was it within the last two

A

I honestly don't know.

5 Q Was it within the last three years? 6 A There's probably one instance where I 7 asked them to tell us about things they were doing 8 related to Windows. 9 Q Did you or others, to your knowledge, 10 from Microsoft tell Intel that if Intel began to 11 compete with Microsoft, Microsoft would be forced to 12 begin to compete with Intel? 13 A No. 14 Q Not at all, sir; never said that in 15 words or in substance? 16 A No. 17 Q To your knowledge did anyone else from 18 Microsoft ever say that? 19 A I'm not aware of anybody saying that. 20 Q If anybody had said that, would you 21 consider that to be inconsistent with company policy? 22 MR. HEINER: Objection. 23 THE WITNESS: I'm confused. Intel and 24 Microsoft are not in the same businesses, so there's 25 no policy about one of our people suggesting that 486

1 2 what you 3 Intel 4 5 6 intended 7

we're going to go into the chip business. Q BY MR. BOIES: Was it part of wanted to accomplish, Mr. Gates, to be to keep and Microsoft in separate businesses? A No. Q Did you ever take any action to accomplish that?

8 A No. 9 Q Did you or, to your knowledge, anyone 10 from Microsoft ever tell people at Intel that 11 Microsoft would hold up support for Intel's 12 microprocessors if Intel didn't cooperate with 13 Microsoft in areas that Microsoft wanted Intel's 14 cooperation in? 15 A When we saw Intel doing the low quality 16 work that was creating incompatibilities in Windows 17 that served absolutely no Intel goal, we suggested to 18 Intel that that should change. And it became 19 frustrating to us because it was a long period of 20 time where they kept doing work that we thought, 21 although it was intended to be positive in the 22 Windows environment, it was actually negative. And 23 we did point out the irony of how while we seemed to 24 communicate with them on microprocessor issues and 25 yet they seemed on the areas where they were trying 487

1 to enhance Windows that the communication worked very 2 poorly. 3 Q Did you or others on behalf of 4 Microsoft tell Intel that Microsoft would hold up 5 support for Intel's microprocessors if Intel did not 6 cooperate with Microsoft? 7 A No. 8 Q No one ever told Intel that, to your 9 knowledge? 10 A That's right. 11 Q Let me see if I can refresh your 12 recollection.

13 Did you or anyone from Microsoft ever 14 tell Intel representatives that Microsoft would hold 15 up support for Intel's microprocessors if Intel 16 didn't cooperate with Microsoft on the Internet? 17 A No. 18 Q Did you or anyone from Microsoft ever 19 tell representatives of Intel that Intel would not 20 cooperate -- that if Intel would not cooperate with 21 Microsoft on communications programs, Microsoft would 22 hold up support for Intel's microprocessors? 23 A No. 24 Q Did you or to your knowledge anyone 25 from Microsoft ever tell Intel that you wanted Intel 488

1 to reduce its support of Netscape? 2 MR. HEINER: Objection. 3 THE WITNESS: It's very likely that our 4 sales force that calls on Intel as a software 5 customer talked to them about their web site and 6 their browsers. And they may have tried to convince 7 them to use our browser in terms of their internal 8 efforts. It's kind of a knit, but I think it's 9 possible. 10 Q Did you, Mr. Gates, ever yourself try 11 to get Intel to reduce its support of Netscape? 12 A I'm not aware of any work that Intel 13 did in supporting Netscape. They may have used their 14 browser internally or one of their server things, but

15 that's -- that's not really support. So I'm not sure 16 of any support they were giving to Netscape. 17 Q You may mean that to answer my 18 question, but I want to be clear. 19 It is your testimony that you're not 20 aware of any instance where you asked anybody at 21 Intel to reduce the support that Intel was providing 22 to Netscape; is that your testimony? 23 A No. I may have asked -- I may -and I 24 don't remember it -- but I may have talked to them 25 about their internal browser use. I don't think so, 489

1 but I may have. And I may have talked to them about 2 their web servers and what they were using, but I 3 don't think so. 4 MR. HEINER: We would like to take one 5 last break here at some point, and we'll go through 6 until 4:00. 7 MR. BOIES: Okay. 8 MR. HEINER: Okay. 9 THE VIDEOGRAPHER: The time is 3:26. 10 We're going off the record. 11 (Recess.) 12 THE VIDEOGRAPHER: The time is 3:36. 13 We're going back on the record. 14 Q BY MR. BOIES: Mr. Gates, you're 15 familiar with a company called RealNetworks, are you 16 not? 17 A Yes. 18 Q Did you ever have any discussions with 19 any representative of RealNetworks concerning what

20 products RealNetworks should or should not offer or 21 distribute? 22 A No. 23 Q Microsoft signed two contracts with 24 RealNetworks, did it not, sir? 25 A I have no idea. I thought it was one. 490

1 Q RealNetworks was previously called 2 Progressive Networks; correct, sir? 3 A Right. 4 Q In the contract or contracts, if there 5 was more than one, between Microsoft and 6 RealNetworks, was there any restriction on what 7 services RealNetworks could provide to competitors of 8 Microsoft? 9 A I've never looked at those contracts. 10 Q Did you participate at all in those 11 contracts either the negotiation of those contracts 12 or discussions concerning those contracts prior to 13 the time they were entered into? 14 A I knew that Muglia and Maritz were 15 talking with Progressive about some kind of deal, but 16 I didn't know what was in the deal. 17 Q Did you know anything about what was in 18 the deal? 19 A I knew there was an investment piece. 20 I knew there was some code licensing in it. That's 21 about all. 22 Q At the time that Microsoft was 23 negotiating the contract or contracts with

24 RealNetworks -- and I'll refer to it as RealNetworks 25 even though at the time it was referred to as 491

1 Progressive Networks -- did you consider that company 2 to be a competitor of Microsoft? 3 A Not -- I think I was confused about 4 what RealNetworks -- what their plans were, and I 5 wasn't sure if they were a competitor or not. 6 Q Was there a time when you did become 7 convinced that they were a competitor? 8 A Yes. 9 Q When was that? 10 A When Rob Glaser appeared in Washington, 11 D.C. 12 Q To testify before a Congressional 13 committee? 14 A Senate, yes. 15 Q What led you to conclude from 16 Mr. Glaser's testimony that RealNetworks was a 17 competitor of Microsoft? 18 A It was nothing in his testimony. 19 Q Why did you become convinced at the 20 time of his testimony that RealNetworks was a 21 competitor of Microsoft? 22 A Well, because he went out of his way to 23 lie about us, I sort of thought, "Hum, he must be a 24 competitor." 25 Q When you say he went out of his way to 492

1 2

lie about you, when was that? A That was at the press interview

3 surrounding the testimony -- maybe the testimony 4 itself, I'm not sure. I've never seen a transcript. 5 Q Did you ever personally have a 6 conversation with Mr. Glaser about his business? 7 A A long, long time ago when Rob was just 8 getting started I think there was one meeting that I 9 had with Rob. I haven't met with him since then. 10 Q Was that meeting before or after the 11 contract between RealNetworks and Microsoft that you 12 say that you know about? 13 A If you mean the contract where we 14 invested in Progressive, it was years before it and 15 not at all related to it. 16 Q When was the contract in which you 17 invested in Progressive Networks or RealNetworks? 18 A I'm not sure. I'd guess it's about a 19 year ago. 20 Q Did you have a conversation with 21 Mr. Glaser a few days after that agreement was 22 signed? 23 A Now that you ask me that, maybe I did. 24 Maybe I did. I think we may have had a short 25 meeting. 493

1 2 thought 3 4 5 6

Q And did you in that meeting tell Mr. Glaser in words or in substance how you he should limit his business? A Absolutely not. Q Not in any way, sir? A Not in any way.

7 Q Did you tell him he ought to get out of 8 the base streaming media platform business? 9 A No. 10 Q Did anyone ever tell you that 11 Mr. Glaser had said he would get out of the base 12 streaming media platform business? 13 A No. 14 Q Did Mr. Maritz ever tell you that 15 Mr. Glaser's stated plan was that he would get out of 16 the base streaming media platform business? 17 A As far as I know, we didn't know what 18 Rob's plans were. 19 Q Did you ever try to find out what those 20 plans were, sir? 21 A No. 22 Q Were those plans important to you? 23 A To me personally? No. 24 Q Were they important to Microsoft? 25 A On a relative basis, I'd say no. 494

1 Q Well, I suppose on a relative basis a 2 business as big as Microsoft, I don't know what would 3 be important, but -4 A I can tell you. 5 Q -- but on a non-relative basis? 6 A I can tell -7 Q Yes. Tell me what would be important 8 to Microsoft on a relative basis. 9 A Improvements in Windows, improvements 10 in Office, breakthroughs in research, breakthroughs 11 in Back Office. 12 Q How about browsers? On a relative

13 basis would that be important -- was that important 14 to Microsoft? 15 A To the degree it relates to Windows, 16 yes. 17 Q What about Java or Java runtime? Was 18 that on a relative basis important to Microsoft? 19 A To the degree it related to Windows, 20 yes. 21 Q Let me ask you to look at a document 22 that we have marked Government Exhibit 379. This 23 purports to be an e-mail from Paul Maritz. You are 24 not shown on this as receiving a copy. The portion 25 I'm particularly interested in is the last full 495

1 2

paragraph that says, quote, "Rob's stated plan is

that 3 he will get out of the base streaming 4 media platform business, and focus on 5 higher level solutions, hosting, and 6 content aggregation, and says that 7 his goal is now to get us to get his 8 base technology as widespread as 9 possible," close quote. 10 Do you see that? 11 A Uh-huh. 12 (The document referred to was marked as 13 Government Exhibit 379 for identification and is 14 attached hereto.) 15 Q BY MR. BOIES: Did anyone ever tell 16 you, as Mr. Maritz writes here, that Mr. Glaser had

17 said that his stated plan was that he would get out 18 of the base streaming media platform business? 19 A No. 20 Q Did you or, to your knowledge, anyone 21 from Microsoft ever tell Mr. Glaser that he should 22 get out of the base streaming media platform 23 business? 24 A No. 25 Q Okay. 496

1

You are aware, are you not, sir,

that 2 one of the issues in this case is the extent to which 3 operating systems and browsers are or are not 4 separate products? 5 MR. HEINER: Objection. 6 Mischaracterizes the allegations of the complaint, I 7 believe. 8 MR. BOIES: Well, if the witness tells 9 me that he doesn't think that's an issue in the case, 10 he can so tell me. 11 THE WITNESS: I'm not a lawyer, so I 12 think it's very strange for me to opine on what's an 13 issue in the case. As far as I know, the issues in 14 the case are not -- are something that you decide, 15 and I don't claim to have any expertise at all. 16 Q BY MR. BOIES: And if you don't know, 17 that's okay. But one of the things that I want to 18 understand from you is whether your understanding, 19 which is important to my next line of questions, is 20 that the issue of whether or not browsers are or are

21 is 22 23 24 25

not a separate product from the operating system in this case. MR. HEINER: Objection. What operating system? What browsers? You referred to "the operating system." 497

1

MR. BOIES:

You want me to stop.

All 2 right. I -3 MR. HEINER: No. I want you to ask the 4 question but with specific specificity. 5 MR. BOIES: I've asked the question. 6 If he says he doesn't understand this question, 7 again, we put it down and then it's there for people 8 to look at later. 9 MR. HEINER: That's fine. You can do 10 that. And I, as his counsel, can pose an objection. 11 MR. BOIES: Yeah. But you can't pose 12 questions to me particularly when you're trying to 13 get the witness out at 4:00. 14 MR. HEINER: I can. 15 MR. BOIES: Not questions to me. 16 Q Mr. Gates -- you can put in an 17 objection, I'm not trying to keep you from putting in 18 an objection. 19 Mr. Gates, do you understand that the 20 issue of whether or not browsers are a separate 21 product or are not a separate product from the 22 operating system is an issue in this case? 23 A I don't consider myself someone who 24 could say if that's an issue in this case or not. 25 Q Have you participated in any way in

498

1 trying to get Microsoft personnel to use language 2 that would suggest that browsers and operating 3 systems are not separate products? 4 A I have no idea what you mean by that. 5 Q Well, have you seen e-mails that urge 6 people within Microsoft not to talk about browsers as 7 if they were separate from the operating system? 8 A I don't recall seeing any such e-mail. 9 Q Are you aware of any anybody within 10 Microsoft who has asserted, either in an e-mail or 11 otherwise, that people ought to not talk about 12 browsers as if they were separate from the operating 13 system? 14 A I don't remember any such e-mail. 15 Q Has Microsoft tried to get companies to 16 agree to statements that Internet Explorer comprises 17 part of the operating system of Windows 95 and 18 Windows 98? 19 A I know it's a true statement, but I'm 20 not aware of us doing anything to try to get anyone 21 else to endorse the statement. 22 Q You're not aware of any effort by 23 Microsoft to get non-Microsoft companies to endorse 24 the statement that Internet Explorer comprises part 25 of the operating system of Windows; is that what 499

1 you're saying? 2 A I'm not aware of such efforts. 3 Q Do you know whether Microsoft has made 4 any efforts to include language like that in any of 5 its license agreements? 6 A No, I don't. 7 Q Do you know why Microsoft might do 8 that? 9 MR. HEINER: Objection. 10 THE WITNESS: I'm not sure. 11 Q BY MR. BOIES: Do you recognize that 12 OEMs have a need to acquire the Windows operating 13 system that Microsoft licenses? 14 A What do you mean by OEM? Is it a 15 tautology because of the way you're defining it? 16 Q Well, if you take IBM and Compaq and 17 Dell, Gateway and some other companies, those are 18 commonly referred to as OEMs or PC manufacturers; 19 correct, sir? 20 A No. The term "OEM" would be quite a 21 bit broader than that. OEMs used means original 22 equipment manufacturer. 23 Q I see. 24 And does OEM have a specialized meaning 25 in your business to refer to people that supply 500

1 personal computers? 2 A No. It usually means our licensees. 3 Q And do your licensees, in part, supply 4 personal computers, sir? 5 A Some of our licensees. 6 Q The licensees to whom you license 7 Windows are suppliers of personal computers, are they

8 not, sir? 9 A If you exclude Windows CE and depending 10 on how you talk about workstations and servers. 11 Q So that if we can get on common ground, 12 the licensees for Windows 95 and Windows 98 would be 13 companies that you would recognize as personal 14 computer manufacturers; is that correct? 15 A Yeah. Almost all the licensees of 16 Windows 95 and Windows 98 are personal computer 17 manufacturers. Some are not, but the overwhelming 18 majority are. 19 Confidential Material Redacted 20 Confidential Material Redacted 21 Confidential Material Redacted 22 Confidential Material Redacted 23 Confidential Material Redacted 24 Confidential Material Redacted 25 Confidential Material Redacted 501

10 11 12 13 14 15 16 17 18 19 20

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted

21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Confidential Confidential Confidential Confidential Confidential 502

Material Material Material Material Material

Redacted Redacted Redacted Redacted Redacted

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 503

1 2 3 4 5 6 7 8

Confidential Confidential Confidential Confidential Confidential Confidential Confidential Confidential

Material Material Material Material Material Material Material Material

Redacted Redacted Redacted Redacted Redacted Redacted Redacted Redacted

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 504

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted MR. HEINER: Okay. We'll step out

10 11 12 13 14 15 16 17 18 19 and 20 then come back in and talk about next steps. 21 MR. BOIES: Okay. 22 THE VIDEOGRAPHER: Okay. The time is

23 24 25

4:03 P.M.

We're going off the record. * * * 505

3 4

1 2 I hereby declare, under penalty of perjury, that the foregoing answers are true and correct to the best of my knowledge and belief. 5 EXECUTED AT _________________, WASHINGTON, 6 this ______day of _________________, 1998. 7 8 _________________________ 9 William Gates

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 506

1

STATE OF CALIFORNIA ) ss. COUNTY OF LOS ANGELES

)

2 ) 3 4 I, Katherine Gale, CSR 9793, a Certified 5 Shorthand Reporter in and for the State of 6 California, do hereby certify:

7 That prior to being examined, the witness named 8 in the foregoing deposition was by me duly sworn to 9 testify the truth, the whole truth, and nothing but 10 the truth; 11 That said deposition was taken before me at the 12 time and place named therein and was thereafter 13 reduced to typewriting under my supervision; that 14 this transcript is a true record of the testimony 15 given by the witness and contains a full, true and 16 correct report of the proceedings which took place at 17 the time and place set forth in the caption hereto as 18 shown by my original stenographic notes. 19 I further certify that I have no 20 interest in the event of the action. 21 EXECUTED this 30th day of August, 1998. 22 23 ____________________________ 24 Katherine Gale, CSR #9793 25 507

Released Pursuant to 15 U.S.C. §30

Go to Trial Documents listing

Deposition of Bill Gates by David Boies (September 2, 1998) 1 2 3 4 5

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA, ) ) 6 Plaintiff, ) ) 7 vs. ) No. CIV 98-1232(TPJ) ) 8 MICROSOFT CORPORATION, ) VOLUME III ) 9 Defendant. ) ) ______________________________ )

DEPOSITION OF BILL GATES, a witness herein, taken on behalf of the plaintiffs at 9:11 a.m., Wednesday, September 2, 1998, at One Microsoft Way, Redmond, Washington, before Kathleen E. Barney, CSR, pursuant to Subpoena.

REPORTED BY: Kathleen E. Barney, BARNEY, UNGERMANN & ASSOCIATES CSR No. 5698 Our File No. 1-49196

25

1 2 3 4 5 6

APPEARANCES OF COUNSEL: FOR THE UNITED STATES OF AMERICA: UNITED STATES DEPARTMENT OF JUSTICE BY KARMA M. GIULIANELLI 450 Golden Gate Avenue Box 36046 San Francisco, California 94102 (415) 436-6660

7 8 9 10 11 12 13

BOIES & SCHILLER LLP BY DAVID BOIES 80 Business Park Drive Armonk, New York 10504-1710 (914) 273-9800

FOR MICROSOFT CORPORATION: MICROSOFT CORPORATION LAW AND CORPORATE AFFAIRS BY DAVID A. HEINER

CONFIDENTIAL

14 15

WILLIAM H. NEUKOM One Microsoft Way Redmond, Washington (425) 936-3103

16

98052

SULLIVAN & CROMWELL BY RICHARD J. UROWSKY 125 Broad Street New York, New York 10004 (212) 558-3546

17 18 19

FOR THE PLAINTIFF STATES: 20 21 22 23 24 25

STATE OF NEW YORK OFFICE OF ATTORNEY GENERAL BY GAIL P. CLEARY 120 Broadway New York, New York 10271-0332 (212) 416-8275 ALSO PRESENT: PRISCILLA ALVAREZ, Paralegal MICHEL CARTER, Video Operator

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

390 391 392 393 394 395 396 397 398 399 400

1 2 3 4 5

WITNESS Bill Gates

I N D E X EXAMINATION BY Mr. Boies

GOVERNMENT EXHIBITS 380 E-mail dated 12/1/96 381 E-mail dated 1/16/96 382 Executive summary 383 E-mail dated 1/5/97 384 E-mail dated 6/10/94 608 385 Computer World article 617 386 E-mail dated 4/6/95 618 387 E-mail dated 4/12/95 623 388 E-mail dated 4/12/95 625 E-mail dated 2/24/97 628 E-mail dated 4/18/95 633 E-mail dated 1/28/97 635 E-mail dated 2/15/98 583 E-mail dated 2/4/95 652 E-mail dated 2/19/97 652 "The Use and Misuse of Technology" E-mail dated 3/13/97 605 E-mail dated 10/3/94 658 E-mail dated 1/8/96 663 E-mail dated 11/6/97 666

401 402 403 404

E-mail E-mail E-mail E-mail

dated dated dated dated

8/15/97 8/5/97 2/16/98 3/23/94

674 676 677 678

PAGE 510

549 565 594 600

655

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 2 3 4 5 6 7 8 9

BILL GATES, a witness herein, having been duly sworn, was deposed and testified further as follows:

1 2 3 4 5

deposition. Q. Who was that? A. I don't remember who. I was at an event where there were like 500 people, some of whom I wasn't introduced to, but I think some people came

EXAMINATION BY MR. BOIES: Q. Good morning, Mr. Gates. Do you understand that you are still under oath? A. Yes. Q. Since the deposition session last Friday, have you talked to anyone, other than your counsel, about your deposition or about this case? A. There were people who knew I'd been deposed who said, "Were you deposed?" and "Are you done being deposed?" And I simply told them I had been deposed and I thought I had one more day of being deposed. Q. Other than simply telling them that you had been deposed and you had one more day to be deposed, did you have any discussions at all with anyone, other than your counsel, either about your deposition or any matters relating to your deposition or about this case since last Friday? A. Oh, I think someone mentioned they'd read in the paper various things about the 510

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

up and said they read about it in the newspaper. Q. And one of the people that said that was somebody who you didn't know; is that your testimony? A. I remember some people saying that. I don't recall exactly who said it. Q. What is this event that you're talking about? A. Oh, it's a get-together that Paul Allen had of a number of people. Q. You attended this get-together? A. Yes. Q. When did this get-together take place? A. Friday night through Monday morning, although I only -- actually, it started Friday morning, but I was there from Friday night until Sunday night. Q. I'd like you to tell me everything that you can recall that you said to anyone since last Friday afternoon about the deposition or this case or 511

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

anything relating to this deposition or this case. A. Other than my lawyers? Q. Other than your lawyers, yes. A. Do you include my wife in that? Q. Did you talk to your wife about this deposition? A. Yes. Q. Did you talk to your wife about this case? A. Well, I talked to her about the deposition, which relates to the case. I didn't talk to her about the case in any sense beyond talking about the deposition. Q. Was anyone else present when you did this? A. No. Q. Let's leave your wife aside, too. A. I can recall some people saying, "Must have been rough," and my saying, "Well, it's like depositions I've been in before." I think a lot of people came up and said they were rooting for us. A number of people asked if I was done with my deposition. Some people suggested that they were surprised I'd been able to make it given that I'd 512

1 2 3 4

been in a deposition. I explained that I had to come late because of the deposition. But that's all I can remember about anything about the deposition. Q. Or about the case or anything related

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5 to the deposition or the case? 6 A. Other than my wife and my lawyers, yes. 7 Q. Yes. 8 I asked you last week whether you were 9 going to be a witness at the trial of this case and you said you didn't know. Do you know now whether you're going to be a witness at the trial of this case? A. I don't know -- no, I don't. I don't know whether our side will make me a witness or whether your side will make me a witness. Q. Do you intend to be a witness at the trial of this case if we do not call you? A. I don't know. Q. Have you spoken to anyone, other than your counsel, about whether or not you intend to be a witness at trial in this case? A. I haven't spoken to anyone else about an intention to be a witness. I have told my wife that there's a time we're on vacation that may overlap this trial and if either side does choose to 513

1 call me, looking at what kind every disruption in our 2 schedule that might cause. 3 Q. Other than conversations which you have 4 had with your wife or your counsel, have you had any 5 conversations with anyone about the possibility of 6 your being a witness at the trial of this case? 7 A. No. 8 Q. Other than conversations that you have 9 had with your counsel, have you had any conversations with anyone about the possibility of someone other than yourself being a witness at the trial of this case? A. Yes. Q. With whom have you had those conversations? A. I spoke to an MIT professor, Professor Dertouzos, about his possibly being a witness in the case, an expert witness. Q. When did you do that? A. A few weeks ago. I -- I don't remember the date. I can go back and try to establish it, but it's more than two weeks ago. Q. Was that a conversation that you had in person or by telephone? A. By telephone. 514

1 2 3

Q. Were you asking him if he would be a witness; is that what you were doing? A. I was inquiring whether he would be

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 willing to be a witness, yes. 5 Q. What did he say? 6 A. He wasn't sure when I talked to him and 7 he said he would think about it. 8 Q. Other than that one telephone 9 conversation, have you had any conversations with anyone concerning the possibility that someone other than yourself might be a witness at the trial of this case? A. Other than with my lawyers, no. Q. Other than with your lawyers. Have you made any efforts or to your knowledge has anyone at Microsoft, other than counsel, made any efforts to determine whether people would be willing to be trial witnesses in this case? A. The only thing I know about along those lines is there was an economist who came out and met with me and some other Microsoft people, and that may have been in connection with whether or not that economist would be an expert witness in this trial. Q. When did that happen? A. A few weeks ago. 515

1 Q. Do you know the economist's name? 2 A. Yes, Dick Schmalansee. I don't know 3 how to spell it. 4 Q. I don't either, but I know who you 5 mean. 6 Other than Professor Schmalansee and 7 that meeting you had with him, and of course the 8 telephone conversation with the MIT professor, have 9 there been any other people that you're aware of that either you or other people at Microsoft have talked to about the possibility of being a witness? A. No. Q. Insofar as you are aware, has anyone at Microsoft, other than your counsel, called up any companies with whom Microsoft does business to discuss the possibility of a representative of those companies being a witness in this case? A. If so, I'm not aware of it. Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 516

1 2

Confidential Material Redacted Confidential Material Redacted

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 517

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 518

1

Confidential Material Redacted

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

2 Confidential Material Redacted 3 Confidential Material Redacted 4 Confidential Material Redacted 5 Confidential Material Redacted 6 Confidential Material Redacted 7 Confidential Material Redacted 8 Confidential Material Redacted 9 Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted Confidential Material Redacted 519

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 Confidential Material Redacted 2 Confidential Material Redacted 3 Q. Well, sir, the term browser is a term 4 that is widely used within Microsoft, or at least was 5 until this year; correct, sir? 6 MR. HEINER: Objection. 7 THE WITNESS: We use the term browser, 8 yes. 9 Q. BY MR. BOIES: And you personally used the term browser, did you not, sir? A. Yes, that term is used in quite a variety of ways. Q. Including by you; correct, sir? A. Yes. Q. You've written e-mails about browsers; correct, sir? A. I've written e-mails where the term browser was used. I wouldn't say it was necessarily an e-mail about browsers. Q. Have you ever written an e-mail that you considered to be about browsers, sir? A. I'll bet there's e-mail where the primary subject relates to browsers. I don't remember a specific piece of e-mail. Q. And when you wrote e-mails using the 520

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 term browsers, you believed that people would 2 understand what you meant by browsers; correct, sir? 3 A. I'm sure there was enough context in 4 the e-mail that I felt I could communicate something 5 of meaning. 6 Q. And you've used the term browser in 7 dealing with people outside of Microsoft, have you 8 not, sir? 9 A. Yes. It's a term that I've used both internally and externally. Q. And there are a lot of people outside Microsoft that have written articles about browsers; correct, sir? A. There's been articles about browsing and the technology people use for browsing and comparing the different -- how different companies do that, and they used the term browser. Q. Yes. The industry and Microsoft tracks what is referred to as browser market share; correct, sir? A. No. Q. No? Does Microsoft track browser market share? A. I've seen usage share. Q. You've seen usage share? 521

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. Uh-huh. But not -- market share usually refers to something related to -- not to usage. And with browsers, I've seen mostly usage. Now, some people might refer to that as a market share, but it's not a market share. Q. What is a market share? A. Well, when I think of a market share, I think of where you're comparing the revenue of one company to the revenue of another company. Q. The total revenue of a company? A. No, the revenue related to one company's product to the revenue of another company's product. Q. And that's what you think of when you use the term market share; is that your testimony? A. Usually. Q. Are you aware of documents within Microsoft that describe browser share as the company's number one goal? A. No. I'm aware of documents within Paul Maritz's group that may have stated that. Q. Is Paul Maritz's group within Microsoft? A. Yes, but his -- he doesn't set the company-wide goals. 522

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 Q. Mr. Maritz you identified last week as 2 being a group vice-president; is that correct? 3 A. Uh-huh. Several times. 4 Q. And he is the group vice-president with 5 responsibility for Windows; is that correct? 6 A. That's among his responsibilities. 7 Q. And included in his responsibilities 8 was Internet Explorer; is that correct? 9 A. Our browsing technology was part of that group. Q. Was Internet Explorer part of that group? A. Yes. Q. Now, did you ever tell Mr. Maritz that browser share was not the company's number one goal? A. No. Q. You knew Mr. Maritz was telling people that browser share was the company's number one goal, did you not, sir? A. I knew that Mr. Maritz was saying to people that the -- that a top goal and perhaps number one goal for his group was browser usage share. Q. Now, you've put in the words "usage share" there. When Mr. Maritz was telling people that browser share was the number one goal, was 523

1 Mr. Maritz saying browser usage share or just browser 2 share, sir? 3 A. You'd have to ask him. I think he 4 meant usage share. 5 Q. I'm not asking what he meant. And 6 perhaps my question was unclear. I'm asking what he 7 said or wrote. 8 MR. HEINER: Object to the question. 9 Q. BY MR. BOIES: Do you understand the question? A. What writings are we talking about? Q. Let me ask you the question, Mr. Gates, since you're the witness. Are you aware of any time that Mr. Maritz wrote in an e-mail or said or otherwise communicated to people that browser share was the number one goal? A. The number one goal for what? Q. Just the number one goal for the company, let's start with that. Are you aware of any time when Mr. Maritz said that? A. Where he said it was the number one goal for the whole company? Q. I didn't say the whole company. I didn't put in the word "whole," Mr. Gates. And I know you're very precise with words, so I want to 524

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 2 3 4 5 6 7 8 9 browser

make sure the questions and answers meet. The question is, are you aware of any instance in which Mr. Maritz, in words or in substance, communicated that browser share was the number one goal for the company? And by "the company," I mean Microsoft. A. I don't remember any such case. Q. Are you aware of any instance in which Mr. Maritz communicated in words or in substance that share was the number one goal for his group? A. I think there was a point where he did that. I don't remember the document, but I think there was a point. Q. Do you know why Mr. Maritz came to the view that browser share was the number one goal? A. For his group? Q. Did he say for his group in the communications -A. Well -Q. -- that you're talking about? A. It's not his position to set goals for the entire company, so when he says something that's a goal, it's certainly implied it's a goal for his group. Q. Interpreting what Mr. Maritz has 525

1 communicated in light of that, do you know how 2 Mr. Maritz came to the view that browser share was 3 the number one goal? 4 A. Well, I think he was aware of the 5 increasing popularity of the Internet and the growing 6 usage of the Internet and felt that all the many many 7 innovations we were doing in Windows, that a 8 particular focus had to be doing the best job on the 9 Internet and Internet browsing features of the operating system and seeing if we could innovate enough to make people prefer to use that technology from us. Q. Mr. Gates, isn't it the case that you told Mr. Maritz that browser share was a very very important goal and that's why he believed it? A. I guess now we're delving into the inner workings of Paul Maritz's mind and how he comes to conclusions? Q. Well, let me try to ask you a question that won't require you to delve into anybody else's mind. Did you tell Mr. Maritz that browser share was a very very important goal? A. I know we talked about browser share being important. 526

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 Q. I'm not asking you what he said to you. 2 I'm not asking what topic you talked about. I'm 3 asking you whether you told Mr. Maritz that browser 4 share was a very very important goal? 5 A. I remember that we agreed that it was 6 an important goal. I'm not sure which one of us 7 reached that feeling before the other. 8 Q. Have you communicated to people other 9 than Mr. Maritz within Microsoft that browser share was a very very important goal? A. Well, you've used several times the "very very" and I don't know if you're asking me specifically about sometime where I used the words "very very," is that the question? Q. Let me begin with that question. Have you communicated to people within Microsoft, other than Mr. Maritz, that browser share was a very very important goal, using those words? A. I don't remember using those words. Q. Have you communicated the substance of that to people within Microsoft? A. Help me understand. If you communicate to people that something is important, is the substance of that identical to communicating to them it's very very important? 527

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. Would it be, in your view, Mr. Gates, if you were using those terms, would important be the same as very very important? A. Not identical. Q. What would be the difference? A. The two very's. Q. And what significance in terms of substance would those two very's have? A. A speaker's tendency towards hyperbole. Q. Other than your tendency, if you have one, to hyperbole, would there be anything different that you would be communicating to people if you were to say browser share is an important goal or browser share is a very very important goal? A. You'd have to look at the context to see. Q. As you sit here now, what you've told me is that you recall communicating that browser share was an important goal, but not a very very important goal, and all I'm trying to do is find out whether you draw a distinction in terms of the substance of those communications? A. And I said, it would depend on the context. Q. Let me ask you to look at at least one

528

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

1 context and that would be Exhibit 358 that we marked 2 during your deposition last week. And it is in the 3 stack of exhibits that you have in front of you. 4 Did you write Exhibit 358, Mr. Gates, 5 on or about January 5, 1996? 6 A. I don't remember doing so specifically, 7 but it appears that I did. 8 Q. And the first line of this is, "Winning 9 Internet browser share is a very very important goal for us." Do you see that? A. I do. Q. Do you remember writing that, sir? A. Not specifically. Q. Now, when you were referring there to Internet browser share, what were the companies who were included in that? A. There's no companies included in that. Q. Well, if you're winning browser share, that must mean that some other company is producing browsers and you're comparing your share of browsers with somebody else's share of browsers; is that not so, sir? A. You asked me if there are any companies included in that and now -- I'm very confused about 529

1 what you're asking. 2 Q. All right, sir, let me see if I can try 3 to clarify. You say here "Winning Internet browser 4 share is a very very important goal for us." What 5 companies were supplying browsers whose share you 6 were talking about? 7 A. It doesn't appear I'm talking about any 8 other companies in that sentence. 9 Q. Well, sir, is a market share something that is compiled only for one company? I understand if a company has a monopoly, that may be so, but in a usual situation where a company does not have a monopoly, share ordinarily implies comparing how much of a product one company has with how much of a product another company has; correct? A. Yes. Q. Now, when you were talking about Internet browser share here, what companies were you talking about? A. You're trying -- you seem to be suggesting that just because share involves comparing multiple companies, that when I wrote that sentence, I was talking about other companies. It doesn't appear that I'm talking about other companies in that

25

sentence.

I've really read it very carefully and I 530

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23

don't notice any other companies in there. Q. Oh, you mean you don't see any other company mentioned in that sentence; is that what you're saying? A. The sentence doesn't appear to directly or indirectly refer to any other companies. Q. When you refer to an Internet browser share here, sir, what is the share of? A. Browser usage. Q. Of course, you don't say "browser usage" here, do you, sir? A. No, it says "share." Q. Now, let's say that you meant browser usage because that's what your testimony is. What browser usage were you talking about in terms of what your share of browser usage was? What browsers? A. I'm not getting your question. Are you trying to ask what I was thinking when I wrote this sentence? Q. Let me begin with that. What were you thinking when you -A. I don't remember specifically writing this sentence. Q. Does that mean you can't answer what you were thinking when you wrote the sentence? 531

1 A. That's correct. 2 Q. So since you don't have an answer to 3 that question, let me put a different question. 4 A. I have an answer. The answer is I 5 don't remember. 6 Q. You don't remember what you meant. Let 7 me try to ask you -8 A. I don't remember what I was thinking. 9 Q. Is there a difference between remembering what you were thinking and remembering what you meant? A. If the question is what I meant when I wrote it, no. Q. So you don't remember what you were thinking when you wrote it and you don't remember what you meant when you wrote it; is that fair? A. As well as not remember writing it. Q. Okay. Now, let me go on to another paragraph and see whether you remember writing that or not. And that is the second paragraph, which reads, "Apparently a lot of OEMs are bundling non-Microsoft browsers and coming up with offerings together with Internet Service providers that get

24 25

displayed on their machines in a FAR" -- and you've capitalized each of the letters in far -- "more 532

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

prominent way than MSN or our Internet browser." Do you see that? A. Uh-huh. Q. Did you write that sentence, Mr. Gates? A. I don't remember, but I have no reason to doubt that I did. Q. Do you remember what you were thinking when you wrote that sentence or what you meant when you wrote that sentence? A. No. Q. Do you remember that in January, 1996, a lot of OEMs were bundling non-Microsoft browsers? A. I'm not sure. Q. What were the non-Microsoft browsers that you were concerned about in January of 1996? A. What's the question? You're trying to get me to recall what other browsers I was thinking about when I wrote that sentence? Q. No, because you've told me that you don't know what you were thinking about when you wrote that sentence. A. Right. Q. What I'm trying to do is get you to tell me what non-Microsoft browsers you were concerned about in January of 1996. 533

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

A. If it had been only one, I probably would have used the name of it. Instead I seem to be using the term non-Microsoft browsers. Q. My question is what non-Microsoft browsers were you concerned about in January of 1996? A. I'm sure -- what's the question? Is it -- are you asking me about when I wrote this e-mail or what are you asking me about? Q. I'm asking you about January of 1996. A. That month? Q. Yes, sir. A. And what about it? Q. What non-Microsoft browsers were you concerned about in January of 1996? A. I don't know what you mean "concerned." Q. What is it about the word "concerned" that you don't understand? A. I'm not sure what you mean by it. Q. Is -A. Is there a document where I use that term? Q. Is the term "concerned" a term that

23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21

you're familiar with in the English language? A. Yes. Q. Does it have a meaning that you're 534

1 familiar with? 2 A. Yes. 3 Q. Using the word "concerned" consistent 4 with the normal meaning that it has in the English 5 language, what Microsoft -- or what non-Microsoft 6 browsers were you concerned about in January of 1996? 7 A. Well, I think I would have been 8 concerned about Internet Explorer, what was going on 9 with it. We would have been looking at other browsers that were in use at the time. Certainly Navigator was one of those. And I don't know which browser AOL was using at the time, but it was another browser. Q. What I'm asking, Mr. Gates, is what other browsers or what non-Microsoft browsers were you concerned about in January of 1996? I'm not asking what you were looking at, although that may be part of the answer, and I don't mean to exclude it, but what non-Microsoft browsers were you concerned about in January of 1996? A. Well, our concern was to provide the best Internet support, among other things, in Windows. And in dealing with that concern, I'm sure we looked at competitive products, including the ones I mentioned. 535

1 Q. Let me try to use your words and see if 2 we can move this along. What competitive products 3 did you look at in January of 1996 in terms of 4 browsers? 5 A. I don't remember looking at any 6 specific products during that month. 7 Q. Were there specific competitive 8 products that in January of 1996 you wanted to 9 increase Microsoft's share with respect to those products? MR. HEINER: Objection. Q. BY MR. BOIES: Do you understand the question, Mr. Gates? A. I'm pausing to see if I can understand it. Q. If you don't understand it, I'd be happy to rephrase it. A. Go ahead and rephrase it. I probably could have understood it if I thought about it, but go ahead. Q. In January, 1996, you were aware that

22 23 24 25

there were non-Microsoft browsers that were being marketed; is that correct? A. I can't really confine it to that month, but I'm sure in that time period I was aware 536

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20

of other browsers being out. Q. And were those non-Microsoft browsers, or at least some of them, being marketed in competition with Microsoft's browser? A. Users were making choices about which browser to select. Q. Is the term "competition" a term that you're familiar with, Mr. Gates? A. Yes. Q. And does it have a meaning in the English language that you're familiar with? A. Any lack of understanding of the question doesn't stem from the use of that word. Q. And you understand what is meant by non-Microsoft browsers, do you not, sir? A. No. Q. You don't? Is that what you're telling me? You don't understand what that means? A. You'll have to be more specific. What -Q. Do you understand what is meant by non-Microsoft browsers? A. In the right context, I'd understand that. Q. Is the term non-Microsoft browser a 537

1 term that you think has a reasonably common and 2 understandable meaning in the industry? 3 A. Yes. It's only the scope of what you'd 4 include in it that would vary according to the 5 context. 6 Q. Okay. That is, in some contexts you'd 7 include more and in some contexts you'd include less? 8 A. That's right. 9 Q. When you refer to non-Microsoft browsers generally, are there particular browsers that you have in mind? A. There are many that I would include in that. And as I said, it would be broader depending on the context. Q. Do all of the non-Microsoft browsers that you're aware of compete with Internet Explorer? A. In the sense that users select which browsers they want to use, yes. Q. Let's focus on January of 1996. What were the non-Microsoft browsers that, in your view,

21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19

were competing with Internet Explorer in January of 1996? A. Well, users could choose from a number of browsers, including the original Mosaic browser, the Netscape Navigator, and I don't know what version 538

1 they had out at the time. The AOL browser. And some 2 others that were in the market. 3 Q. And using the term as you used the 4 term, were all of those three browsers competing with 5 Internet Explorer in January of 1996? 6 A. In the sense that users could choose to 7 use them or use Internet Explorer, yes. 8 Q. I want to use it the way you use it, 9 not the way somebody else might use it, Mr. Gates. What I want to know is in January, 1996, did you consider Mosaic, Navigator and AOL's browser as all competing with Internet Explorer? A. In the sense that users could select one of those others to choose, yes. Q. Is that the only sense that you use the term competition? A. No. Q. What I want to do is I want to focus on competition the way you use it in the ordinary operation of your business. A. And one of the senses is whether people choose to use our way of providing a feature or if they choose to get additional software to provide them with that feature. Q. And was that the choice that users were 539

1 making between Internet Explorer and the AOL browser 2 in January of 1996, Mr. Gates? 3 A. Users can choose between those two. 4 Q. Were they making that choice, 5 Mr. Gates, so far as you're aware? 6 A. Some were, yes. 7 Q. And some were choosing the AOL browser 8 instead of Internet Explorer, that's your testimony? 9 A. Well, people can switch at any time and they can intermix their usage. Some people choose to primarily use the AOL browser. Q. Instead of Internet Explorer is your testimony? A. When I say primarily, that means it got most of their usage share and it means nothing else does. Let's take somebody who exclusively would have used the AOL browser. I can't name anybody like that, but I'm sure there were people like that. That would mean they weren't using the Internet Explorer

20 21 22 23 24 25

technologies in Windows. Q. And because of that, as you use the term competition, you would consider that a competitive alternative? That's what you said; is that correct? A. In terms of competing for usage share, 540

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18

yes.

Q. And what you've testified is that when you use browser share, you meant usage share; correct? A. That's right. Q. So that as you use the term browser share, it is your testimony that in January of 1996 Microsoft was competing for browser share with Mosaic, Navigator and AOL's browser; correct? A. In the sense that users would choose to use one of those in varying degrees, yes. Q. But in terms of what you meant by browser share, that was what you considered to be competition in January of 1996; correct? A. That we were competing to see who could make the better browser that users would choose to take advantage of, yes. Q. And you were competing with the supplier of Mosaic and the supplier of Navigator and the supplier of AOL's browser to do that; is that your testimony? A. I know we were interested in making our browser attractive so that we'd gain higher usage share. Q. Higher usage share compared to -541

1 A. All the other browsers, including 2 particularly those browsers. 3 Q. Okay. Now, in January of 1996, did you 4 consider any one of those three browsers to be a 5 stronger or more important competitor than any of the 6 others? 7 A. It's hard for me to pin it down to 8 January, 1996. At some point we definitely thought 9 of the Netscape browser as the number one in terms of how our Windows browsing would be compared by users and which they would select. Q. Have you finished your answer? A. Uh-huh. Q. When did you first consider Netscape's browser to be your primary or most important non-Microsoft browser with which Internet Explorer was competing? A. I think by late 1995 we thought of

19 20 21 22 23 24 25

Navigator as competing both with -- well, competing with Windows broadly, including the Internet capabilities of Windows. Q. Prior to late 1995, did you think of the Netscape browser as competing either broadly with Windows or with Internet Explorer? A. No. I think prior to that we were 542

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

unclear about whether that was the case. Q. Let me try to go back now to the first sentence in your memo of January 5, 1996 that has been marked as Exhibit 358 where it says, "Winning Internet browser share is a very very important goal for us." Does the prior discussion that we've just had refresh your recollection that you would have been referring primarily there to the goal of gaining market share versus Netscape? A. You keep trying to read Netscape into that sentence and I don't see how you can do that. Q. I just really want to get your testimony, Mr. Gates. A. Okay. Q. And that is, when you wrote, "Winning Internet browser share is a very very important goal for us," in January, 1996, were you referring primarily to gaining market share compared to Netscape? A. I've testified I don't remember what I was thinking when I wrote that sentence. Q. If you can't remember what you meant when you wrote that sentence, do you at least remember that in January, 1996, winning Internet browser share was an important goal for Microsoft? 543

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

A. Yes. Q. And with respect to the goal of winning Internet browser share in 1996, was that goal primarily to gain share compared to Netscape? A. Not necessarily. Q. When you talk about winning browser share, not necessarily just in this document but generally, you're referring to gaining market share compared to other competitors; correct? A. Or any new products that come along. Q. That are competitive; correct? A. That people use for that function. Q. In January of 1996, was it the case that the most important competitive product to Internet Explorer was Netscape's browser? A. I think by this time the browser that had the highest usage share was Netscape's Navigator.

18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16

MR. BOIES:

Would you read the question

back, please. (Record read.) Q. BY MR. BOIES: Can you answer that question, sir? A. In terms of users picking browsers, the product that was on the market that competed for usage the most in this time period was probably 544

1 Netscape's Navigator. 2 Q. Okay. Was the fact that you've just 3 described a fact that caused you and Microsoft to 4 want to study Netscape and determine how you could 5 reduce Netscape's ability to compete? 6 MR. HEINER: Objection. 7 THE WITNESS: I don't know what you 8 mean by that. 9 Q. BY MR. BOIES: In or about January of 1996 or thereafter, did Microsoft try to study Netscape to determine how you could reduce Netscape's ability to compete? MR. HEINER: Objection. THE WITNESS: I don't know what you mean by that. Q. BY MR. BOIES: Let me try to break it up into as small a pieces as I can. In or about January, 1996 or thereafter, did Microsoft, to your knowledge, undertake to try to study Netscape as a company, including where its revenues came from, what its dependencies were, what it needed to remain viable? A. I'm sure we looked at their revenue. And I'm sure we looked at their products and their organizational structure. 545

1 Q. Was that in whole or in part a result 2 of an attempt to find out what their vulnerabilities 3 were, Mr. Gates? 4 MR. HEINER: Objection. 5 THE WITNESS: Did you end the question? 6 Q. BY MR. BOIES: Both your counsel and I 7 thought so. 8 A. Okay. 9 Q. But if you don't understand it, I'll rephrase it. A. We were interested in learning what users liked about their products and what kind of response customers had. Q. For my present question I'm not asking about learning about their products just for the sake of learning about their products. What I'm asking

17 18 19 20 21 22 23 24 25

about is whether you were trying to figure out where Netscape's dependencies were so that you could attack Netscape and render Netscape a less effective competitor? MR. HEINER: Objection. THE WITNESS: We were interested in building a product that users would prefer over them. Q. BY MR. BOIES: My question, sir, is whether in addition to whatever you did to improve 546

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15

your product, were you also attempting to ascertain what Netscape's dependencies were so that you could attempt to render Netscape less viable, less able to compete with Microsoft? MR. HEINER: Objection. THE WITNESS: We gathered information about Netscape like we do a number of companies we compete with, including IBM, Sun, Novell and many others. Q. BY MR. BOIES: Have you finished your

answer? A. I have. Q. I'm now asking you about Netscape in particular and I'm asking you whether you gathered information about Netscape for the purpose, in whole or in part, to determine what Netscape's dependencies were so that you could then try to attack those dependencies and render Netscape a less viable competitor? MR. HEINER: Objection. THE WITNESS: It's the compoundness of the question that makes it so confusing. Q. BY MR. BOIES: Is the question so confusing that you really think you can't answer it? A. It's the compoundness that makes it so 547

1 confusing that I don't think I can give you a good 2 answer. 3 Q. You gathered information about 4 Netscape; correct? 5 A. People in the company did. I didn't 6 personally. 7 Q. Well, you asked them to gather 8 information about Netscape; correct, sir? 9 A. I didn't initiate any particular gathering of information. I may have asked questions once I was presented some information. Q. You told people that you wanted them to gather information concerning such things as Netscape's revenues and head count and how much revenues they got from various sources, things like

16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14

that, did you not, sir? A. No. I already -- we already talked about the fact that there was a normal competitive review done of a number of companies, and I didn't initiate that particular review. MR. BOIES: Let me mark as the next exhibit, which will be Government Exhibit 380, a document that I will give you a copy of and give your counsel copies of. The first page of Exhibit 380 contains 548

1 what purports to be a message from you dated 2 December 1, 1996. Do you see that, sir? 3 A. Yes. 4 (The document referred to was marked 5 by the court reporter as Government Exhibit 380 for 6 identification and is attached hereto.) 7 Q. BY MR. BOIES: Did you write that 8 message? 9 A. We've already discussed this particular message. As I said when we discussed it before, I don't remember specifically sending that message, but I don't have any reason to doubt that I did. Q. Do you see the first paragraph of this message that says, "What kind of data do we have about how much software companies pay Netscape?" A. It's weird that you're repeating this exhibit without the enclosures to the e-mail. I think it's very misleading to have the version of the document -- you had the real exhibit earlier. Did you lose it? Q. Mr. Gates, I am prepared to sit here just as long as you want to have whatever debate you want to have. I think you understand that I put questions and you give answers and if your counsel has an objection, he makes an objection. And that's 549

1 the way the deposition will get over with. If we 2 proceed this way, the deposition is never going to 3 get over with. If you need to see something else, 4 we'll take whatever time you need to try to put it in 5 front of you. 6 What I'm asking you about is a document 7 that bears Microsoft's document production numbers 8 MS6 6013069 with two additional pages, MS6 6013070 9 and 3071. The last two pages of this have stamps that say "Privileged Material Redacted," which I will represent to you means that your counsel has whited out what was there. Now, I don't have any objection to being given that privileged material that has been redacted and I can ask you about that, too, but what

15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13

I'm asking you about right now is this document that was produced to us by your counsel. A. And I've told you it appears to be incomplete. MR. HEINER: If I can cut through this a little bit, Mr. Gates is simply referring to the fact that there was another version of this produced where the material was not redacted because the redaction in this case was in error. It's a simple matter. MR. BOIES: But I also think that the 550

1 previous exhibit, if I'm thinking about the one that 2 you have, has a different document production number, 3 it has a different number of pages. It was something 4 marked by the states. 5 MR. HEINER: I think all of that is 6 probably true. 7 MR. BOIES: And I'm happy to have that 8 other document in front of the witness if he thinks 9 he needs it. What I want to do, though, is just talk about his e-mail. And I don't think his e-mail is in any way incomplete. THE WITNESS: Yes, sir, it is certainly incomplete. Q. BY MR. BOIES: Okay, sir. Then tell me how it is incomplete. A. Do you see where it says "RE:"? Q. Yes. A. That means there is an enclosure. Q. You mean your e-mail is missing the enclosure, is that what you're saying? A. Right. So the thing I'm referring to in my e-mail is completely missing here, which it wasn't earlier in this deposition. Q. It was not missing earlier in the deposition? 551

1 A. That's right. 2 Q. All right, sir. Let's see if we can 3 find the earlier exhibit that you're referring to. 4 Let me see if what you mean to be referring to is 5 Government Exhibit 353. 6 A. I didn't see it when I flipped through 7 these. Do you have 353 in this pile (indicating)? 8 Q. If the reporter did her job, which she 9 almost always has, when you started the deposition today you would have had all of the exhibits in numerical order. A. Okay, great. Here is 353. Q. Now, first of all, let's see if we can

14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

reach some agreement. Is Exhibit 353 the other exhibit that you were referring to? A. Yes. Q. All right. And Exhibit 353, the e-mail from you, is the same as the e-mail on Exhibit 380, but Exhibit 353 has an additional e-mail; is that correct? A. No. Q. Okay. Let me try to go through Exhibit 353. The first e-mail on Exhibit 353 is an e-mail from Mr. Ballmer to you and others; correct? A. Right. 552

1 Q. The second e-mail is an e-mail from you 2 dated December 1, 1996 at 9:24 p.m.; correct? 3 A. Yes. 4 Q. And there is a third e-mail from 5 Mr. Nehru dated November 27, 1996, at 11:54 a.m.; 6 correct? 7 A. Well, it's not a separate e-mail. It's 8 part of my e-mail. 9 Q. Well, sir, let me try to see if we can get this straight. And we'll read this whole thing into the record if we have to. A. I can explain what you're confused about. Q. I'm not confused, Mr. -MR. HEINER: Gates. Q. BY MR. BOIES: -- Gates. Indeed I think I stated it accurately, if you want to start talking about what I think. But my function is to ask you questions and your function is to give me answers to the questions and neither of our functions are to debate the other at this point. Exhibit 353 starts with an e-mail dated December 1, 1996 from Mr. Ballmer to you; correct? A. There's only one e-mail in here, which is the one from Steve, which has two e-mails enclosed 553

1 2 3 4 5 6 7 8 9 10 11 12

in it.

Q. Well, what is enclosed here are two additional e-mails; correct, sir? A. They're part of Steve's e-mail. Q. That is, Steve -- and by Steve you mean Mr. Ballmer; correct? A. Yes. Q. -- is sending around with his e-mail two earlier e-mails; correct? A. They're part of his e-mail. Q. When you say they're part of his e-mail, he didn't write them, did he, sir?

13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. No, but they're part of his e-mail. Q. That is, he is sending them around? That's what I said three times. He is sending them around with his e-mail. He wrote something and in addition to what he wrote, he is sending around what two other people wrote earlier; correct, sir? A. It's part of his communication. It's not separate. Q. I don't know what you mean by part or separate and neither one of those were in my question, Mr. Gates. My question is, Mr. Ballmer wrote an e-mail that he sent around and with that e-mail he sent around two earlier e-mails; that's 554

1 2 3 4 5 6 7 8 9 Gates,

clearly what's going on here; right, sir? A. He only sent one thing. Q. All right, sir. The first line on Exhibit 353 says "Leslie Halverson (LCA)"; correct, Mr. Gates? A. Yes. Q. Okay. The next line says "From: Steve Ballmer." The next line says, "Sent: Sunday, December 1, 1996, 9:25 p.m." and then "To: Bill Amar Nehru." A. Does yours say 9:25? Q. Well, on 353 it looks like 9:26. A. Right. And you said 9:25. Q. Okay, then I misspoke. With that amendment, it is correct, though; correct? A. That's right. Q. And it then goes down six more lines and then there is a line that says "Original Message;" correct? A. Right. Q. And that says "From: Bill Gates," correct? A. That's right. Q. And it says you sent it Sunday, December 1, 1996 at 9:24 p.m.; correct? 555

1 2 3 4 5 6 7 8 9 10 11

A. That's right. Q. And then it goes down one, two, three, four, five, six, seven, eight, nine, ten lines and then there is another line that says "Original Message;" correct, sir? A. That's right. Q. And that says it is from Mr. Nehru; correct? A. Yes. Q. And it says it was sent on Wednesday, November 27, 1996 at 11:54 a.m.; correct, sir?

12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10

A. Right. Q. Now, the portion that follows your line that says, "I don't think this analysis needed to be sent to so many people," that's the last line before the line that says "Original Message" from Mr. Nehru; correct? A. That's right. Q. Everything after your line saying "I don't think this analysis needed to be sent to so many people" has been blocked out on Exhibit 380, correct, and replaced with a stamp that says "Privileged Material Redacted"? A. Do I still have 380? Q. Unless you have eaten it. It was the 556

1 one we just marked a few moments ago, a few minutes 2 ago. 3 MR. HEINER: It's gone. 4 Q. BY MR. BOIES: In any event, your 5 counsel has in front of him another copy of it. 6 A. Yes. 7 Q. And we'll use that copy. 8 A. Yeah, it looks like they're the same 9 except that they deleted the part of my message where I enclosed the information from Amar. Q. When you say you enclosed the information from Amar, you mean where you enclosed Mr. Amar's e-mail? A. As part of my e-mail. Q. In haec verba? MR. HEINER: Don't use that. Q. BY MR. BOIES: Word for word? A. Yes, it appears to be his e-mail word for word. Q. Okay. I was just trying to make sure the record is clear. MR. HEINER: I'm ready for a break if you're about to get into the more interesting part. MR. BOIES: We can take a break. VIDEOTAPE OPERATOR: The time is 10:38. 557

1 2 3 4 5 6 7 8 9 around.

We're going off the record. (Recess.) VIDEOTAPE OPERATOR: The time is 10:59. We're going back on the record. Q. BY MR. BOIES: The November 27, 1996 Nehru e-mail that you sent around is headed "Netscape Revenues;" correct, sir? And it is a discussion of an analysis of Netscape's revenues? A. I didn't send it around. Amar sent it I enclosed it.

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. I thought we established that you then sent it around. A. I enclosed it, yes. Q. When you say you enclosed it, that means it's enclosed with what you have written so that it goes around to everybody that your e-mail is directed to; correct? A. Well, Amar had already sent it to quite a large superset of the people I copied on my e-mail, so he sent it to them. Q. He sent it to them and then you sent it to everybody that is on the addressee or copy list of your e-mail; correct? A. I enclosed it to those people who had already all gotten it from Amar. 558

1 Q. And by enclosing it means you sent it 2 around? 3 A. That's not the word I would use, but it 4 was enclosed in the e-mail I sent to those people who 5 had already received it directly from Amar. 6 Q. So when people got your e-mail -- all 7 I'm trying to do is -- I don't think this is obscure. 8 All I'm trying to do is establish that when you sent 9 your e-mail to the five people that you sent it to, with your e-mail they got Mr. Nehru's e-mail? A. Which they had already gotten. Q. And they got it again? A. As an enclosure, yes. Q. As an enclosure to your e-mail? A. Right. Q. And that e-mail from Mr. Nehru that you enclosed with your e-mail is a discussion of Netscape's revenues; correct, sir? A. That's the subject line of his e-mail. Q. Not only is it the subject line, that's what the substance of the e-mail is? A. Do you want me to look at it? Q. If you need to to answer the question. A. It appears to be a discussion of Netscape's revenue, or what he was able to find out 559

1 2 3 4 5 6 7 8 9

about it at a 70 percent confidence. Q. And the first line of your memo that you send to the five people indicated here, including Mr. Maritz and Mr. Ballmer, is "What kind of data do we have on how much software companies pay Netscape?" correct, sir? A. Yes. Q. And did they furnish you with that information?

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. I don't think so. Q. You say in the next line, "In particular I am curious about their deals with Corel, Lotus and Intuit." Do you see that? A. Uh-huh. Q. You've got to say yes or no for the -A. Yes. Q. Did you ever receive information about what revenues Netscape was getting from any of those companies? A. I'm quite sure I didn't. Q. Netscape was getting revenues from Intuit. You knew that in December of '96; correct, sir? A. I still don't know that. Q. You still don't know that? You tried 560

1 to find that out in December of 1996; correct? 2 A. I did not myself try and find that out. 3 Q. You tried to find it out by raising it 4 with people who worked for Microsoft, didn't you? 5 That's what this message is? 6 A. It says I'm curious about it. 7 Q. Well, the first line says, "What kind 8 of data do we have about how much software companies 9 pay Netscape? In particular I am curious about their deals with Corel, Lotus and Intuit." That's what you wrote to Mr. Nehru, Mr. Silverberg, Mr. Chase, Mr. Ballmer and Mr. Maritz; correct, sir? A. Right, because Amar's mail didn't seem to have any data about that. Q. And is it your testimony that you never got any data about that? A. That's right. I don't remember getting any data. I'm quite sure that I didn't. Q. Did you follow up to try to get an answer to those questions? A. No. Q. After December of 1996, Microsoft entered into an agreement with Intuit that would limit how much money Intuit paid Netscape; correct, sir? 561

1 2 3 4 5 6 7 8

A. I'm not aware of that. Q. Are you aware of an agreement Intuit entered into with Microsoft? A. I know there was some kind of agreement. I wasn't part of negotiating it, know what was in it. Q. Do you know anything that was Intuit agreement?

that an nor do I in the

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

9 A. I'm quite sure that Intuit had a plan to use our componentized browser. And I think in the agreement they agreed to make that their default browser. Q. Do you know anything else about the Intuit agreement? A. Well, Mr. Houck, when he -Q. Do you know anything else about the Intuit agreement? A. I was going to answer. Q. Well, okay. I just want to be clear that what I'm asking about has nothing to do with what Mr. Houck knows or what Mr. Houck suggested. It's what you know. Now, if Mr. Houck refreshed your recollection about it, that's fine. A. Let me say the sentence and then we'll see what you say. 562

1 Q. Okay. 2 A. Mr. Houck showed me an e-mail which 3 appeared to be written by Will Poole talking about 4 his discussions with Intuit, and I could tell you 5 what I remember from that e-mail that Mr. Houck 6 showed me. 7 Q. No, because that's in the record 8 already. What I need to know is whether, based on 9 anything that Mr. Houck did or that I did -- I think I actually may have showed you the e-mail you're talking about, but whether it was Mr. Houck or me, based on whatever happened before, do you now have a recollection of the Intuit agreement other than about the default browser? MR. HEINER: Objection. THE WITNESS: I'm confused. Q. BY MR. BOIES: Okay. Let me distinguish two things. I'm not asking you to try to remember the e-mail that you were shown before. What I'm asking is whether, as you sit here now, you have a memory or recollection of the Intuit deal other than that it made IE the default browser? A. No. Q. Now, let me go back to where I was before we entered into our discussion of Mr. Nehru's 563

1 2 3 4 5 6 7

e-mail. Other than the e-mail that you sent on December 1, 1996, do you recall any other instances in which you were personally asking for data about Netscape? A. I think I was in a meeting, a normal review-type meeting, where some data on Netscape was

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

presented by Amar, and it's likely that I asked at least one question during the meeting. Q. Any other instances? A. I think there was e-mail about a specific deal that Netscape did with Citicorp in the last couple months where I was curious about how much Citicorp had paid. Either that or the mail just included that information. Q. Any other instance in which you personally asked for information concerning Netscape's revenues, head count, business, plans or dependencies? A. I remember once saying to Brad Silverberg how many developers does Netscape have, and being curious about that. Q. Any other instances? A. I think when we did geographic reviews one time, I asked someone if Netscape had an office 564

1 in their country. 2 I think once when I was in Japan -3 this is another instance -- I asked what the browser 4 usage share was in Japan, in particular what 5 Netscape's usage share was. 6 Q. Have you completed your answer? 7 A. Yes. 8 Q. Have you now given me all of the 9 instances that you can recall in which you have personally asked for information concerning Netscape's revenues or head count or dependencies? A. Yes. Q. Let me ask you to look at a document that we will mark as Exhibit 381. The third item on the first page is an e-mail from Paul Maritz to you dated January 16, 1996. It is to you and a number of other people, but you are the first there. Do you see that? A. Yes. (The document referred to was marked by the court reporter as Government Exhibit 381 for identification and is attached hereto.) Q. BY MR. BOIES: Did you receive this e-mail in January, 1996? A. I don't remember receiving it, but I 565

1 2 Maritz's 3 4 5

have no reason to doubt that I did. Q. The second sentence of Mr. e-mail to you says, "We need to look carefully at any significant opportunity to gain share versus Netscape." Do you see that?

6

A.

That's part of the sentence that

7

Q.

The rest of the sentence says,

I see. "and 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

think carefully before AOL goes off and partners with Netscape." Do you see that? A. Yes. Q. That's the rest of the sentence; right? A. Right. Q. Even though you don't recall receiving this particular e-mail, do you recall Mr. Maritz telling you in or about January of 1996 that he believed that Microsoft had to look carefully at any significant opportunity to gain share versus Netscape? A. No. Q. Do you recall Mr. Maritz telling you in or about January of 1996 that there was a possibility that AOL was going to go off and partner with Netscape? A. I don't know the time frame, but I know there was -- there came a time where AOL was 566

1 considering whether to keep doing their own browser 2 technology or work with someone else on that. 3 Q. And is that your understanding of what 4 Mr. Maritz was referring to when he talks about AOL 5 going off and partnering with Netscape? 6 A. It appears to be a mail about -- let me 7 take a look at it. 8 It appears to be a mail about OEMs 9 prominently featuring the AOL client in such a strong way that anything we would do for AOL in that regard would be of no impact and, therefore, that maybe we should work with AOL on the browser. MR. BOIES: Could I have that answer read back. (Record read.) MR. BOIES: And would you read my question back, please. (Record read.) THE WITNESS: Well, having read the mail, my best guess is that he is talking about the browser, but it's just a guess reading the e-mail. Q. BY MR. BOIES: Well, when you say that your best guess is he is talking about the browser, you mean in his e-mail that this is about a browser? A. About working with AOL on browsing 567

1 2

technology. Q.

Well, do you have any doubt that this

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

is related to browsers, sir? A. It's certainly part of what it's about. Q. When Mr. Maritz says, "We need to look carefully at any significant opportunity to gain share versus Netscape," he is talking about browser share, is he not? A. Almost certainly. Q. And as you've previously pointed out, part of the same sentence is that he says that it's important to "think carefully before AOL goes off and partners with Netscape." Do you see that? A. I see it. Q. And when he is talking about going off and partnering with Netscape, he is talking about AOL partnering with Netscape relating to browsers; correct? A. As I said, I'm not certain what he means, but from reading the e-mail, certainly browsers is part of what he is talking about, it appears. Q. And in response to this issue, did Microsoft go off and partner with AOL with respect to browsers? 568

1 A. In response to what? 2 Q. In response to the thing that 3 Mr. Maritz writes to you in January of 1996, that he 4 wants to look carefully at any significant 5 opportunity to gain share versus Netscape and AOL is 6 thinking about going off and partnering with 7 Netscape. 8 MR. HEINER: Objection. 9 THE WITNESS: The reason we did enter into some partnership activities with AOL is in order to let them take advantage of some of the innovations we'd done in browsers and get broader exposure of the work that we'd done there. Q. BY MR. BOIES: And did you enter into partnership relationships with AOL concerning browsers? A. We entered into a partnership, a primary element of which was working together to make the Windows browsing technology meet AOL's needs. Q. And was one of the reasons that you did that to try to gain share versus Netscape? A. Our goal was certainly to improve the exposure of our innovation and therefore the usage share of IE. Q. Now, when Mr. Maritz writes to you, he 569

1

is not writing about gaining exposure for your

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

innovations, he is writing about gaining share versus Netscape; correct, sir? A. Are we back to focusing on this piece of e-mail here? Q. I don't know what you mean by "back to," but in January of 1996, Mr. Maritz writes to you about pursuing any significant opportunity "to gain share versus Netscape." Do you see that sir? You said you didn't have any doubt that you'd read this; correct? A. I have no reason to doubt that I received it. Q. Do you doubt that you received it? A. No. Q. Okay. So you accept you received this e-mail? A. I said I had no reason to doubt that I received it. Q. And you also said you don't doubt it? A. I don't know for sure that I received it because I don't remember specifically receiving it. Q. Let me put it this way. As you sit here now, you believe you received it, don't you, 570

1 Mr. Gates? 2 A. I believe it's more likely than not 3 that I received this e-mail. 4 Q. As you've described previously in the 5 deposition, can you give me any probability greater 6 than that? 7 A. I think it's very likely. 8 Q. Okay. Now, in this e-mail that it is 9 very likely that you received in January of 1996, Mr. Maritz writes that you need to look carefully at any significant opportunity to gain share versus Netscape and you need to think carefully before AOL goes off and partners with Netscape. Was the desire to gain share versus Netscape part of what led Microsoft to itself partner with AOL with respect to browsers? MR. HEINER: Objection. Asked and answered. THE WITNESS: Our goal was to raise the usage share of our Internet Explorer technologies in Windows and that's the reason we did the agreement with AOL. Q. BY MR. BOIES: Now, when you refer to gaining things in Windows, the documents that talk about browser share don't talk about gaining share 571

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 for Windows, do they, sir? 2 A. They talk about gaining share for the 3 IE part of Windows. 4 Q. Well, they don't even talk about 5 gaining share for the IE part of Windows. Have you 6 seen any documents that talk about gaining share for 7 the IE part of Windows? 8 A. Well, certainly if you're talking about 9 e-mail within Microsoft, we all know that IE is a part of Windows and so we don't bother, for any feature that we're studying usage of, to restate "and that feature is a part of Windows." We simply refer to the feature. Q. IE is distributed other than as part of Windows, is it not, sir? It's distributed separately? A. It's a different thing we do, which is we create an IE for Macintosh that shares some of the same code as the IE capabilities that are in Windows. MR. BOIES: Would you read back the question, please. (Record read.) Q. BY MR. BOIES: Can you answer that question, sir? A. We take a subset of the IE technologies 572

1 that are in Windows and create something independent, 2 which is the IE for Macintosh, although there is a 3 lot of unique code that is written for that work. 4 And we also create it for Unix as well. 5 Q. When you look at your browser share, do 6 you include in your browser share the usage of IE 7 browsers that are used on Macintosh? 8 A. Sometimes yes and sometimes no. You 9 can add those numbers together and sometimes we do that. You can track the numbers separately and we've certainly done that as well. Q. When you talk about your IE browser share without further elaboration, is that including your IE usage on Macintosh or not? A. Highly ambiguous. Q. When you receive discussion of Microsoft's browser share without further elaboration, how do you understand those references? Do you understand those references to include your usage on Macintosh or not to include IE's Macintosh usage? A. I'd have to look at the reference. If they say Windows, then they don't include Macintosh. If they just say it without mentioning Windows, it's not clear whether they're including the Macintosh 573

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 usage or not. 2 Q. Have you ever asked someone who wrote 3 you just talking about browser share whether they 4 were talking about browser share including Macintosh 5 or not? 6 A. Yes, I believe I have. 7 Q. Who did you ask that of? 8 A. I'm sure I sent mail and probably 9 included Brad Chase as one of the people I would have, in responding to something like that, included. Q. What was the response? A. I'm sure they clarified which numbers referred to the IE usage from within Windows 95 and which referred to the IE offering we make on the Macintosh. Q. And with respect to Exhibit 381, the January, 1996 message from Mr. Maritz to you where he is talking about gaining share versus Netscape, does that include usage share on Macintosh or not? A. It's not clear at all. Q. Do you have any understanding as to what he meant by that? A. Whether he included the Macintosh share or not, is that the question? Q. Yes. 574

1 2 3 4 5 6 7 8 9 ahead.

A. No, I don't know. Q. When IE share is discussed within Microsoft, that share is discussed as a share of browsers, is it not, sir? Those are the words that are used? Whatever they may mean, whatever you say they may mean, that's the words that are used; is that correct, sir? A. We're talking about -MR. HEINER: Objection. Sorry. Go

THE WITNESS: We have data about the usage levels of various browsers and we look at those. MR. BOIES: Could I have the question read back, please. (Record read.) THE WITNESS: I've never heard anyone say it's discussed as a share of browsers. What the heck would that mean? Q. BY MR. BOIES: Well, if your answer is that you have never heard of that, that's your answer, Mr. Gates. A. I don't know what you mean "as a share of browsers." I've never heard of anybody use the phrase "as a share of browsers." I don't know what 575

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 it would mean. 2 Q. So it's your testimony as you sit here 3 under oath that if somebody asked you that question 4 or said something like that within the course of your 5 business, you just wouldn't have any idea what it 6 meant? That's your testimony? 7 A. I would certainly seek clarification of 8 what they were trying to say. I'd have an idea they 9 were referring to something to do with the Internet, something to do with browsers, so I'd certainly have some idea, but I'd seek clarification before I could communicate effectively with them. Q. Have you ever sought clarification from anyone on that? A. I told you I've never heard that term used in my recollection. Q. When you said in the exhibit we were talking about that browser share was a very very important goal -- do you remember that document? A. Which exhibit are you referring to? Is there a number? Q. I'm sure we can find the number, but since I know you have very good memory about these exhibits since you remembered Exhibit 353 from several days ago, do you remember the document we 576

1 were talking about this morning? 2 A. I remember many documents that we were 3 talking about this morning. 4 Q. Do you remember a particular document 5 in which you were writing that browser share is a 6 very very important goal for Microsoft? 7 A. Yes. 8 Q. Let me see if I can get you to look at 9 Exhibit 358. Now, when you personally were talking about winning Internet browser share, Mr. Gates, what were you talking about there? A. I'm not sure. If I had to guess, I'd say this e-mail appears to be in the context of Windows. Q. So what you're saying is that in this context you were including only usage share on Windows; is that what you're saying? A. Well, it's interesting because I say here, "I would like to understand what we need to do to convince OEMs to focus on our browser. Is our problem proving our technology and its capability? Is our problem that they are getting bounty fees by having Internet Service providers pay them a sum or a royalty on the business they get? Is a 3.1 browser a key issue for them?" So except for that sentence, I 577

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

would have thought it was mainly Windows 95 share of browser usage, but when I say "Is a 3.1 browser a key issue for them," I'm talking about something else. Q. So is it your testimony you're just, as you sit here now, confused as to what you were talking about? A. I think it's likely I was referring to usage on Windows 95, but that one sentence throws me off. Q. Prior to the time that Windows 98 -not Windows 95 -- Windows 98 came out, what was it called internally within Microsoft? A. Most commonly it was called Memphis. Q. Was there also a period of time where it was referred to as Win 97? A. It's possible. It's also possible it would have been called Win 96 at some point, but the primary term, the one I remember being used, was Memphis. Q. When you talked about in January of 1996 that "Winning Internet browser share is a very very important goal for us," are you saying it was limited to Windows 95 and perhaps earlier Windows operating systems, that it did not include Memphis or Windows 98? 578

1 A. Now you're trying to get me to indicate 2 whether I was talking about future products in this 3 mail? 4 Q. Well, what you talk about is winning 5 Internet browser share, and as I understood what you 6 said was that you thought that you were probably 7 talking about share of usage on Windows 95. Did I 8 understand you correctly? 9 A. I think you're making a good point that the future products that -- innovations that we were doing in the IE thing, depending on the time frame you look at, are key in -- I don't think I'm referring to future products here. Do you think I am? Q. I don't have a view on that, Mr. Gates. A. Okay. Q. I'm not entitled to at this stage. MR. HEINER: You certainly expressed a lot of views in the papers yesterday. MR. BOIES: That is where we are entitled to express views, in the papers we file. Q. Let me approach it a little more generally. In a number of questions I've asked you about whether Microsoft wanted to gain browser share, and you have said, well, we want to have more

579

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

exposure for our innovations. Are you aware of any effort within Microsoft, for purposes of this litigation, to sort of change the way you and others use terms? A. No. Q. None at all, sir? A. Changing the way I use terms? No. Q. How about changing the way others in Microsoft use terms? A. I'm not aware of that, no. Q. Are you aware of any discussions within Microsoft about changing the way terms are used in order to advance your interests in the litigation? A. No. Q. In your answers you refer often to browser technologies or browsing technologies as opposed to answering a question simply about browsers. Is that related at all to avoid using a term that you think connotes a separate product? A. It's all done with the goal of making sure you're not confused about what I'm referring to. Q. Well, is it part of the goal to try to advance a particular point of view in this litigation, is that part of why you don't want to use in this deposition words like browser that are 580

1 throughout the documents of the Microsoft 2 Corporation? 3 A. I'm glad to use the term browser and 4 I've used the term many times in this deposition and 5 in many other cases. 6 Q. And when you use the term browser, you 7 know what it means, do you not, sir? 8 A. When I use terms in general, I do it in 9 a context where it's clear what they mean. In the case of browser, as we've discussed, sometimes it might include what we're doing on Macintosh, sometimes it might include one version of Windows, sometimes it might include other people's products that include those capabilities. Isolated by itself are you saying does the word browser without any context mean something that is evident to me? No, but in a specific context, I freely use the word without any difficulty. Q. And, for example, in writing to your top officers in January of 1996, you talk about winning Internet browser share and you believed you were being understood; correct, sir? A. Are you referring to an e-mail to a single person, to Joachim Kempin?

25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q.

1 addressed to Mr. Kempin with copies to 2 Mr. Silverberg, Mr. Chase, Mr. Ludwig, Mr. Ballmer, 3 and a number of other people. 4 A. But I think in terms of understanding 5 the context of the message, the fact that it is 6 directed to Joachim Kempin and talks about OEMs helps 7 establish what I probably meant when I talked about 8 browser share here and browsers. 9 Q. Let me just be clear. When you sent a copy -- I don't want to go through all the names here, but two of the people you sent copies to were Mr. Ballmer and Mr. Maritz; is that fair? A. Yes. Q. And they were two of the very top officers of Microsoft; correct? A. Yes. Q. Now, let me go back to what I was pursuing before. Is there an effort at all on your part or insofar as you are aware on other people's parts, to change the way words are used so as to, from your standpoint, clarify what is meant for purposes of this litigation? A. I've told you I'm not aware of an effort to change the use of terminology related to the purposes of this litigation. 582

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

The one I have in front of me is 581

Q. Let me ask you to look at a document that has been marked as Government Exhibit 393. The first e-mail here -- and there's an e-mail from you later on, but the first e-mail here is an e-mail to you and others dated February 15, 1998; is that correct? A. To me? Q. Yes. A. Yes. (The document referred to was marked by the court reporter as Government Exhibit 393 for identification and is attached hereto.) Q. BY MR. BOIES: And the subject is "Re: Browser in the OS." Do you see that subject of the February 15, 1998 e-mail to you? A. Yes. Q. And is it fair to say that that e-mail is a response to an e-mail from you dated February 14, 1998 at 10:42 a.m.? A. It appears to be. Q. And the subject of your e-mail was "Browser in the OS;" is that correct? A. Yes.

24 25

Q. Now, the next to last paragraph on the first page of the memo to you -- and this memo goes 583

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

to you and to a large number of other people; is that correct? A. I'm sorry? I just wasn't listening carefully. Q. Sure. The February 15th, 1998 memo that is addressed to you also goes to four other addressees and a large number of additional copies; correct? A. 13, yes. Q. And this includes, together with yourself, the top executives of the company; correct? A. Not all the top executives, no. Q. Well, it includes Mr. Ballmer? A. It includes some of the top executives. Q. And it includes Mr. Maritz; correct? A. Yes. Q. And it includes yourself; correct? A. Yes, in the "To" line. Q. And it says in the next to last paragraph "Saying 'put the browser in the OS' is already a statement that is prejudicial to us." A. Where are you looking? I thought you said the next to last paragraph. Q. Next to last paragraph on the first page. 584

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

A. Oh, okay. Q. It says -- and this is a quotation from the memo to you and the others, "Saying 'put the browser in the OS' is already a statement that is prejudicial to us. The name 'browser' suggests a separate thing." Do you remember being told that in or about February of 1998? A. No. Q. Do you remember receiving this e-mail? A. I don't remember receiving it, but I have no reason to doubt that it was a piece of e-mail that was sent. Q. Does this in any way refresh your recollection that within Microsoft there were discussions as to what words should or should not be used? A. I don't know what you mean refresh my recollection. Q. That is, having seen this, does this make you remember something that you didn't remember before?

23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. No. Q. Are you aware, Mr. Gates, of any documents that were destroyed or disposed of relating 585

1 to the subject matter of this litigation? 2 MR. HEINER: Objection. Vague and 3 ambiguous in view of the Antitrust Division's view of 4 the subject matter of the litigation, apparent view. 5 THE WITNESS: Yeah, help me out with 6 that. 7 Q. BY MR. BOIES: Okay. In the last three 8 years, are you aware of any documents that have been 9 destroyed or disposed of that relate to the issue of Microsoft's conduct with respect to competitors or agreements that Microsoft has entered into with customers or others that restrict the ability of those customers or others to deal with competitors of Microsoft? MR. HEINER: I'd like that pretty long question read back. MR. BOIES: Sure, absolutely. (Record read.) THE WITNESS: No. Q. BY MR. BOIES: Microsoft has a public relations firm; correct? Maybe more than one? A. Yes. Q. Does it have a main public relations firm? A. Yes. 586

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Q. What is that firm? A. Waggoner Edstrom is the name they go by, I think. Q. Are you aware of any document destruction by or involving Waggoner Edstrom in the last three years? A. No. Q. Are you aware of any destruction or disposal of documents relating to DR DOS? MR. HEINER: Objection. Vague and ambiguous. THE WITNESS: It's possible somebody once upon a time sent an e-mail message to somebody else that DR DOS was part of the subject of that e-mail and then the person deleted that message. Q. BY MR. BOIES: When you say it's possible that someone did that, were you involved in that, Mr. Gates? A. I doubt that every e-mail message I ever received that had the word DR DOS in it, that I choose to preserve forever after.

22 23 24 25

Q. I'm not really asking that question. I'm asking whether there was ever an instance involving you that met the description that you put in your answer about how it may have been possible 587

1 2 3 4 5

that someone who sent a message that somehow related to DR DOS thereafter deleted a portion of the message? Do you remember saying that just a minute ago? A. I said nothing about a portion of

6 7

message. That's a completely false thing. Q. Let's read back your answer so

the

that we 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

don't get distracted about what the words are. (The record was read as follows: "Q. Are you aware of any destruction or disposal of documents relating to DR DOS? MR. HEINER: Objection. Vague and ambiguous. THE WITNESS: It's possible somebody once upon a time sent an e-mail message to somebody else that DR DOS was part of the subject of that e-mail and then the person deleted that message.") Q. BY MR. BOIES: So rather than deleting a portion of the e-mail, you're talking about the whole message being deleted; is that the point you're making? A. That is the words I used and that's my objection to your mischaracterization of what I said. Q. You said it's possible that once upon a 588

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

time somebody sent an e-mail, part of the subject of which was DR DOS, and then this someone unidentified deleted the e-mail. Was that you, sir? Was this someone that you're referring to you? A. I think it's true in general that not every message that everyone here ever received about DR DOS would have necessarily been preserved by them because most people here delete most of the e-mail they receive every day. In terms of me in particular, it's possible that sometime in history -- I'd say it's even likely -- I received a message about DR DOS that I didn't choose to keep. I don't keep most e-mail I receive. Q. Is there a message relating to DR DOS that not only did you choose to delete, but did you ask somebody else to delete? A. No.

19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. Is there any message relating to DR DOS that you recall deleting? A. Well, since I delete 98 percent of my e-mails, I think it's likely that once there was a message about DR DOS that I deleted, but I don't recall any specific message. Q. That's what I'm asking. I'm not asking 589

1 2 3 4 5 6 7 8 9 years.

Q. Have you deleted messages not only that you have received with respect to DR DOS but also messages that you have sent? A. I don't preserve messages that I send, so there's no -Q. You never preserve messages that you send? A. I don't preserve them. There is the extremely rare case, which I've done almost never, where you copy yourself on the e-mail. Q. And you don't either copy yourself or copy some file or something like that? A. No. Q. I just want to be sure of your testimony. Your testimony is you have never asked 590

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

what was likely. I'm asking whether there was any message, in whole or in part, relating to DR DOS that as you sit here now under oath you can tell me that you remember deleting or causing to be deleted? A. No. Q. When was the last time you think it is likely that you deleted a message relating to DR DOS? A. Well, I don't think I've gotten a message that related to DR DOS in the last five

somebody to delete a message that you have sent them relating to DR DOS? A. That's right. Q. And that although you believe that you have deleted messages related to DR DOS that you have received, you can't remember actually having done that and you don't remember any specific message or type of message; is that correct? A. That's right. Q. When was the last time that you deleted e-mail messages concerning Netscape? A. I'm not sure. Q. Approximately. A. I think there was a press article about Netscape that I got a message on recently that I deleted. Q. How recently?

18 19 20 21 22 23 24 25

A. In the last few months. Q. Who was the message from? A. The New York Times syndicate. Q. Other than that instance, can you recall any instance in which you deleted e-mail messages relating to Netscape in the last year? A. No. Q. Do you believe that there have been 591

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16

such instances or there have not been such instances or you simply don't know? A. Are you including the attorney-client privileged e-mail? Q. I will for purposes of this question, yes. A. I don't think I've deleted, other than press articles, e-mail messages related to Netscape during the last year. Q. Are you aware of anyone else within Microsoft who has deleted e-mail messages relating to Netscape in the last year? A. No. Q. Have you ever had any discussions with anyone concerning whether or not any e-mail messages relating in any way to Netscape have been deleted in the last year? A. No. Q. Did Microsoft, insofar as you are aware, make an effort to go back and research its e-mails in order to find particular e-mails that might be useful to it in this litigation? A. I'm not aware of what might or might not have been done in that connection. I know people have come in and looked at my e-mail and whether 592

1 2 3 4 5 6 7 8 9 answer.

that's just for a request from the governments or also things that they're looking for, I'm not sure. Q. Would it be fair to say that no one has ever communicated with you about any effort to go back and research particular kinds of e-mails or e-mails related to a particular subject? A. You're including attorney-client discussions in that? Q. I am just for purposes of a yes or no

MR. HEINER: Objection. MR. BOIES: All I want is yes or no. Last time I asked him I said include attorney-client and the answer was still no. MR. HEINER: But it's a different question.

17 18 19 20 21 22 23 24 25

Can I have the question read back. (Record read.) MR. HEINER: I don't think you should include the substance of attorney-client in that question. MR. BOIES: I'll take the attorneys out. I think -- I'll take the attorneys out. Q. Other than conversations that you've had solely with your attorneys, have you ever had any 593

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15

discussions with anyone or have you ever received any communications that indicated that there had been any effort to go back and search e-mail messages or files for purposes of this litigation? A. No. What time is it? MR. HEINER: It's noon. Do you want to take a break? THE WITNESS: Probably. MR. HEINER: Okay. MR. BOIES: Absolutely. VIDEOTAPE OPERATOR: The time is 12:00 noon. We're going off the record. (Lunch recess.) VIDEOTAPE OPERATOR: The time is 12:38. We are going back on the record. Q. BY MR. BOIES: Good afternoon, Mr. Gates. Let me show you Government Exhibit 382 and I would ask you if that is a document that you've ever seen before? A. No. (The document referred to was marked by the court reporter as Government Exhibit 382 for identification and is attached hereto.) Q. BY MR. BOIES: There is a reference in 594

1 this document to "Fiscal Year 1998 WWSMM Attendees." 2 Do you see that? 3 A. Yes. 4 Q. Do you know what that is? 5 A. Yes. 6 Q. What is it? 7 A. World-wide sales and marketing meeting, 8 otherwise known as the WWSMM. 9 Q. Did you attend the fiscal year 1998 WWSMM? A. No, I don't attend that. I come in and speak usually at the end of it, but I don't attend it. Q. The subject matter of this is the "Fiscal Year 1998 Planning Memo 'Preserving the

16 17 18 19 20 21 22 23 24 25

desktop paradise.'" Are you familiar with that? A. I don't know what you mean am I familiar with that. I know fiscal year '98. Q. Have you ever seen the Fiscal Year 1998 Planning Memo? A. The one from Brad Chase? No. Q. Have you seen a Fiscal Year 1998 Planning Memo from somebody else? A. There's a lot of these. Each group 595

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14

writes planning memos. I'm not copied on most of them. Q. Are there planning memos from some of the groups that you recall receiving for fiscal year 1998? A. I think there's a memo Steve wrote that was probably sent to me. Q. And by Steve you're referring to Mr. Ballmer? A. Yes. Q. In the third paragraph of this memo on the first page it says "Our competitors are still hard at work trying to obsolete Windows. More people than ever now believe they will. Netscape and Sun endeavor to commoditize the OS." Do you know what is meant by "commoditize the OS" in this context? A. In the context of this memo? Q. Yes. A. I'd need to read the memo. Q. Have you ever heard anybody say that Netscape or Sun threatened to commoditize the operating system? A. Yes. Q. Have you ever said that? 596

1 2 3 4 5 6 7 8 9 within

A. Those words? Q. Yes. A. I don't think so. Q. When other people have said those words, what have you understood them to mean? A. I think the first time I heard that was from Marc Andreessen. And I never had a chance to ask him what he meant. Q. Have you heard those words from people Microsoft? A. Subsequently to Andreessen using those words, I know they were repeated inside the company quite a bit. Q. Did you understand that some people

15 16 17 18 19 20 21 22 23 24 25

within Microsoft were saying that they believed that Netscape or Sun were threatening to commoditize the operating system? A. I don't know of anybody using that terminology before Andreessen did. I don't think it was used before he used it. Q. My question is not whether it was used before or after Mr. Andreessen's statement. My question is whether people within Microsoft communicated with you that they believed that Netscape or Sun threatened to commoditize the 597

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13

operating system? A. It says "endeavor" here and you're switching? Q. I was asking a question that was not necessarily tied to the document. My question is whether anyone within Microsoft told you that they believed that Netscape or Sun threatened to commoditize the operating system? A. Those specific words? Q. Yes, the same words we've been using in the last previous series of questions, Mr. Gates, those words. A. I think that most of the time when people use those words, they were repeating what Andreessen had said. Q. My question is not what they meant most of the time or what they were doing most of the time. My question is whether people within Microsoft ever communicated to you that they believed that Netscape or Sun were threatening to commoditize the operating system? A. Well, they certainly communicated to me that Netscape was communicating that they were on a path to, in Netscape's words, commoditize the operating system. 598

1 2 3 4 5 6 7 8 9 sales.

Q. Have you finished your answer? A. Yes. Q. Now, my question is whether anyone within Microsoft ever communicated to you that they believed that either Netscape or Sun were threatening to commoditize the operating system? A. I think after Andreessen said it, some people suggested they agreed with Andreessen's sentiment that Netscape was trying to reduce Windows

Q. When people used the word with you "commoditize" as in the statement that Netscape was threatening or endeavoring to commoditize the

14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

operating system, what did you understand commoditize to mean? A. That they were creating a product that would either reduce the value or eliminate demand for the Windows operating system if they continued to improve it and we didn't keep improving our product. Q. Did you have any other understanding of the term "commoditize" in that context? A. Well, it was a word that was used to refer to Andreessen's comment. Q. Other than that, did you have any understanding of the meaning of the term 599

1 "commoditize" in that context? 2 A. Other than those two things? 3 Q. Yes. 4 A. No. 5 Q. Let me show you next a document that 6 has been marked as Exhibit 383. This purports to be 7 an e-mail from Mr. Maritz to you and others with 8 charts attached to it. 9 (The document referred to was marked by the court reporter as Government Exhibit 383 for identification and is attached hereto.) Q. BY MR. BOIES: First, have you seen this e-mail before? A. I think Mr. Houck showed it to me. Q. You may be right in a sense, Mr. Gates, in the sense that I think that your counsel has produced to us various versions of documents. I do not believe that this particular version, which was produced to us stapled this way, was shown to you by Mr. Houck. A. When you ask me whether I'd ever seen the e-mail before, I wasn't referring to the way it was stapled. Q. This happens to have various charts attached to it. Have you ever seen this e-mail with 600

1 2 3 4 5 6 7 8 9 10 11 12

these charts attached to it? A. Can I look back through the old exhibits? Q. What I'd -- yes, you can. You can do whatever you want to answer the question, but what I'd like you to do is I'd like to get an answer to this question with respect to Exhibit 383. If you need to look back at the other exhibits to answer this question, then you can do whatever you need to. A. You've asked me if I've ever seen something before and I'm thinking maybe a previous exhibit had some or part of this. And therefore, to

13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11

answer your answer question, I need to look at the exhibits to see if that's the case or not. Q. Let me see if I can move things along. Did you receive this e-mail in or about January, 1997, this e-mail being a message from Paul Maritz to you and others dated January 5, 1997? A. I don't remember receiving it, but I don't have any reason to doubt that it was sent. Q. Did you see this e-mail at any time prior to the commencement of your deposition last week? A. I don't remember seeing it. Q. The subject of this e-mail is "Overview 601

1 slides for Billg/NC & Java session with 14+'s on 2 Monday." Do you see that? 3 A. Yes. 4 Q. And I think you identified the 14+'s 5 as the -- some group of executives; is that correct? 6 A. No. 7 Q. What is the 14+'s? 8 A. It's people above a certain level, 9 primarily engineers. Also executives, but mostly engineers. Q. It's all the people in the company above a certain level, the 14 level? A. Which are mostly engineers and not executives. Q. How many people are there in the 14+'s group? A. It's a good question. I think around 200 to 300. Q. And these would be the people in the 200 or 300 top rated jobs in the company; is that correct? A. If top means the best compensation, yes. Q. Now, do you recall the slides that are attached to this e-mail? 602

1 A. I remember when I testified earlier 2 seeing these and saying that I was pretty sure that I 3 never presented these slides. 4 Q. Do you recall whether someone else 5 presented these slides in January of 1997? 6 A. I'm not sure. I remember looking at 7 the slides and thinking probably not. 8 Q. Let me ask you to look at the third 9 page of the exhibit, which is headed "Key Platform Challenge." It is page 2 of the charts and page 3 of Exhibit 383, in which it says "NC & Java are platform

12 13 14 15 16 17 18 19 20 21 22 23 24 25

challenges." Do you see that? A. Uh-huh. Q. Did you believe in January of 1997 that Java was a platform challenge? A. Not Java the language, but some of the Java runtime APIs that were being promoted to ISPs in the way that Sun and others were talking about enhancing them were platform challenges. Q. When reference is made here to Java, do you understand that to refer to what you refer to as Java runtime APIs? A. I'm not sure. Q. Are you aware of people asserting that Java runtime APIs were a platform challenge in or 603

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

about January of 1997? A. I just told you that we looked at what was going on in terms of the plans of Sun and other people with Java runtime APIs as being a platform challenge. Q. Are you aware of any other platform challenge represented by Java other than Java runtime APIs? A. No. Q. So would it be fair to say that you believe that when reference is made here to Java, the reference means Java runtime APIs since it asserts here that Java is a platform challenge? A. It's the best way to make sense of a document that I haven't seen until my deposition, as far as I know. Q. Let me show you a document that has been marked as Exhibit 397. This purports to be a message to you and others from Brad Chase dated March 13, 1997. Did you receive this message in or about March of 1997? A. I don't remember receiving it. In fact, it's very strange that the e-mail names aren't expanded. But I probably received it. 604

1 2 3 4 5 6 7 8 9 10

(The document referred to was marked by the court reporter as Government Exhibit 397 for identification and is attached hereto.) Q. BY MR. BOIES: Let me go down to the third paragraph of the document and the fifth sentence that says "Browser share needs to remain a key priority for our field and marketing efforts." Do you see that? A. In the third paragraph? Q. Yes.

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. Okay, the third sentence, the third paragraph. Yeah. Q. Were you told in or about March of 1997 that people within Microsoft believed that browser share needed to remain a key priority for your field and marketing efforts? A. I don't remember being told that, but I wouldn't be surprised to hear that people were saying that. Q. Immediately before that sentence there is a statement that Microsoft needs to continue its jihad next year. Do you see that? A. No. Q. The sentence that says "Browser share needs to remain a key priority for our field and 605

1 marketing efforts," the sentence right before that 2 says "we need to continue our jihad next year." 3 That's the way it ends. Do you see that? 4 A. Now I see -- it doesn't say Microsoft. 5 Q. Well, when it says "we" there, do you 6 understand that means something other than Microsoft, 7 sir? 8 A. It could mean Brad Chase's group. 9 Q. Well, this is a message from Brad Chase to you, Brad Silverberg, Paul Maritz and Steve Ballmer; correct? A. As I say, it's strange that this -- if this was a normal piece of e-mail, it wouldn't print like that. I'm not aware of any way -- maybe there is some way -- that e-mail ends up looking like this when you print it out. Q. I wasn't the one that was asserting it was an e-mail. I don't know whether it is an e-mail or memo or what it is. All I know is it was produced to us by Microsoft. And the first line of it says "To" and the first name there is "Bradsi." Do you see that? A. Uh-huh. Q. Does that refer to Brad Silverberg? A. Usually you can use that shorthand in 606

1 2 3 4 5 6 7 8 9

typing in someone's name, but when you print out e-mail, it doesn't come out that way. Q. Do you believe that the reference here to "Bradsi" is a reference to Brad Silverberg, sir? A. Yes. Q. The next addressee is "Paulma." Do you believe that that is Paul Maritz? A. Yes. Q. And the next addressee is "Steveb". Do

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

you believe that that is Steve Ballmer? A. Yes. Q. The next addressee is "Billg" and do you believe that that is yourself? A. Yes. Q. And it says it's from "Bradc" and do you believe that is Brad Chase? A. Yes. Q. Now, when Brad Chase writes to you and the others "we need to continue our jihad next year," do you understand that he is referring to Microsoft when he uses the word "we"? A. No. Q. What do you think he means when he uses the word "we"? A. I'm not sure. 607

1 Q. Do you know what he means by jihad? 2 A. I think he is referring to our vigorous 3 efforts to make a superior product and to market that 4 product. 5 Q. Now, what he says in the next sentence 6 is, "Browser share needs to remain a key priority for 7 our field and marketing efforts;" is that correct? 8 A. Yes. 9 Q. The field and marketing efforts were not involved in product design or making an improved browser, were they, sir? A. No. Q. Let me show you next a document that has been marked as Exhibit 384. MR. HEINER: Which number is this now? MR. BOIES: 384. (The document referred to was marked by the court reporter as Government Exhibit 384 for identification and is attached hereto.) Q. BY MR. BOIES: I want you to look at the second message that is on this exhibit. In the middle of the first page is a message from Steven Sinofsky. Do you see that? A. Uh-huh. Q. And it is dated June 10, 1994. There 608

1 2 3 4 5 6 7 8

is one name that it's hard to read on the copy that we were produced, but I don't believe that you were shown as receiving a copy of this exhibit, at least back in 1994. Have you seen this message before, sir? A. Not before this lawsuit. Q. When did you first see it? A. I think sometime during the course of

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

the lawsuit. Q. That is, sometime in the last six

months? A. That's right. Q. Have you discussed this with anyone in Microsoft, other than your counsel? A. Yeah, I think I had a short conversation with Mitch Matthews on the general topic, not on this specific message. Q. What was the general topic that you refer to? A. The history of our decision to put browsing functionality into Windows. Q. There is a reference here to Chicago. Is that a reference to Windows? A. It's a code name that was used for what became Windows 95. 609

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. The third paragraph of this e-mail says "We do not currently plan on any other client software, especially something like Mosaic or Cello." Do you see that? A. I see it. Q. You've identified Mosaic as a browser; correct, sir? A. Yes. Q. Do you know what Cello is? A. No. Q. Were you informed in or about June of 1994 that people within Microsoft did not currently plan on including something like Mosaic or Cello in Windows 95? A. Quite the opposite. Q. So it's your testimony that this is just not accurate, is that what you're saying? MR. HEINER: Objection. THE WITNESS: What are you referring to? Q. BY MR. BOIES: Well, I'm referring to this document. And what this document says is, "We do not currently plan on any other client software, especially something like Mosaic or Cello." And you understand this to mean that you're not currently 610

1 2 3 4 5 6 7

planning on including something like Mosaic or Cello in Chicago; correct, sir? A. I guess I'd read the whole e-mail message if I was really interested. And I've gone ahead and done that. So you're trying to take that sentence just out by itself or you're trying to get me to talk about what the e-mail itself is saying?

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

8 Q. What I'm trying to do is get you to 9 tell me whether, as you understand it, Mr. Sinofsky is writing here on June 10, 1994, that at least insofar as he is concerned, there is not a plan to include something like Mosaic or Cello in Chicago? Is that what he is saying here? A. No. Q. That's not what he is saying. Let's go to the previous paragraph. He says, "I think it is really important that we stick to the basic facts of the situation and not over commit Chicago or Microsoft in any way. The Chicago message is 'all the plumbing you need to connect to the Internet,' which translates to TCP/IP stacks, SLIP and PPP, and the basic FTP and TELNET clients. Our built-in client (and our NT server) will also support Internet protocols such as SMTP and MIME." 611

1 He then continues in the very next 2 sentence "We do not currently plan on any other 3 client software, especially something like Mosaic or 4 Cello." 5 Are any of the things that Mr. Sinofsky 6 indicates here are going to be included in Chicago 7 software that you would consider to be browser 8 software? 9 A. The e-mail I'm looking at talks about the Chicago message and this is -- he seems to be talking about what we're saying externally about the Chicago project. This e-mail doesn't include anyone who is involved in deciding what's in Chicago, and so he is talking about the Chicago message here. Q. Mr. Gates, my question is whether any of the software that Mr. Sinofsky identifies here as being included in Chicago is software that you considered to be browser software? A. Where do you see the phrase "included in Chicago"? Q. Well, sir, when he says "The Chicago message is 'all the plumbing you need to connect to the Internet,' which translates to TCP/IP stacks, SLIP and PPP and the basic FTP and TELNET clients. Our built-in mail client (and our NT server) will 612

1 2 3 4 5 6

also support Internet protocols such MIME," when he says those things, do is saying that those are going to be Chicago? A. No. He is saying the is...

as SMTP and you believe he included in Chicago message

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

7 Q. So what you're saying is that when he 8 says the Chicago message is that, he doesn't mean 9 that you're going to include in Chicago what he then lists; is that what you're saying? A. He is saying that the Chicago message may imply that. Q. But that's what I'm asking you. What I'm asking you is whether you read this document as saying that TCP/IP stacks, SLIP and PPP and the basic FTP and TELNET clients are going to be included in Chicago? Do you read it that way? A. No. Q. Okay. And when he says "Our built-in mail client and our NT server will also support Internet protocols such as SMPT and MIME," do you believe that he is saying that your built-in mail client and your NT server are going to come out with Chicago? A. Certainly not. 613

1 Q. And when he says, "We do not currently 2 plan on any other client software, especially 3 something like Mosaic or Cello," and then in the next 4 sentence says "Chicago is investigating 5 possibilities, but nothing at all is public and DRG 6 should not be talking to anyone with the thought of 7 including them in the box or resource kit -- that is 8 purely for Chicago/NT to deal with -- though any 9 interesting packages should, of course, be brought to everyone's attention. Our plans for offering any sort of connection to the Internet are highly confidential and merely speculative." Do you think when he talks about Mosaic and Cello he is talking about something for Chicago? A. He is talking about the Chicago message. The definition of what would and wouldn't be in Chicago wasn't finally known until Chicago shipped. Certainly at this time we had made the decision to do our best to include the browsing functionality if we could. We weren't saying that as part of the Chicago message. Q. Mr. Gates, you've testified that you never saw this until the last six months; correct? A. That's right. Q. Who showed you this? 614

1 2 3 4 5

A. I'm not sure. I think maybe the government cited it. I'm not sure. Q. Well, who showed it to you? A. I'm not sure anyone showed it to me. think the government cited it in something.

I

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. Well, the government cited it. Do you read through the government's papers and pick out cites and go find them for yourself? A. No. Q. Didn't think so. So somebody had to go pick this out and show it to you; correct, sir? A. I'm not sure, other than attorney-client meetings, when I've seen the entire mail message. Q. Have you -- and this only calls for a yes or no answer -- seen this in attorney-client discussions, the whole message just like we have here? MR. HEINER: Objection. I think it intrudes on the privilege and work product. I think that's a common objection to assert as well. MR. BOIES: It is a common objection to assert. Ordinarily I, you know, I don't press the question. Here, this is something that he is now testifying as to what it means and I think the only 615

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

way that he has any knowledge about this, he says, is something that has happened in the last six months. And so I think at least in terms of knowing where that information comes from, I'm entitled to know on a yes or no basis, even if I may not be entitled to find out what he was told. MR. HEINER: Yeah, I don't think that's right. I don't think you should ask that precise question. MR. BOIES: I'll press the question. Are you going to instruct him not to answer? This time I'm going to press the question. MR. HEINER: I'd like to have it read back then. (The record was read as follows: "Q. Have you -- and this only calls for a yes or no answer -- seen this in attorney-client discussions, the whole message just like we have here?") MR. HEINER: Just a minute. We're going to stand on the instruction not to answer that question. MR. BOIES: Okay. Q. Have you ever seen this document, the whole message, other than in an attorney-client 616

1 2 3 4

conversation, prior to your deposition? A. I'm not sure. Q. Let me show you a document marked as Exhibit 385, which is a copy of an article from

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5 Computer World dated January 16, 1995. And under the 6 column "News Shorts" there is a heading that says 7 "Microsoft licenses Mosaic Internet browser" and it 8 says "Microsoft Corp. chairman Bill Gates said last 9 week that his company has licensed Mosaic software for browsing the World-Wide Web." Did you so state in or about January of 1995, Mr. Gates? A. I don't know. (The document referred to was marked by the court reporter as Government Exhibit 385 for identification and is attached hereto.) Q. BY MR. BOIES: Later on it says that Microsoft will "incorporate the technology into The Microsoft Network. Mosaic support will arrive in the fourth quarter, a few months after The Microsoft Network debuts, Gates said." Do you see that? A. Yes. Q. Did you say that, Mr. Gates, in or about January of 1995? A. It doesn't make sense to say 617

1 "incorporate the technology into The Microsoft 2 Network," so I'm pretty sure I didn't say that. 3 Q. Let me show you a document that has 4 been marked as Exhibit 386. The second item here 5 purports to be a message from you to a number of 6 people dated April 6, 1995. Do you see that? 7 A. Yes. 8 (The document referred to was marked 9 by the court reporter as Government Exhibit 386 for identification and is attached hereto.) Q. BY MR. BOIES: Did you send this message on or about April 6, 1995? A. I don't remember sending it, but I don't have any reason to doubt that I did. Q. Now, attached to this message, as it was produced to us, I believe, by Microsoft, is a two-page document headed "Netscape as Netware." Do you see that? A. I see a three-page document, yes. Q. Yes, three pages. Pages 3558 through 3560. Have you seen this before? A. I don't remember seeing it before. Q. Now, the title of this three-page attachment is "Netscape as Netware" and there is a 618

1 2 3

footnote that says, "The analogy here is that the major sin that Microsoft made with Netware was to let Novell offer a better (actually smaller and faster

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 with simpler protocol) client for networking. They 5 got to critical mass and can now evolve both client 6 and server together." 7 Do you see that? 8 A. Uh-huh. Yes. 9 Q. In or about April of 1995, was Microsoft concerned with Netscape getting to what is referred to here as critical mass? A. I don't know what Paul meant in using that word. Q. Do you have any understanding at all about what Mr. Maritz meant when he referred to a competitor getting "to critical mass"? A. He seems to be using that phrase with respect to Netware or Novell, but I'm not sure what he means by it. Q. He is also using it with respect to Netscape in the analogy, is that not so? A. It's not clear that the term "critical mass" is part of the analogy, is it? It's not to me. Q. Okay. This document is about Netscape, it's not about Novell; correct, sir? 619

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. I didn't write the document. The document appears to refer to "Netscape as Netware" as its title, so Novell is talked about in this document and a lot of things seem to be talked about here. Do you want me to read it? Q. If you have to to answer any of my questions. Netware is something from Novell; correct, sir? A. Fact. Q. What? A. Fact. Q. Does that mean yes? A. Yes. Q. And what Mr. Maritz here is doing is analogizing Netscape to Netware; correct? A. It's kind of confusing because Netscape is the name of a company and Netware is the name of a product and so I'm not sure what he is doing. Usually you think of analogizing two products to each other or two companies to each other, but he appears to be analogizing a company to a product, which is a very strange thing. Q. Well, sir, in April of 1995, insofar as Microsoft was concerned, was Netscape primarily a 620

1 2

browser company? A. No.

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. A. Q.

It was not? No. All right, sir. In this document do you understand what Mr. Maritz is saying is that Microsoft should not make the same mistake with Netscape's browser as it did with Novell's Netware? A. I'd have to read the document. Do you want me to? Q. If you need to read the document to answer that question, Mr. Gates, go ahead and do so. And when you've finished, if you have the question in mind, please answer it. If you don't have the question in mind, we'll read it back. And the question is, do you understand that what this document is saying is that Microsoft should not make the same mistake with Netscape's browser as it did with Novell's Netware? And you can read any portion that you want, but I am particularly interested the heading which says "Netscape as Netware" and the footnote right off that heading, "The analogy here is that the major sin that Microsoft made with Netware was to let Novell offer a 621

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

better (actually smaller and faster, with simpler protocol) client for networking. They got to critical mass and can now evolve both client and server together." A. Are you asking me a question about the whole document? Q. No, I didn't think I was. I thought it was possible for you to answer the question by looking at the title and first footnote. A. I thought you were asking me what the document is about. Q. I think it's possible to answer the question by looking at the heading and that footnote. My question is whether, as you understand it, what Mr. Maritz is saying here is that Microsoft should not make the same mistake with Netscape's browser as it did with Novell's Netware? A. Does it say "mistake" somewhere? Q. All I'm asking you is whether you interpret this that way? A. Does it say "mistake" somewhere? Q. Mr. Gates, we have had a conversation about how I ask the questions and you give the answers. I think -A. I don't see where it says "mistake." 622

1

Q.

It doesn't say "mistake."

It says

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

2 "major sin." If you think major sin is something 3 different than mistake, you can answer the question 4 no, that's not what you think Mr. Maritz means. My 5 question is clear. You can answer it yes, no, or you 6 can't tell. 7 A. What is the question? 8 Q. My question is whether -- as you 9 understand what Mr. Maritz is saying here, is he saying that Microsoft should not make the same mistake with Netscape's browser as it did with Novell's Netware? A. No, I think he is saying something else. Q. Okay. Do you think that when Mr. Maritz uses the term "major sin" that Microsoft made, he is referring to what he thinks is a mistake? A. Probably. Q. Okay. Let me ask you to look next at a document marked as Exhibit 387. This is an e-mail from Brad Silverberg, or it's a message from Brad Silverberg -- I don't know whether it's an e-mail or not -- dated April 12, 1995 at 12:53 p.m. (The document referred to was marked by the court reporter as Government Exhibit 387 for 623

1 2 3 4 5 6 7 8 9 view of

identification and is attached hereto.) Q. BY MR. BOIES: Have you ever seen this message before, sir? A. No. Q. The first paragraph says, "I have spoken with Paul Maritz and he is in agreement that we should get our Internet client distributed as broadly as possible as soon as possible." Did you understand that that was the Mr. Maritz in April of 1995? A. I think -- I think it probably was. Q. And when reference is made here to Microsoft's Internet client, do you understand that to be Internet Explorer? A. I think at the time of this document it meant O'Hare. Q. And what did O'Hare become? A. It became Internet Explorer plus some other things. Q. Let me ask you to look next at a document marked Exhibit 388. The second e-mail or message here is a message dated April 12, 1995 at 12:54 p.m. from Paul Maritz to you and a number of other people; correct, sir? A. That's what it appears to be. 624

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 2 3 4 5 6 7 8 9 have no

(The document referred to was marked by the court reporter as Government Exhibit 388 for identification and is attached hereto.) Q. BY MR. BOIES: And the subject is the "3 year plan thoughts - draft;" correct? A. That's, yes, the subject. Q. Did you receive this message on or about April 12, 1995? A. I don't remember receiving it, but I reason to doubt that I did. Q. Now, attached here is something that is titled "3 year plan follow-up (draft)." Do you see that? A. Yes. Q. Did you receive this at or about the time indicated of April 12, 1995? A. I'm not sure. Q. Let me ask you to look at the page that bears in the bottom right-hand corner the Microsoft document production stamp ending 7193. And in particular the portion that is under the heading "Shell/Browser." Do you have that? A. Yes. Q. And it says here, "We should get a view as to what will be handled by the 'Win97' Shell, and 625

1 what will not - and if not, how is the needed 2 extension integrated into the Win97 environment." 3 Do you see that? 4 A. Uh-huh. 5 Q. Were you told in or about April of 1995 6 that one of the issues in terms of planning that was 7 needed to be decided was what would be handled by the 8 Win97 shell and what would not be? 9 A. I'm not sure -- I'm not sure what is meant by Win97 shell here. I don't remember seeing that at the time. Q. Well, you know what a shell is in this context, do you not, sir? A. Yes. Q. And you recognize Win97 as a reference to what ultimately became Windows 98, do you not, sir? A. No. The fact that we use a name like that before we have decided what's in a product doesn't mean that when we used that name back then it references what eventually got into the product. Q. Let me make sure I understand that last answer. Was Win97 a reference that was used within Microsoft to refer to what ultimately became 626

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Windows 98? A. It was a term that was used to refer to a project. When it was used, none of us knew either what would be in the project or what it would be called. So any time you see that reference, you can't assume it's a reference to the things that eventually became Windows 98. All you know is they're referring to the next project related to enhancing Windows. Q. Let me ask the question this way. Was the project that was internally described within Microsoft as Win97 the project that ultimately resulted in Windows 98? A. I believe so. MR. HEINER: Would you like to take a break now? MR. BOIES: Sure. VIDEOTAPE OPERATOR: The time is 1:33. We are going off the record. (Recess.) VIDEOTAPE OPERATOR: The time is 1:48. We're going back on the record. Q. BY MR. BOIES: Mr. Gates, let me show you a document marked as Government Exhibit 390. The first message here purports to be a message to you 627

1 and Mr. Maritz and Mr. Allchin on February 24, 1997 2 at 11:07 p.m. Do you see that? 3 A. Yes. 4 (The document referred to was marked 5 by the court reporter as Government Exhibit 390 for 6 identification and is attached hereto.) 7 Q. BY MR. BOIES: And it talks about a 8 focus group report and it says that most of the 9 people in the focus group were Navigator users. And then it goes on to say about those Navigator users, "They said they would not switch, would not want to download IE 4 to replace their Navigator browser. However, once everything is in the OS and right there, integrated into the OS, 'in their face' so to speak, then they said they would use it because there would be no more need to use something 'separate.'" Do you see that? A. Yes. Q. Do you recall being told that in or about February, 1997? A. No. Q. Let me ask you to turn to the fifth page of this exhibit. And this is an original message dated February 24, 1997 at 10:38 a.m. also relayed into the Memphis focus group's report. 628

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 A. It's an enclosure to the message above. 2 Q. It's an enclosure to the message above. 3 That is what you have is first a message dated 4 February 24, 1997 at 11:07 p.m. that went to you and 5 Mr. Maritz and Mr. Allchin, and then you have another 6 message that was an enclosure that went to you and 7 others; correct? 8 A. Yes. 9 Q. So you would have received the second message when you received the message that was addressed to you; correct? A. If I did, which I told you I don't remember, but I have no reason to doubt that I did. Q. Right. The next to last paragraph on the fifth page of the exhibit, the one that ends with the Microsoft document production stamp 8179, do you have that page? A. Yes. Q. The next to last paragraph of this material that was sent to you on February 24th, '97 if in fact it was, on page 5 says "It seems clear that it will be very hard to increase browser market share on the merits of IE 4 alone. It will be more important to leverage the OS asset to make people use IE instead of Navigator." 629

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Do you see that? A. Yes. Q. Were you told that in or about February of 1997? A. Out of the context of this memo? Q. Well, first let's ask were you told that in the context of this memo? MR. HEINER: Objection. Is your question if he received the memo? Q. BY MR. BOIES: Well, I don't know what he meant by his statement. He simply was asking me whether I was asking him if he was told outside of the context of the memo, and I want to know if he was told that inside the context of this memo. MR. HEINER: Objection. THE WITNESS: Those sentences seem to appear in this memo that's talking about some features. It wasn't a product demo but some features, including WebView, that they showed to some end users. Q. BY MR. BOIES: Let me try to break the question down. First, do you recall being told in any context in or about February of 1997, "It seems clear that it will be very hard to increase browser market share on the merits of IE 4 alone. It will be 630

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

more important to leverage the OS asset to make people use IE instead of Navigator"? A. Those words? Q. Let me begin with that. Do you recall being -A. No. Q. -- communicated those words in or about February of 1997? A. I said no. Q. Do you recall being communicated those words at any time, whether in or about February of 1997 or any other time? A. Isn't that what I just answered? Q. Perhaps you did. I thought the first answer related to February, 1997, but if you're telling me you don't recall ever being told that, I just want that clarified for the record. A. Those words, no. Q. Do you recall being told in substance what is stated here at any time in the language that I've just quoted? A. That's a self contradictory question. You can't say you're asking me something in substance and then say in the language you just quoted. That's completely contradictory. 631

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. Sir, if you don't understand the question and you can't answer it, all you have to do is say so. A. I understand that the question is contradictory to itself. Q. Well, Mr. Gates, the memo says -MR. HEINER: There is no problem there. You just made a mistake on that question. It's okay. Why don't you just state a new question. MR. BOIES: Well, Mr. Heiner, I frankly think -- I won't debate with the witness, I will debate with you. MR. HEINER: Be my guest. MR. BOIES: I think the question was actually quite clear, but what I was about to do is put a new question. MR. HEINER: Okay. Q. BY MR. BOIES: This document that purports to have gone to you, sir, says "It seems clear that it will be very hard to increase browser market share on the merits of IE 4 alone. It will be more important to leverage the OS asset to make people use IE instead of Navigator." Do you recall ever being told or ever receiving a communication that said in substance what

632

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

is reflected there? A. No. Q. Let me show you Exhibit 591 -- or I guess it's Exhibit 391. This purports to be a message to you dated April 18, 1995, to you and other people. (The document referred to was marked by the court reporter as Government Exhibit 391 for identification and is attached hereto.) Q. BY MR. BOIES: Did you receive this message in or about April of 1995? A. I don't remember receiving it, but I have no reason to doubt that it was sent to me. Q. Let me ask you to look at the bottom of the first page, next to last paragraph, the sentence that begins "This does not mean that Netscape needs to be a direct competitor." Do you see that? A. Yes. Q. Do you recall discussions in or about April of 1995 about whether or not Netscape would or would not be a direct competitor of Microsoft? A. I'm sure there was some discussion about Netscape and the whole Internet phenomenon, and particularly what that meant about the business Nathan was in charge of, which was Marvel. I don't 633

1 remember specifically if we figured out whether they 2 would or wouldn't be a competitor or what they were 3 doing. 4 Q. Do you recall communications within 5 Microsoft in or about April of 1995 about what might 6 be done to be sure that Netscape did not become a 7 direct competitor of Microsoft? 8 A. No. 9 Q. Do you recall any communications within Microsoft in or about April of 1997 relating to what Microsoft might do to influence whether or not Netscape became a direct competitor of Microsoft? A. No. Q. Do you recall any discussions within Microsoft at any time or any communications within Microsoft at any time relating to what Microsoft might do to influence whether Netscape became a direct competitor of Microsoft? A. No. Q. Let me ask you to look next at an exhibit marked Government Exhibit 392. The second item here purports to be a message from you to Paul Maritz and Brad Silverberg with copies to a number of other people dated January 28, 1997, at 10:34 a.m.

25

Do you see that? 634

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23

A.

Yes. (The document referred to was marked by the court reporter as Government Exhibit 392 for identification and is attached hereto.) Q. BY MR. BOIES: Did you send this message to Mr. Maritz and Mr. Silverberg and others on or about January 28, 1997? A. I don't remember doing so, but I have no reason to doubt that I did. Q. You say that there has been -- the beginning of the document, the very beginning of the document you say, "There has recently been an exchange on e-mail with people in the Office group about Office and HTML. In one piece of mail people were suggesting that Office had to work equally well with all browsers and that we shouldn't force Office users to use our browser. This is wrong and I wanted to correct this." Do you see that? A. Yes. Q. Did you send that message to Mr. Maritz and Mr. Silverberg and others in or about January of 1997? A. You already asked that and I told you I don't remember sending it. 635

1 Q. Did you convey the substance of what is 2 here to Mr. Maritz and Mr. Silverberg in or about 3 January of 1997? 4 A. I don't know the time frame, but there 5 was a question for very advanced features in Office 6 that had to do with the fact that older browsers, 7 including our own older browsers, couldn't display 8 the information and should we therefore display it to 9 no one or what should we do about advance display semantics. And I know in that case the issue came up about should we support the advanced display semantics at all. Q. Is it your testimony, Mr. Gates, that that is what you were talking about here? A. Absolutely. That's what this message -- I mean if you read it, that's what it is about. Q. This is a message that you don't recall sending; is that correct? A. I've read it today, but I don't recall sending it, that's right. Q. But what you're doing is you're testifying under oath that when you say that you

24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

should force Office users to use Microsoft's browser, you were talking about what you just described; is 636

1 that your testimony? 2 A. I don't see that in the message. 3 Q. Well, you're saying here that Microsoft 4 should force Office users to use Microsoft's browser, 5 are you not, sir? 6 A. No. 7 Q. Well, sir, you say "In one piece of 8 mail people were suggesting that Office had to work 9 equally well with all browsers and that we shouldn't force Office users to use our browser. This is wrong and I wanted to correct this." Is it your testimony under oath that you are not saying that the assertion that you had heard that Microsoft shouldn't force Office users to use Microsoft's browser was wrong? A. There's a sentence there that talks about whether Office has to work equally well with all browsers and because I'm talking about Trident here, Trident was a set of technologies we were doing to extend things so that you could work with Office documents that are very rich documents in a new way that no previous browser, including our own previous browsers, was willing to display. And there was a question of whether they should take advantage of those Trident things or not. Some people were 637

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

questioning whether we should take advantage of those Trident things and here I'm making very clear, and all you have to do is read the complete e-mail, I'm saying we should go ahead and take advantage of those Trident things. Now, that is very different than saying people are forced to use any browser. It's just if you want the best experience in terms of seeing those rich documents, what we're doing in Trident I thought we should take advantage of. Q. Now, sir, is it your testimony sitting here under oath that when in the language that I have quoted you wrote "This is wrong and I wanted to correct this" relating to the previous sentence, which had said "In one piece of mail people were suggesting that Office had to work equally well with all browsers and we shouldn't force Office users to use our browser," you were talking about Trident? Is that your testimony? A. Well, I think you've mischaracterized my testimony. Q. All I'm asking is whether that is your testimony. If you tell me that's not your testimony,

23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21

we go on. Is that what you're telling me, sir? A. Are you trying to characterize my previous testimony? 638

1 Q. I was trying to see whether we 2 understood your previous testimony. 3 A. Your characterization was wrong. 4 Q. Okay. In the second paragraph of this 5 exhibit you write "In one piece of mail people were 6 suggesting that Office had to work equally well with 7 all browsers and that we shouldn't force Office users 8 to use our browser. This is wrong and I wanted to 9 correct this." Does that statement relate to Trident, sir? A. I explained how it relates to Trident. Q. So your answer is that that relates to Trident; is that your testimony? A. In order to know that, I read the entire piece of e-mail and upon reading it, I know that what that relates to is whether we should exploit the advanced features of Trident so that Office works particularly well with the new browser from us with those Trident features. Q. Mr. Gates, isn't it clear that the discussion at the end of the memo about Trident is about a different point than the point we've been talking about? A. Absolutely not. Q. Well, sir, immediately after the 639

1 paragraph we've been talking about don't you write, 2 "Another suggestion in this mail was that we can't 3 make our own unilateral extensions to HTML. I was 4 going to say this was wrong and correct this also." 5 And then you go on to talk about Trident. Isn't that 6 what you wrote here? 7 A. I think you've correctly read some of 8 the words in the e-mail. We could go on and read 9 more of the words so you could understand why what I've told you is correct. Q. Is there anything in here that asserts that forcing Office users to use Microsoft's browser is limited to the Trident situation? A. It's clearly about whether Office should exploit HTML that takes advantage of Trident and whether that's a good idea or not. That's what this piece of e-mail is about. Q. If that's all it's about, Mr. Gates, why do you introduce the Trident discussion by saying "Another suggestion in this mail is that we can't make our own unilateral extensions to HTML. I was

22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

going to say this was wrong and correct this also"? Aren't you clearly saying this is an additional point? A. No. You're just trying to misread my 640

1 e-mail. It talks about Office. 2 Q. Yes, it certainly does talk about 3 Office. And it talks about forcing Office users to 4 use your browser; correct, sir? 5 A. No. 6 Q. It doesn't? When you say that somebody 7 is saying -- that you've seen an e-mail of people 8 saying "we shouldn't force Office users to use our 9 browser" and that this is wrong, you're not saying that you should use Office to force users to use your browser; is that what you're saying? A. That was the most circular thing I've ever heard. Q. I think it was pretty circular because -A. You continue to not read the sentence and look at the piece of e-mail. The question in this e-mail is whether Office should work equally well with all browsers. And it's talking about -Q. Now, sir -A. If you want to look further to understand it -Q. How about let me put a question. MR. HEINER: Let me -MR. BOIES: May I ask the witness what 641

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

question is he answering? MR. HEINER: Whatever the last question that was posed. MR. BOIES: I want to know if he knows what question he is answering. THE WITNESS: Can you read back the question? Q. BY MR. BOIES: No. Can you tell me, Mr. Gates, what question you're purporting to answer? A. Your last question. Q. Do you know what it is? A. Could I make it as convoluted as you did? No. Q. Can you tell me what question you're answering? A. I can't repeat back that convoluted a question. I could ask the reporter to. Q. Can you tell me the substance of the question you're answering? MR. HEINER: Mr. Boies, pose the next

21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19

question. MR. BOIES: Okay. MR. HEINER: Let me suggest one. Ask him about the first sentence, which is the subject matter being introduced. 642

1 Q. BY MR. BOIES: Okay. Actually, I've 2 read the first sentence, but I'll read it again. The 3 first sentence, which is one paragraph, says "There 4 has recently been an exchange on e-mail with people 5 in the Office group about Office and HTML." 6 Second paragraph says "In one piece of 7 mail people were suggesting that Office had to work 8 equally well with all browsers and that we shouldn't 9 force Office users to use our browser. This is wrong and I wanted to correct this." Third paragraph says "Another suggestion in this mail was that we can't make our own unilateral extensions to HTML. I was going to say this was wrong and correct this also." Now, have I read correctly the first three paragraphs of this memo, Mr. Gates? A. Yes. Q. And is it your testimony that when you said that the e-mail suggesting that Office had to work equally well with all browsers and that Microsoft shouldn't force Office users to use Microsoft's browser was wrong, that all you were talking about there was Trident; is that your testimony? A. I'm not sure what you mean all I was 643

1 talking about. This e-mail is about Office and HTML. 2 Q. Yes. 3 A. There is a new extension to HTML being 4 created in Trident. There was a question of whether 5 Office could take advantage of it, which meant that 6 it would take advantage of those new browsers in a 7 better way than it would take advantage of our old 8 browsers or other people's browsers without those 9 extensions. I was suggesting here, and it's totally a mischaracterization to suggest that that third paragraph isn't totally in line with it, that we should take advantage of those Trident HTML extensions and, therefore, Office documents would look better, at least for those users. Q. And is it your testimony -- and all I'm trying to do is clarify your testimony, Mr. Gates, because once the testimony is done, then the trier of fact can decide what credibility to give it. All I'm trying to do is identify it. And you have said that

20 21 22 23 24 25

the extensions to HTML relates to Trident; correct? A. Yes. Q. Now, what I'm trying to find out is whether these extensions to HTML that relate to Trident is also the only point of your statement that you should force Office users to use your browser? 644

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. That's a sentence fragment here. What people were saying was if we took unique advantage of Trident, wouldn't people feel like they needed to upgrade to Trident. And I said, hey, if that's the only way they can see the advanced document capability, then fine. Q. Mr. Gates, I mean that's not what this e-mail says. A. We certainly know what the e-mail says. Q. Yes, exactly. And I don't mean to be disrespectful here, but aren't you doing what we talked about before here, just trying to substitute different words for the words that you actually wrote that you think will sound better in the context of this litigation? A. I've explained to you what this e-mail is about. You don't seem to like the facts. Q. Mr. Gates, my question, and if the answer is yes or no or I don't understand your question, you can give me that testimony. But is the explanation that you're giving me now of this document an explanation where you're trying to use words differently now because of the litigation than you used them back in 1997? A. No. 645

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Q. Not at all, sir? A. No. Q. Do you feel more uncomfortable admitting in a deposition in this case that you were trying to force Office users to use your browser than you did back in January of 1997? A. You're mischaracterizing the e-mail. Q. Well, let me ask you a question independent of the e-mail. Do you feel more uncomfortable with the characterization that Microsoft is forcing Office users to use Microsoft's browser today than you did back in January, 1997? A. I've never been comfortable with lawyers mischaracterizing the truth. Q. Well, Mr. Gates, could I have my question answered? A. I answered it.

19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17

MR. BOIES:

Would you read the question

back, please. (Record read.) Q. BY MR. BOIES: Could I have an answer to that question, sir? MR. HEINER: Objection. THE WITNESS: My view of lawyers 646

1 mischaracterizing something has not changed. 2 Q. BY MR. BOIES: Mr. Gates, I'm not 3 talking about your view of lawyers mischaracterizing 4 things. I'm talking about your view of the use of 5 language. You've got a document in here in which you 6 talk about forcing Office users to use your browser. 7 You say "In one piece of mail people were suggesting 8 that Office had to work equally well with all 9 browsers and we shouldn't force Office users to use our browser." You go on to say to the top executives of your company, "This is wrong." Now, my simple question is whether you're more concerned about the use of those words today than you were back in January of 1997, whether this litigation is influencing the care and precision, if you want to put it that way, with which you are determined to use words? A. I'm not sure what I'm comparing to what. Q. Okay, let me try to be clear. In January of 1997 you wrote this e-mail -A. In total. Q. In total. And at the time you wrote this e-mail, you didn't have any expectations it was going to show up in this litigation, did you? 647

1 A. I'm not sure what you mean by that. 2 Q. What I mean is you thought this was a 3 private e-mail. You thought you were writing to your 4 executives and you didn't think anybody outside the 5 company was going to review this and do what I'm 6 doing now, which is asking you questions about it, 7 right? 8 A. Oh, I think the general notion that any 9 e-mail I write might be reviewed at some point is one that I've understood certainly since 1990. Q. So it is your testimony that taking this e-mail in its entirety, that you today are entirely comfortable that the memo, the e-mail in its entirety, is a fair and accurate statement of your views; is that correct? A. If somebody takes the trouble to understand it, yes.

18 19 20 21 22 23 24 25

Q. That is, if somebody reads this document all the way through, takes the trouble to figure out what is here, you say that's a fair and accurate statement of your views; correct? A. Views on what? Q. Views on the things that you're talking about in the memo. Let me try to approach it a different 648

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16

way. Sometimes when people write things after the fact, they say "I wish I hadn't written it that way, that just isn't accurate." Or "I overstated it," or "I got it wrong." Are you saying that about this document? A. I guess I can say that if I realized how you might misinterpret the thing, I would have put a little footnote in here for you to help make sure you didn't misinterpret it. Q. And that's because you think that what I'm doing, as you've said before, is mischaracterizing what's here; correct? A. Several of your questions I believe have mischaracterized it. Q. Now, suppose, Mr. Gates, that you have to worry not about what I think about this memo, which is really irrelevant, but only about what the trier of fact thinks about this memo. Assume that a neutral trier of fact is going to look at this memo in a fair and balanced way. Would you say to that neutral trier of fact "I really shouldn't have written this. This really doesn't reflect my views. I made a mistake"? Or would you say "If you read the whole thing and read it fairly, that's what I believe"? 649

1 A. If they understood what it was about, I 2 wouldn't feel any need to amend or change it. 3 Q. Okay, sir, that's -- I mean on that 4 basis, I think we can leave it to the trier of fact 5 to determine what it means. Because I think the one 6 thing -- you believe this memo is clear, don't you? 7 A. I don't know what you mean by that. 8 You've made it clear that somebody can misinterpret 9 this memo. Whether that is being done maliciously or not, I don't know. So now I understand that somebody who doesn't understand the subject matter of the memo can misinterpret it. In particular you can misinterpret what is meant there. Q. Well, you've told us that extensions to HTML that you are referring to here were the Trident extensions, haven't you, sir? That's what you've

17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

said? A. And general principals about HTML extensions, yes. MR. HEINER: Will the Antitrust Division of the United States, when it tries this case, present information to the trier of fact so that the trier of fact understands what HTML is, what Trident is and so forth, or will it present snippets and fragments as it did in the fall in the consent 650

1 decree case? 2 MR. BOIES: I believe the trier of fact 3 will have this entire document and we will ask the 4 trier of fact to read this entire document and we 5 will present to the trier of fact -- and if we don't, 6 you will -- everything that either of us can think of 7 that relates to the subject matter of this. 8 One of the things about a trial is we 9 both get our shot and if you think there is anything that you can say to the trier of fact that will get the trier of fact to interpret this differently than I have, take your best shot. MR. HEINER: All I'm saying is that even the plaintiff in an action has an obligation as an officer of the court to present facts in a summary judgment motion, in a complaint, in a motion for preliminary injunction or at the trial so that the court can understand the full set of facts. MR. BOIES: We will continue to do that. Q. Let me show you a document marked as Government Exhibit 394. This purports to be an e-mail dated February 4, 1995, or at least a message dated February 4, 1995 at 12:04 p.m. regarding "Frosting and O'Hare." 651

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

(The document referred to was marked by the court reporter as Government Exhibit 394 for identification and is attached hereto.) Q. BY MR. BOIES: Have you ever seen this document before, sir? A. I think Mr. Houck showed it to me. Q. Other than whatever was shown at your deposition, have you ever seen this document before? A. No. Q. All right. Let me ask you to look next at Government Exhibit 395. This purports to be a memo or message from you dated February 19, 1997, to Mr. Allchin with copies to Mr. Maritz, among others. (The document referred to was marked by the court reporter as Government Exhibit 395 for

16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14

identification and is attached hereto.) Q. BY MR. BOIES: Did you send this message on or about February 19, 1997? A. I don't remember sending the message. Q. The second message here in this exhibit is a message from Mr. Allchin to you dated February 18, 1997, at 5:17 p.m. with a copy to Mr. Maritz. Do you see that? A. Yes. Q. And am I correct that when you sent 652

1 your message, you enclosed this earlier message from 2 Mr. Allchin with your message? 3 A. That's right. The default reply 4 command does the enclosure. 5 Q. Let me ask you to look at the second 6 page, the first full paragraph in which Mr. Allchin 7 writes to you "I am convinced the path we're on is 8 the wrong one. We are playing into Netscape's 9 strengths and against our own. I hear lots of words about how the software will of course be 'better' on Windows because we have more people working on Windows, but I can't sell abstract statements like this." Do you see that? A. Uh-huh. Q. He then goes on in the very next sentence to say "We focus attention on the browser battle where we have little marketshare instead of focusing the battle at integrating things into Windows where we have marketshare and a great distribution channel." Did Mr. Allchin write this to you on February 18, 1997? A. I'm not sure. Q. Did Mr. Allchin communicate that to you 653

1 at some point, whether in February, 1997 or some 2 other time? 3 A. I know Jim was a big advocate of 4 increasing the integration features to make them even 5 stronger. 6 MR. BOIES: May I have the question 7 read back, please. 8 (Record read.) 9 Q. BY MR. BOIES: May I have an answer to that question, sir? A. That's what I answered. Q. I'm not asking you what Mr. Allchin was a big advocate of. I'm asking whether he communicated this to you at some point?

15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. Those specific words? Q. Or what you understand to be the substance of those words. A. In looking at the substance of those words, I can say the one part I do remember him communicating is that he was a big advocate of strengthening even further the integration benefits of the browser technology in Windows. Q. Well, sir, when he talks about integrating the browser technology into Windows, which he does a little later, what he says is, 654

1 "When IE 4 was first discussed, we were 'integrating 2 the browser into Windows.' That is what we told 3 everyone. That was a strong message for Windows. 4 That message is now gone since IE 4 is going onto all 5 platforms. It won't be as 'integrated' (whatever 6 they means technically) but all the words about 7 WebPC and the like convince me we are determined to 8 put a gun to our head and pull the trigger." 9 Now, did he tell you that, Mr. Gates, in or about February of 1997? A. I don't remember him using those words. They're colorful enough. Sometimes I might remember that, but I don't remember that. Q. All right, sir. Let me ask you to look at a document that has been marked as Government Exhibit 396. And this purports to be some questions and answers on "The Use and Misuse of Technology" by Bill Gates dated October 24, 1995, copyrighted 1992 to 1995 by the Microsoft Corporation. (The document referred to was marked by the court reporter as Government Exhibit 396 for identification and is attached hereto.) Q. BY MR. BOIES: Do you recall preparing these questions and answers, sir? A. I know I was at a meeting where this 655

1 2 3 4 5 6 7 8 9 10 11 12 13

was worked on. Q. And did the statements set forth here reflect your views at the time? A. I don't remember specifically these sentences, but I have no reason to doubt this is what was discussed and put into the column. Q. And you understood that when this was prepared and, as you put it, put into the column, that it was going to be published, did you not, sir? A. Yeah, the column is published. Q. Where is the column published? A. A number of newspapers. Q. Now, when you refer here on the second

14 15 16 17 18 19 20 21 22 23 24 25

page, fourth line, to "winning for Microsoft a larger share of the market for Internet browsers," do you see that? A. No. Q. It's on the second page, fourth line -A. Oh, you're on the second page. Let me just read this. Okay, go ahead. Q. When you refer in here to "winning for Microsoft a larger share of the market for Internet browsers," do you see where you say that? A. Yes, it's part of a sentence here. 656

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12

Q. What did you mean by "the market for Internet browsers," sir? A. I assume I meant usage share of browsers on the World-Wide Web. Q. You then go on in parens to say "An Internet browser is software that lets an individual roam the worlds of information available on the Internet. Microsoft's browser is called the Internet Explorer." Do you see that? A. Close paren. Yeah. Q. Close paren and then close quote, since I'm quoting it. Did you believe that was an accurate statement at the time that you made it and published it? A. In trying to give an explanation to the broad audience that the column was aimed at, yes, I thought it was a good way of describing it to that audience. Q. Let me ask you to look at a document that's been previously marked as Government Exhibit 398. The first message here is one from Brad Silverberg to you and others including Mr. Maritz and Mr. Allchin dated October 3, 1994 at 6:42 p.m. 657

1 Do you see that? 2 A. Say again. 3 Q. The first message here is a message to 4 you and others, including Mr. Allchin and Mr. Maritz, 5 from Mr. Silverberg dated October 3, 1994, at 6 6:42 p.m., correct? 7 A. It appears to be. 8 (The document referred to was marked 9 by the court reporter as Government Exhibit 398 for identification and is attached hereto.) Q. BY MR. BOIES: And he references Marvel and Capone. Do you see that?

13 14 15 16 17 18 19 20 21 22 23 24 25

A. Yes. Q. Marvel is a code word for what became MSN; is that correct? A. Not the way he uses it here. Q. Oh, what does Marvel refer to here? A. Blackbird. Q. So here Marvel refers to Blackbird. And what does Capone refer to? A. I think an e-mail client that was a feature of Windows. Q. And it also refers to Chicago. A. In the next sentence. Q. Next sentence of Mr. Silverberg's 658

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11

message to you. What is Chicago, as you understand it here? A. The name for the project that resulted eventually in the product Windows 95. Q. And Mr. Silverberg writes you and Mr. Maritz and others that "There is no one in the world outside of Microsoft who will buy the argument that Marvel and Capone are 'part of Chicago.'" A. No, that's not -Q. That's not so? A. No. Q. Well, let me see. He says "I will jump in -- yes, we have to take them out of Marvel and Capone too. There is no one in the world outside of Microsoft who will buy the argument that they are 'part of Chicago' so get the interfaces while others don't. This is an impossible sale." As you read this -- do you recall receiving this? A. No. Q. Did you ever discuss it with Mr. Silverberg? A. I'm not sure. Q. Did you ever discuss with Mr. Silverberg or anyone else what he meant by "part 659

1 of Chicago"? 2 A. I'm not sure. It's clear -- it's very 3 clear that they're not referring to what you asked 4 about. 5 Q. All right, sir. Let me ask you about 6 the third message down. That is a message from you 7 dated October 3, 1994 at 5:18 p.m. Do you see that? 8 A. Yes. 9 Q. You write in the first line "It's time for a decision on ShellBrowser." Do you see -A. "iShellBrowser."

12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. "iShellBrowser." And in the third sentence you say "It's hard to know how much actual market benefit iShellBrowser integration would bring." A. Third paragraph? Q. Of your message. A. Not sentence. Q. Third paragraph of your message. A. Right. Q. First sentence. A. Right. Q. "It's hard to know how much actual market benefit iShellBrowser integration would bring." Do you see that? 660

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10

A. I see it. Q. Do you recall writing that in or about October, 1994? A. I don't recall the specific message. I recall the general issue about the iShellBrowser APIs. Q. The next paragraph, the first line you talk about how Microsoft is in "a real struggle versus Notes." Do you see that? A. Yes. Q. What do you mean by "Notes" when you say that Microsoft is in a real struggle against notes? A. I mean Notes. Q. Can you explain what Notes is? A. It's a product called Notes. Q. Produced by whom, sir? A. You can say Lotus or IBM or there's actually the company who wrote it, I forget their name. Q. But in any event, not Microsoft; correct, sir? A. That's right, not Microsoft. Q. And is it true that Microsoft in or about October of 1994 was in a real struggle against 661

1 2 3 4 5 6 7 8 9 should

Notes? A. I think some people would say yes and some people would say no. Q. You said yes, though, right? A. Apparently in an e-mail in 1994, I said "we are in a real struggle versus Notes." Q. And in the next paragraph, the fifth paragraph of your message, you say "I have decided that we should not publish these extensions. We wait until we have a way to do a high level of

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

integration that will be harder for the likes of Notes, Wordperfect to achieve, and which will give Office a real advantage." Do you see that? A. Yes. Q. Did that reflect your views in October of 1994? A. That sentence taken out of context or the whole e-mail? Q. That sentence in the context of this e-mail. A. I don't think -- in the context of the e-mail, I have no reason to think that it didn't. Q. What I'm asking again is, fairly read in its entirety, does this message from you reflect 662

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

your views at the time that you wrote it? MR. HEINER: The question assumes -MR. BOIES: That he wrote it. MR. HEINER: Okay. THE WITNESS: If you're asking about the whole message, I have no reason to think I didn't write that message or that it didn't reflect my thinking at the time. I haven't actually read the whole message, but I'll still say that. Q. BY MR. BOIES: Okay. Let me ask you to look at a document marked as Government Exhibit 399. This purports to be a message from you to Brad Silverberg with a copy to Paul Maritz and others dated January 8, 1996. (The document referred to was marked by the court reporter as Government Exhibit 399 for identification and is attached hereto.) Q. BY MR. BOIES: Did you send this message, sir? A. I don't remember it specifically. Do you want me to read it? Q. If you need to to answer my questions. This is on a subject of Steve Case of America Online; is that correct? A. Yes. 663

1 2 3 4 5 6 7 8 9

Q. In the second paragraph you write that Mr. Case said that he viewed Microsoft as "technically behind Netscape but credible enough to do a very good job." Do you see that? A. Uh-huh. Q. Did Mr. Case tell you that? A. With respect to IE 2, the product we were shipping. But later they had a chance to see the work we were doing and changed that view.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. Is there a document that you're aware of which reflects their changed view? A. Almost certainly. Q. Have you seen that document in the last six months? A. No. Q. Do you know who that document was from? A. Oh, I think -- I know there are technical discussions subsequent to this where AOL came away impressed with the componentization work we were doing and how it was superior technically with what they had seen anyplace else. Q. My question right now is not what AOL's view was. You told me that and I asked you if there was a document that reflected that they changed their position? 664

1 A. Yes. So I should have gone on to say 2 that after they came out and saw that technology, 3 it's likely that somebody -- either in e-mail -4 recorded their impressions at that time. 5 Q. Do you recall actually seeing such a 6 document, sir, ever? 7 A. I recall being told that they were 8 impressed that we had the best technology. 9 Q. Do you recall ever seeing a document that reflected that? A. I'm not sure if it was verbal or e-mail, but I remember being told that after they had come out and seen the componentization technology as part of IE 3, they viewed it as the best technology. Q. When you say verbal there, you mean oral, not written down in e-mail or written memo form; is that correct? A. Yes. Q. Let me ask you to look at a document previously marked as Government Exhibit 400. The second item here is a message from you to Steve Ballmer, Paul Maritz, Jim Allchin, Christine Turner on the subject of IBM dated October 30, 1997; is that correct? A. It appears to be. 665

1 2 3 4 5 6 7 8

(The document referred to was marked by the court reporter as Government Exhibit 400 for identification and is attached hereto.) Q. BY MR. BOIES: Did you send this message, sir? A. Let me look at it. I don't remember specifically, but this kind of topic was being discussed, so I have no

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

reason to doubt this is a piece of e-mail I wrote. Q. This relates to a conversation you had with Gary Stimac, is that correct? A. Not strictly. Q. Does it relate in part to that? A. Yes. Q. And did Mr. Stimac tell you that he was thinking about taking a job with IBM? A. I think he did. Q. And did he tell you that one of his concerns was whether IBM's relationship with Microsoft would be a problem? A. I see that in the e-mail. I don't remember it specifically. Q. Do you remember people at IBM being concerned about IBM's relationship with Microsoft being a problem? 666

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. No. Q. Do you remember Mr. Stimac telling you that he was concerned about whether IBM's relationship with Microsoft would be a problem either here or -- or at any other time? A. No, I don't remember that. Q. In response to that you say that you told him that "The Java religion coming out of the software group is a big problem." Do you see that? A. Uh-huh. Q. Did you tell Mr. Stimac that? A. I don't remember telling him that. Q. Now, when you talk about the Java religion coming out of the software group, you're talking about IBM's software group; correct, sir? A. I'm not sure. Q. Well, this sentence immediately follows Mr. Stimac purporting to be concerned about whether IBM's relationship with Microsoft would be a problem and immediately precedes a sentence in which you say you told him that IBM refused to big anything related to Backoffice. A. Yeah. That doesn't relate to the IBM software group. Q. But it relates to IBM; correct, sir? 667

1 2 3 4 5 6 7

A. Yes. Q. This whole paragraph relates to IBM; correct, sir? A. Primarily. Q. So when you say that you told Mr. Stimac that the Java religion coming out of the software group is a big problem, do you really have

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

any doubt that you were talking about IBM's software group? A. Well, there was a lot of joint work between IBM people and Sun's people and other companies, and so it's very hard to draw a line between the IBM software groups and other people's software groups. Q. Does that mean that it is your testimony here under oath that when you refer to the software group in this sentence, you don't know whether you were talking about the IBM software group? A. I'm certainly talking about software groups that IBM is at least a part of. Q. You go on to say that "they continue to use their PCs to distribute things against us." Is the "they" that you are referring to there IBM? 668

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. I think so. Q. And is the "us" there Microsoft? A. I think so. Q. And next sentence says you told Mr. Stimac that "they are dabbing in NCs in a way we don't like." Is the "they" there again IBM? A. Apparently. I don't know what dabbing is. Q. I was going to ask you that. The next paragraph you say, "Overall we will never have the same relationship with IBM that we have with Compaq, Dell and even HP because of their software ambitions. I could deal with this just fine if they weren't such rabid Java backers." Now, when you refer in that sentence to "they" as in "I could deal with this just fine if they weren't such rabid Java backers," you're again talking about IBM; correct? A. Parts of IBM. It's important to distinguish different groups in IBM. Q. And the different groups in IBM would include perhaps, among others, the software group as one and the PC group as another; correct? A. That's right. 669

1 2 3 4 5 6

Q. At the end of that you say that you are willing to take some risk in improving the relationship and you think that steps ought to be taken to approach them, and you end by saying "We should position it as let's do some things that are good for both of us but which require some of the

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

7 rhetoric to be lowered on both sides. On their side 8 I mean Java and NC." 9 And "their side" you're talking about IBM's side? A. I think so. Q. And what you're saying is that you want a message conveyed to IBM that in order to improve the relationship, you want some of their rhetoric lowered on Java and NC? A. No. Q. No? Did you want IBM to lower their rhetoric on Java? A. I actually explain in this message that I thought the rhetoric was actually hurting IBM itself, independent of Microsoft. Q. Did you think it was hurting Microsoft? A. I wasn't sure. In terms of specifics, I wasn't sure. Q. When you say that you could deal with 670

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

IBM's relationship just fine if IBM wasn't such rabid Java backers, weren't you saying that you thought that IBM's rabid backing of Java was bad for Microsoft? A. I know at this time we thought some of the claims around Java were just plain false and weren't doing customers any favors by leading them down a belief that certain things were solved that were not solved. Q. My question, Mr. Gates, is in October of 1997, did you believe that what you refer to here as IBM's rabid backing of Java was something that was hurting Microsoft? A. I can't point to any particular hurting that it was doing. We didn't think it was accurate in terms of what technically could be achieved with Java. Q. Let me put the question this way. In or about October of 1997, did you want to stop IBM from being what you refer to here as a rabid Java backer? A. We thought some of the rabidness was hurting IBM as well as the industry as a whole. Q. Did you believe it was hurting Microsoft, or were you just doing this as sort of a 671

1 2 3 4 5

public spirited company to try to help IBM from hurting itself? A. I can't point to any particular damage, but we certainly would have preferred if the more extreme statements we didn't think were true, if they

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

weren't pushing those forward. Q. Mr. Gates, let me put it this way. In October of 1997, were you trying to get IBM to reduce its public support for Java? A. I say in here that under some circumstance the rhetoric should be lowered on both sides and that I think that's -- you know, that makes sense in certain circumstances. Q. I don't think you actually say in certain circumstances, do you, sir? You may have meant that, I'm not saying you didn't mean it, I'm just saying those words don't appear here, do they? A. No. It's all about "I am willing to take some risk in improving the relationship and think you should approach them on steps for improvement." It's in that vein that I talk about rhetoric being lowered on both sides. Q. And then you go on to say that you mean on IBM's side they lower the rhetoric on Java and NC; correct? 672

1 A. The rhetoric. 2 Q. And by rhetoric, you were talking about 3 public rhetoric? 4 A. Definitely public rhetoric. 5 Q. And is it fair to say in October of 6 1997 you were trying to get IBM to reduce its public 7 rhetoric in support of Java? 8 A. I don't know what you mean "trying." I 9 talk about a circumstance in which both sides would lower their rhetoric. Q. You were offering to lower your rhetoric if they would lower their rhetoric; is that fair? Isn't that what you say right here? A. In the context -- this is about improving the overall relationship, which is not focused on the rhetoric. It says in the context of that improved relationship, I think both of us should lower our rhetoric. Q. Indeed you say that the improved relationship will "require some of the rhetoric to be lowered on both sides." A. That's a statement about human feelings that if our rhetoric is so high, it will be hard for them to do their side of improving the relationship and vice-versa. 673

1 2 3 4

Q. You then go on to say on their side, IBM's side, you mean Java and NC. A. That's part of the rhetoric I'm referring to.

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. Part of their rhetoric? A. Yes. Q. That you wanted them to lower; isn't that true? A. No. Q. Okay. Let me ask you to look at Exhibit 401. This is a message from you to Mr. Ballmer and Mr. Chase with a copy to Mr. Maritz and some other people also given copies dated August 15, 1997 at 4:07 p.m. on the subject of IBM and Netscape; correct? A. Uh-huh (The document referred to was marked by the court reporter as Government Exhibit 401 for identification and is attached hereto.) Q. BY MR. BOIES: And you type in here "Importance: High." A. No. Q. No? A. No, I didn't type that. Q. Who typed in "High"? 674

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. Q. in "High"? A. Q. e-mail? A. attribute. Q. A. In this

A computer. A computer.

Why did the computer type

It's an attribute of the e-mail. And who set the attribute of the Usually the sender sends that Who is the sender here, Mr. Gates? case it appears I'm the

sender. Q. Yes. And so you're the one who set the high designation of importance, right, sir? A. It appears I did that. I don't remember doing that specifically. Q. Right. Now, did you send this message on or about August 15, 1997? A. I don't remember doing so. Q. Now, you say that you had a meeting with Jeff Papows; is that correct? A. I did have a meeting with Jeff Papows, yes. Q. And the third paragraph from the bottom you write "He doesn't want anything attributed to me or he will get in trouble, but he says we can just 675

1 2 3

refer to all the rumors on the Web about what kind of deal is being done between Netscape and IBM." Do you see that?

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 A. I do. 5 Q. At this point, that is, in or about 6 August of 1997, were you aware prior to your 7 conversation with Mr. Papows, that there was a 8 prospect of a deal between Netscape and IBM? 9 A. There had been rumors of that, so yes. In fact, there had been deals. There was rumors of a new deal. Q. Let me ask you to look next at a document marked as Exhibit 402. The second message on this exhibit is a message from you to Mr. Ballmer and Mr. Maritz dated August 4, 1997 at 5:17 p.m.; correct? A. It appears to be, yes. Q. Did you send this, Mr. Gates? A. I don't remember sending it, but I have no reason to think that I didn't. (The document referred to was marked by the court reporter as Government Exhibit 402 for identification and is attached hereto.) Q. BY MR. BOIES: Okay. Let me ask you to look at Exhibit 403. 676

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. HEINER: What was this last one? MR. BOIES: 403. 402 was the one just before this one. This one is 403. MR. HEINER: Right, okay. Q. BY MR. BOIES: This is a message dated February 16, 1998, from Laura Jennings to you and a number of other people, including Mr. Allchin, Mr. Ballmer and Mr. Maritz. Do you see that? A. Yes. (The document referred to was marked by the court reporter as Government Exhibit 403 for identification and is attached hereto.) Q. BY MR. BOIES: Did you receive this e-mail in or about February of 1998, sir? A. I don't remember receiving it, but I have no reason to think that I didn't. Q. Let me take you down to the next to last paragraph on the first page. The first sentence says "One potential concern: Brad mentioned to me late Friday that there may be new concerns about our plan to make Start a requirement for being in the IE referral server, or at least there may be timing issues related to your appearance at Senator Hatch's hearings." 677

1 2

A.

Do you see that? Yes.

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q. Do you recall a discussion of this in or about February of 1998? A. Not with Laura. But on the general subject, yes. Q. Did Microsoft in fact make Start "a requirement for being in the IE referral server"? A. No, I don't think we did. Q. Why not? A. I think the PR group thought it would be controversial and we didn't see the benefit as being worth having that controversy. Q. Let me ask you to look at a document that has been marked as Exhibit 404. The first message here is a message to you and Mr. Ballmer with copies to other people dated March 23, 1994 at 9:13 a.m. on the subject of "IBM helps Lotus." (The document referred to was marked by the court reporter as Government Exhibit 404 for identification and is attached hereto.) Q. BY MR. BOIES: Did you receive this message in or about March of 1994, sir? A. I don't know. Q. The message begins by describing how 678

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

IBM is helping in the selling of Notes. Do you see that? A. Yes. Q. And at the end Mr. Kempin, who is the author of this, says "I am unsure if we need to see this as an organizational issue or an OEM issue." Do you know what he means by that? A. What's he talking about? Q. Do you know what he is talking about? A. No. Q. He then says "I am willing to do whatever it takes to kick them out, but strongly believe we need a WW hit team to attack IBM as a large account, whereby the OEM relationship should be used to apply some pressure." Do you see that? A. Uh-huh. Q. You have to say yes for the record. A. I see it. Q. Do you know what Mr. Kempin means when he writes to you about a "WW hit team"? A. He means a salesperson. Q. If he means a salesperson, why doesn't he say salesperson, sir? A. It clearly means salesperson. 679

1

Q.

Are salespeople within Microsoft

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

2 commonly referred to as WW hit teams? 3 A. If they're world-wide and if they're 4 trying to sell to somebody who is a large account, 5 you bet. 6 Q. And when your salespeople go out to 7 sell large accounts, are they commonly referred to as 8 needing a "WW hit team to attack IBM as a large 9 account, whereby the OEM relationship should be used to apply some pressure"? A. No. Q. Did you say no? A. I said no. Q. Do you remember Mr. Kempin telling you in March of 1994 that he was proposing that the OEM relationship with IBM should be used to apply some pressure to stop IBM from promoting the sale of Notes? A. No. Q. Do you recall anyone ever telling you that, sir? A. No. Q. Did you ever respond to Mr. Kempin and tell him that no, you didn't think that Microsoft ought to apply OEM pressure to IBM? 680

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A. I don't understand your question. Q. Do you understand that Mr. Kempin is here proposing to you that Microsoft apply OEM pressure to IBM? A. It doesn't say OEM pressure. Q. I didn't say it said it, sir. It says he is proposing that the OEM relationship should be used to apply some pressure on IBM; correct, sir? A. You're asking me to read it? Q. I'm asking you if that's what you understand him to be saying. A. What? Q. That he is proposing that the OEM relationship should be used by Microsoft to apply some pressure on IBM. A. No, I don't think he is proposing anything. Q. You don't think he is proposing anything. When he says that he strongly believes that there needs to be a "WW hit team to attack IBM as a large account, whereby the OEM relationship should be used to apply some pressure," you don't think that he is suggesting that Microsoft apply pressure on IBM? A. I don't think he is making a proposal. 681

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 It is one of the things he mentions, but it's not a 2 proposal. 3 Q. Now, Mr. Kempin's message was a 4 response to a message from you to Mr. Kempin and 5 Mr. Ballmer dated March 20, 1994 at 11:29 p.m., 6 correct? 7 A. It appears to be, yes. 8 Q. And you write him in the first 9 paragraph "This is one topic I really want to try to get to the bottom of. Why does IBM help Lotus so much? Is there anything we can do about this? Should it become an issue in our global relationship with IBM?" Did you send this message to Mr. Kempin and Mr. Ballmer in March, 1994? A. It appears I did. I mean that's part of the message I sent, it appears. Q. Now, when Mr. Kempin replied saying "We need a WW hit team to attack IBM as a large account, whereby the OEM relationship should be used to apply some pressure," did you understand him to be responding to your questions? A. I don't remember receiving his mail. Q. All right. I have no more questions at this time. 682

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

It's 3:15. 3:16 p.m.

VIDEOTAPE OPERATOR: The time is We're going off the record. * * *

I hereby declare, under penalty of perjury, that the foregoing answers are true and correct to the best of my knowledge and belief. EXECUTED AT_____________, WASHINGTON, this_________day of________________, 1998. _______________________________ BILL GATES

683

1

10 11 12 13 14 15 16 17 18 19 20 21 22

2 3 4 5 6 7 8 9 nothing

STATE OF CALIFORNIA ) ss. COUNTY OF LOS ANGELES

) )

I, Kathleen E. Barney, CSR 5698, a Certified Shorthand Reporter in and for the State of California, do hereby certify: That, prior to being examined, the witness named in the foregoing deposition was by me duly sworn to testify the truth, the whole truth, and but the truth; That said deposition was taken down by me in shorthand at the time and place named therein and was thereafter reduced to typewriting under my supervision; that this transcript is a true record of the testimony given by the witness and contains a full, true and correct record of the proceedings which took place at the time and place set forth in the caption hereto as shown by my original stenographic notes. I further certify that I have no interest in the event of the action. EXECUTED this_______day of____________,

23 24 25

1998. ______________________________ Kathleen E. Barney, CSR #5698

684

Released Pursuant to 15 U.S.C. §30

Go to Trial Documents listing Go to initial reference

David Boies's Opening Statement on Behalf of the Department of Justice (October 19, 1998) October 19, 1998 (A.M. Session) 1

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

2 ______________________________ 3

UNITED STATES OF AMERICA, PLAINTIFF,

4

:

: :

VS.

:

5

C. A. NO. 98-1232

: MICROSOFT CORPORATION, ET AL. :

6

DEFENDANTS

:

______________________________: 7

STATE OF NEW YORK, ET AL. PLAINTIFFS

:

:

8 VS. 9

:

C. A. NO. 98-1233

: MICROSOFT CORPORATION, ET AL. :

10

DEFENDANTS

:

_______________________________ 11

WASHINGTON, D. C. OCTOBER 19, 1998

12 13

(A. M. SESSION) TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE THOMAS P. JACKSON

14 15 16 17 18 19 COURT REPORTER: 20

PHYLLIS MERANA 6816 U. S. COURTHOUSE 3RD & CONSTITUTION AVE., N.W.

21

WASHINGTON, D. C. 281-6648

22 23 24 25

2 1 FOR THE UNITED STATES: 2

PHILLIP MALONE, ESQ.

DAVID BOIES, ESQ. U. S. DEPT. OF JUSTICE

3

ANTITRUST DIVISION SAN FRANCISCO, CA.

4 FOR THE DEFENDANT: 5

JOHN WARDEN, ESQ. RICHARD J. UROWSKY, ESQ. STEVEN L. HOLLEY, ESQ.

6

RICHARD PEPPERMAN, ESQ. SULLIVAN & CROMWELL

7

125 BROAD STREET

NEW YORK, NEW YORK 8 FOR THE STATE OF NEW YORK: 9

STEPHEN HOUCK, ESQ.

ALAN R. KUSINITZ, ESQ. N. Y. STATE DEPT. OF LAW

10

120 BROADWAY, SUITE 2601 NEW YORK, NEW YORK

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

3 1

INDEX

2

OPENING STATEMENT BY MR. HOUCK

3

OPENING STATEMENT BY MR. BOIES

4 5 6 7

PAGE 11 PAGE 31

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 1 2

P-R-O-C-E-E-D-I-N-G-S THE DEPUTY CLERK: CIVIL ACTIONS 98-1232 AND

3

98-1233, UNITED STATES VERSUS MICROSOFT AND STATE OF NEW

4

YORK, ET AL. VERSUS MICROSOFT.

5 6 7 8 9 10

MR. MALONE, STEVEN HOUCK AND DAVID BOIES FOR THE GOVERNMENT. JOHN WARDEN, STEVEN HOLLEY, RICHARD UROWSKY AND WILLIAM NEUKOM FOR THE DEFENDANT. THE COURT: ALL RIGHT. GENTLEMEN, WE HAVE GOT SOME PRELIMINARY MATTERS THAT WE PROBABLY HAVE TO OR SHOULD

11

ADDRESS BEFORE WE TAKE OPENING STATEMENTS. THE ONLY ONE I

12

HAVE HAD A CHANCE TO LOOK AT IN ANY DETAIL IS THE

13

GOVERNMENT'S RENEWED EMERGENCY DISCOVERY MOTION.

14

MR. MALONE, LET ME TELL YOU TENTATIVELY AT THE

15

OUTSET, READING YOUR THIRD REQUEST LITERALLY, I CERTAINLY

16

WOULD HAVE READ IT TO RELATE ONLY TO SALES TO OEM'S.

17

MR. MALONE: YOUR HONOR, AT THE TIME WE DRAFTED

18

IT, WE DID NOT KNOW WHAT PRECISELY THESE DATABASES WERE, OR

19

WHAT FORM IN WHICH THEY WERE KEPT. AND SO WE SPECIFIED BY

20

NAME THE TWO THAT WE HAD SOME INFORMATION ABOUT, THE TWO

21

THAT WE KNEW EXISTED. THOSE WERE THE MS SALES AND THE OEM

22

QUERY DATABASE. AND THEN, TO MAKE SURE IF THERE WERE OTHERS

23

OF THAT TYPE, WE SPECIFIED. AND TO TRY TO LIMIT IT AND MAKE

24

IT AS SPECIFIC AS WE COULD, FOR THAT ADDITIONAL PART WE SAID

25

OTHER DATABASES RELATING TO SALES OF MICROSOFT OPERATING

5 1

SYSTEM PRODUCTS TO OEM'S, BUT WE --

2

THE COURT: TO OEM'S?

3

MR. MALONE: CORRECT. BUT WE DID THAT IN ADDITION

4

TO SAYING THE OEM QUERY DATABASE AND THE MS SALES DATABASE,

5

AND FOR THOSE TWO, AS WELL AS OTHERS THAT MIGHT EXIST, THE

6

ORIGINAL REQUEST SAID ALL DATA CONTAINED IN OR THE CONTENTS

7

THEREOF. THE CRITICAL THING, I THINK, YOUR HONOR, IS THAT

8

WE CONTINUE TO TRY TO MAKE THIS AS NARROW AS POSSIBLE.

9

WE'RE NOT DOING WHAT MICROSOFT HAS SUGGESTED IN ITS

10

OPPOSITION; THAT IS, TRYING TO GAIN INFORMATION ABOUT

11

HUNDREDS OF PRODUCTS THAT HAVE NOTHING TO DO WITH THIS

12

LITIGATION.

13 14

THE COURT: THAT MAY VERY WELL BE, BUT THE FACT OF THE MATTER IS, READING YOUR REQUEST LITERALLY, I READ IT AS

15

BEING LIMITED TO INFORMATION RELATING TO OEM'S, THE OEM

16

DISTRIBUTION CHANNEL.

17

MR. MALONE: IT WAS NOT INTENDED TO BE SO NARROW.

18

IF A LITERAL READING IS THAT NARROW, I CERTAINLY ACCEPT THE

19

COURT'S READING OF THAT AND WE WOULD SUGGEST -- REQUEST

20

LEAVE OF THE COURT TO INITIATE NEW DISCOVERY SPECIFICALLY --

21

THE COURT: YOU CAN INITIATE A NEW REQUEST.

22

MR. MALONE: YOUR HONOR, IF WE DO THAT -- I RAISE

23

THIS NOW ONLY BECAUSE WE STILL HAVE A TEAM OF PEOPLE IN

24

SEATTLE WAITING TO TRY TO GO THROUGH THIS DATA -- WE WOULD

25

SERVE THAT REQUEST ON MICROSOFT TODAY AND MAKE IT AS NARROW

6 1

AS OUR MOTION SAYS; THAT IS, DATA IN THE OTHER TWO CHANNEL

2

PARTS OF THE DATABASE. THAT IS WHAT THEY CALL FINISHED

3

GOODS OR THE RETAIL CHANNEL AND THE ON-LINE CHANNEL. FOR

4

THOSE TWO FIELDS OR THOSE TWO CHANNELS --

5

THE COURT: THEY ARE GOING TO OBJECT ON RELEVANCE

6

GROUNDS, I AM SURE. TELL ME WHAT YOU THINK THE RELEVANCE IS

7

OF THAT INFORMATION.

8

MR. MALONE: ABSOLUTELY, YOUR HONOR. WHAT WE

9

BELIEVE THAT INFORMATION WILL SHOW IS SHIPMENTS OF, SALES

10

OF, AND REVENUES FOR THE TWO THINGS THAT REALLY ARE AT THE

11

HEART OF THIS CASE: WINDOWS OPERATING SYSTEMS AND THE

12

INTERNET EXPLORER. AND IT'S THAT KIND OF VERY BASIC

13

STATISTICAL INFORMATION FOR THOSE TWO THINGS ONLY, NOT THE

14

HUNDREDS OF OTHER PRODUCTS THAT MAY BE IN THERE, THAT WE

15

THINK REALLY GO RIGHT TO THE HEART OF THIS.

16 17

MICROSOFT'S SALES AND REVENUES FROM WINDOWS EXCEL, AND IN PARTICULAR HOW IT TREATS INTERNET EXPLORER, HOW IT

18

ATTRIBUTES THE REVENUE FROM INTERNET EXPLORER IN THE

19

RETAIL -- FOR EXAMPLE, IN ANY THAT IT HAS IN THE ON-LINE

20

CHANNEL. WE THINK THAT GOES TO THE VERY CORE ISSUE IN THE

21

CASE, HOW MICROSOFT TREATS THESE TWO PRODUCTS.

22 23 24 25

THE COURT: IT MIGHT BE SUGGESTED THAT IF IT'S SUCH A CORE ISSUE, YOU SHOULD HAVE THOUGHT OF IT EARLIER. MR. MALONE: AND AS WE SAID IN OUR ORIGINAL PAPERS, HAD WE SEEN THE DATABASES, AND PARTICULARLY HAD WE

7 1

HAD ACCESS TO THEM BACK IN AUGUST WHEN WE FIRST REQUESTED

2

THEM AND HAD NOT HAD TO GO THROUGH THE SEVERAL ROUNDS OF

3

MOTIONS TO GET THE ACCESS WE HAD, WE WOULD HAVE BROUGHT --

4

HAD AN INITIAL REQUEST BEEN NECESSARY, WE CERTAINLY WOULD

5

HAVE BROUGHT THAT MUCH SOONER.

6

WE'RE BRINGING THIS NOW ONLY BECAUSE WE NOW HAVE

7

SEEN PORTIONS OF THE DATABASE AT LEAST AND UNDERSTAND THAT

8

THERE ARE THESE OTHER CHANNELS TO WHICH WE HAVE BEEN DENIED

9

ACCESS THAT DO CONTAIN WHAT SEEMS TO BE HIGHLY RELEVANT AND

10

DIRECTLY PROBATIVE DATA. THAT IS REALLY ALL WE WANT AND ALL

11

THAT WE WOULD ISSUE A NEW REQUEST FOR.

12 13 14

THE COURT: AND YOU'RE ONLY LOOKING AT DATA AS TO INTERNET EXPLORER; IS THAT RIGHT? MR. MALONE: AND WINDOWS. ONLY WINDOWS OPERATING

15

SYSTEM AND INTERNET EXPLORER, NOT ANY OF THE OTHER DOZENS OR

16

HUNDREDS OF PRODUCTS THAT THEY SAY ARE IN THE DATABASE.

17 18

THE COURT: ALL RIGHT. LET ME HEAR FROM THE DEFENDANT. MR. HOLLEY?

19

MR. HOLLEY: YOUR HONOR, I WOULD JUST POINT OUT

20

THAT THE ENTIRE HISTORY OF THIS SITUATION PROVES THAT I WAS

21

RIGHT BACK IN EARLY AUGUST WHEN I SAID TO MR. MALONE, "IT'S

22

A VERY COMPLICATED DATABASE. WHY DON'T YOU JUST ASK ME TO

23

GET THE INFORMATION YOU NEED AND WE'LL DO IT."

24 25

NOW MR. MALONE IS SAYING THAT HE FINDS THAT THERE IS MORE INFORMATION HE WANTS AND THAT WE SHOULD HELP THEM

8 1

GET THAT. MY REACTION TO THAT AT THIS POINT IS THAT YOUR

2

HONOR'S ORDER, ENTERED AFTER THE FINAL PRETRIAL CONFERENCE,

3

SAYS THEY HAVE TO SHOW GOOD CAUSE FOR WHY THEY ARE

4

INSTITUTING NEW DISCOVERY REQUESTS AT THIS LATE STAGE, AND I

5

HAVEN'T HEARD AN EXPLANATION FOR WHY THEY DIDN'T ASK FOR

6

THIS STUFF A LOT EARLIER. AS YOUR HONOR CORRECTLY POINTED

7

OUT --

8 9

THE COURT: I THINK THE EXPLANATION IS THAT THEY THOUGHT THEY WERE GOING TO GET IT WITH WHAT THEY HAD

10

REQUESTED, BUT IT TURNS OUT THEY ARE NOT GOING TO GET IT.

11

MR. HOLLEY: WELL, YOUR HONOR, I THINK THE BEST

12

WAY TO DEAL WITH THIS WOULD BE FOR MR. MALONE TO SEND ME A

13

RENEWED REQUEST AND THEN WE'LL RESPOND TO IT AS WE THINK IS

14

APPROPRIATE. BECAUSE I DO --

15

THE COURT: BUT THAT RAISES THE LOGISTICAL PROBLEM

16

OF ARE THEY GOING TO HAVE TO SEND A TEAM BACK OUT THERE OR

17

IS IT SOMETHING THAT COULD BE DONE WITH PEOPLE ON THE SCENE

18

AT PRESENT.

19

MR. HOLLEY: WELL, I WILL COMMIT, YOUR HONOR, THAT

20

IF I GET A REQUEST OVER THE LUNCH HOUR, EVEN AN ORAL

21

REQUEST, THAT WE WILL PROMPTLY RESPOND TO IT.

22

THE COURT: ALL RIGHT.

23

I THINK YOU'RE ENTITLED TO A WRITTEN REQUEST OF

24

EXACTLY WHAT IT IS THEY WANT.

25

MR. HOLLEY: OKAY. THANK YOU, YOUR HONOR.

9 1

THE COURT: ALL RIGHT.

2

NOW, I HAVE IN HAND AT THE MOMENT TWO REQUESTS FOR

3

PROTECTIVE ORDERS FROM NONPARTIES, SUN MICROSYSTEMS AND

4

NETSCAPE. AND I GATHER WHAT IT IS THAT THEY WISH TO BE

5

ASSURED OF IS THAT WHAT THEY REGARD AS CRITICAL TRADE

6

SECRETS WILL NOT BE REVEALED IN OPEN COURT ON THE RECORD.

7

AND FRANKLY, I DON'T HAVE A RESPONSE FROM ANYONE AT THIS

8

POINT. AND I'M MENTIONING THESE TWO MOTIONS AT THIS POINT

9

SIMPLY TO FIND OUT WHETHER OR NOT THERE IS SOME URGENCY IN

10

IT, SPECIFICALLY WITH REFERENCE TO PROPOSED OPENING

11

STATEMENTS.

12

MR. WARDEN?

13

MR. WARDEN: WE HAVE HAD -- MR. HOLLEY HAS HAD

14

SOME CONVERSATIONS WITH THEM. AND WE MAY OR MAY NOT AGREE

15

WITH THEIR POSITIONS, BUT NONE OF THIS IS IN OUR OPENING

16

STATEMENT.

17

THE COURT: ALL RIGHT. MR. BOIES?

18

MR. BOIES: AND NONE OF IT IS IN OURS EITHER, YOUR

19

HONOR.

20

MR. HOUCK: AND NONE IN MINE EITHER.

21

THE COURT: THEN WE WILL ADDRESS THAT WHEN THE

22

SITUATION ARISES. I HAD PREPARED A DRAFT ORDER ESTABLISHING

23

A PROTOCOL FOR DEALING WITH CONFIDENTIAL OR HIGHLY

24

CONFIDENTIAL INFORMATION PRODUCED BY A NONPARTY, BUT I AM

25

NOT SATISFIED WITH IT YET. BUT WE WILL SHARE IT WITH YOU IN

10

1

DUE COURSE WHEN I HAVE GOT IT IN A FORM IN WHICH I AM

2

REASONABLY CONTENT WITH IT AND YOU CAN OFFER WHATEVER

3

COMMENTS YOU WANT.

4

BOTH SIDES HAVE INDICATED AN INTEREST IN HAVING A

5

WITNESS ROOM ASSIGNED TO THEM. AND I HAVE ARRANGED WITH THE

6

ADMINISTRATIVE ASSISTANT TO THE CHIEF JUDGE FOR A WITNESS

7

ROOM TO BE ASSIGNED TO BOTH SIDES. PLAINTIFFS ARE ASSIGNED

8

TO WITNESS ROOM NUMBER 2716. DEFENDANT HAS 2220. THEY ARE

9

BOTH ON THIS FLOOR. FRANKLY, I AM NOT SURE WHICH ONE IS

10

WHICH, BUT YOU CAN TRACK IT DOWN AT THE FIRST RECESS.

11

I JUST RECEIVED THIS MORNING TWO MOTIONS IN LIMINE

12

FILED BY THE DEFENDANT. AGAIN, I WILL ADDRESS IN DUE

13

COURSE, AFTER THE PLAINTIFFS HAVE HAD A CHANCE TO RESPOND TO

14

THE WRITTEN MEMORANDA.

15 16

DO THE PARTIES HAVE ANY PRELIMINARY MATTERS THAT WE NEED TO TAKE UP? MR. HOUCK?

17

MR. WARDEN: YOUR HONOR, I HAVE A STIPULATION FOR

18

THE ENTRY OF A PROCEDURAL ORDER WITH RESPECT TO THE TIMING

19

OF REBUTTAL DEPOSITION DESIGNATIONS AND OBJECTIONS TO

20

DEPOSITION DESIGNATIONS WHICH EVERYONE HAS SIGNED.

21

THE COURT: ALL RIGHT. ANYTHING THAT YOU AGREE

22

TO.

23

(PASSING UP TO THE COURT.)

24

THE COURT: FINE.

25

(COURT SIGNING.)

11 1 2 3

THE COURT: ARE YOU READY FOR THE PLAINTIFFS, MR. BOIES? MR. BOIES: YES, WE ARE, YOUR HONOR.

4

THE COURT: MR. HOUCK?

5

MR. HOUCK: WE WILL BEGIN WITH THE COURT'S

6 7

PERMISSION. OPENING STATEMENT ON BEHALF OF STATE OF NEW YORK

8

MR. HOUCK: GOOD MORNING, YOUR HONOR. STEVEN

9

HOUCK FOR THE 20 PLAINTIFF STATES AND THE DISTRICT OF

10

COLUMBIA.

11

THIS IS AN HISTORIC CASE FOR SEVERAL REASONS.

12

FIRST AND MOST IMPORTANT, IT INVOLVES THE APPLICATION OF

13

COURT ANTITRUST PRINCIPLES TO THE SOFTWARE INDUSTRY, A KEY

14

SECTOR OF OUR ECONOMY AS WE MOVE INTO THE INFORMATION AGE

15

FROM THE INDUSTRIAL ERA. THE ENORMOUS PRESS FOCUS ON THE

16

CASE UNDERSCORES ITS SIGNIFICANCE TO THE PUBLIC AT LARGE.

17

AS AN ANTITRUST LAWYER, IT'S A SPECIAL PRIVILEGE

18

TO PLAY A ROLE IN SHAPING THE LAW IN A CASE THAT WILL TAKE

19

ITS PLACE ALONGSIDE SUCH LANDMARK SECTION 2 DECISIONS AS

20

STANDARD OIL, ALCOA AND UNITED SHOE. ANTITRUST SCHOLARS AND

21

STUDENTS WILL BE DOUBTLESS STUDYING THE MICROSOFT CASE WELL

22

INTO THE 21ST CENTURY.

23

THIS CASE IS EQUALLY IMPORTANT BECAUSE OF THE FIRM

24

WAY YOUR HONOR HAS MANAGED IT. THE SUPREME COURT HAS

25

DESCRIBED THE SHERMAN ACT AS THE MAGNA CARTA OF THE FREE

12 1

ENTERPRISE SYSTEM. BUT THAT IS AN EMPTY PHRASE UNLESS THE

2

LAW CAN BE APPLIED IN A TIMELY MANNER. THE LENGTHY

3

PROCEEDINGS IN THE UNITED STATES' LAWSUIT IN THE 1970S

4

AGAINST IBM MADE IT APPEAR AS IF THE COURTS COULDN'T HANDLE

5

SECTION 2 CASES EFFICIENTLY OR IN A TIMEFRAME THAT MADE ANY

6

SENSE. THAT WON'T HAPPEN HERE.

7

SINCE THE FILING OF THE COMPLAINTS IN MAY,

8

COUNTLESS DOCUMENTS HAVE BEEN EXCHANGED AND NUMEROUS

9

DEPOSITIONS TAKEN. BOTH SIDES HAVE HAD A FULL, FAIR AND

10

EQUAL OPPORTUNITY TO DEVELOP EVIDENCE. IN ADDITION, YOUR

11

HONOR HAS CRAFTED INNOVATIVE PROCEDURES WHICH SHOULD MAKE

12

FOR A RELATIVELY EXPEDITIOUS TRIAL.

13

TO BE SURE, THE PACE HAS NOT BEEN EASY ON EITHER

14

SIDE. MICROSOFT HAS REPEATEDLY SOUGHT DELAYS, LONG DELAYS.

15

THE STATES HAVE NOT, EVEN THOUGH ADDITIONAL TIME WOULD HAVE

16

BENEFITED US MORE THAN MICROSOFT. WE NEEDED DISCOVERY TO

17

LEARN ABOUT MICROSOFT'S BUSINESS; MICROSOFT DID NOT. WE

18

HAVE THE BURDEN OF PROOF. MICROSOFT DOES NOT.

19

EVERY TIME WE TURNED OVER A NEW STONE IN

20

DISCOVERY, WE FOUND EVIDENCE THAT MICROSOFT HAD ABUSED ITS

21

MONOPOLY POWER. ADDITIONAL DISCOVERY UNDOUBTEDLY WOULD HAVE

22

YIELDED MORE PROBATIVE EVIDENCE. UNLIKE MICROSOFT, THE

23

STATES DID NOT SEEK TO PUT THIS TRIAL OFF FOR MONTHS OR EVEN

24

YEARS.

25

WE RECOGNIZE THAT, THOUGH EVERY PROCESS HAS ITS

13 1

LIMITATIONS, THE PROCEDURES IMPLEMENTED BY YOUR HONOR ARE

2

FAIR, APPLY EQUALLY TO BOTH SIDES, AND MOST IMPORTANTLY

3

PERMIT CLOSURE IN A MEANINGFUL TIMEFRAME. THE STATES'

4

ECONOMIC EXPERT, DR. WARREN-BOLTON, WILL TESTIFY THAT AS A

5

RESULT OF MICROSOFT'S CONTINUING ANTICOMPETITIVE PRACTICES,

6

ITS SALES OF INTERNET EXPLORER HAVE INCREASED SO RAPIDLY

7

THAT MICROSOFT NOW THREATENS TO EXTEND ITS OPERATING SYSTEM

8

MONOPOLY TO THE BROWSER MARKET.

9 10

THE NECESSITY FOR THE EQUITABLE RELIEF WE SEEK, IN OUR VIEW, IS URGENT AND COMPELLING. THE STATES ARE

11

APPRECIATIVE OF THE COURT'S WILLINGNESS TO CLEAR ITS BUSY

12

CALENDAR TO GIVE US THE OPPORTUNITY TO PRESENT OUR CASE

13

WHILE THE RELIEF WE SEEK STILL MIGHT MAKE A DIFFERENCE.

14

THERE IS ANOTHER SENSE IN WHICH THIS CASE HAS

15

ALREADY MADE HISTORY. AS BEST AS I CAN DETERMINE, THE

16

MICROSOFT CASE REPRESENTS THE LARGEST COALITION OF STATES

17

THAT HAVE EVER JOINED TOGETHER TO TRY A CASE IN ANY SUBJECT

18

MATTER AREA AND CERTAINLY IN THE ANTITRUST AREA. THE 20

19

STATES AND THE DISTRICT OF COLUMBIA REPRESENT MORE THAN HALF

20

THE CONSUMERS OF THE COUNTRY AND CONSTITUTE A VERY LARGE

21

PERCENTAGE OF THE ATTORNEY GENERAL OFFICES WITH ANY

22

SIGNIFICANT ANTITRUST ENFORCEMENT CAPABILITY AT ALL.

23

THEY REPRESENT A DIVERSE CROSS-SECTION OF STATES

24

IN TERMS OF SIZE, GEOGRAPHY, AND POLITICAL IDEOLOGY. WHAT

25

ACCOUNTS FOR THIS UNPRECEDENTED ALLIANCE OF ATTORNEYS

14 1

GENERAL? THEIR PRESENCE HERE TODAY, YOUR HONOR, STEMS FROM

2

THEIR ROLE AS CHIEF CONSUMER ADVOCATES IN THEIR STATES.

3

WHAT UNITES THEM IS A DEEP UNEASE, UNEASE THAT ONE COMPANY

4

ENJOYS ENORMOUS MONOPOLY POWER OVER WHAT HAS BECOME A VITAL,

5

VIRTUALLY UBIQUITOUS CONSUMER PRODUCT, THE PERSONAL COMPUTER

6

AND UNEASE THAT MICROSOFT IS NOW POISED TO EXTEND ITS

7

MONOPOLY TO THE INTERNET, THE GATEWAY TO THE INFORMATION

8

HIGHWAY.

9

WHAT IS PARTICULARLY DISTURBING IS HOW MICROSOFT

10

HAS WIELDED ITS ENORMOUS MARKET POWER, REFUSING TO COMPETE

11

ON THE MERITS, AND INSTEAD, USING ITS DOMINANCE TO CONSTRUCT

12

A WEB OF EXCLUSIONARY CONTRACTS WITH OEM'S, ISP'S AND OTHERS

13

TO DISADVANTAGE ITS RIVALS AND TO PROTECT ITS MONOPOLY.

14

YOUR HONOR, THE ATTORNEYS GENERAL ARE NOT

15

CONCERNED ABOUT MONOPOLY POWER IN THE ABSTRACT. THEY ARE

16

CONCERNED BECAUSE MICROSOFT HAS ABUSED ITS POWER TO DEPRIVE

17

CONSUMERS OF CHOICE. WITHOUT COMPETITION, CONSUMERS HAVE NO

18

ALTERNATIVE BUT TO TAKE WHAT MICROSOFT OFFERS THEM, OR MORE

19

ACCURATELY, WHAT MICROSOFT ALLOWS P.C. MAKERS TO OFFER THEM.

20

ABSENCE OF COMPETITION IN THE MARKET FOR OPERATING SYSTEM

21

AND RELATED SOFTWARE ALSO MEANS THAT CONSUMERS PAY MORE FOR

22

THEIR P.C. SYSTEMS THAN THEY SHOULD.

23

AS THE EVIDENCE WILL SHOW, WHILE P.C. HARDWARE HAS

24

IMPROVED SUBSTANTIALLY IN PERFORMANCE, IT HAS DECREASED

25

SUBSTANTIALLY IN PRICE. THE OPERATING SYSTEM, BY CONTRAST,

15 1 2

HAS ACTUALLY INCREASED IN PRICE. FOR EXAMPLE, A CHART CONTAINING GOVERNMENT EXHIBIT

3

439, WHICH IS PART OF A LENGTHY MICROSOFT STUDY PREPARED FOR

4

C.E.O. BILL GATES AND WHICH WILL BE OFFERED INTO EVIDENCE,

5

COMPARES THE COST OF P.C. HARDWARE TO THE SOFTWARE REVENUE

6

EARNED BY MICROSOFT FROM 1990 THROUGH 1996. IT SHOWS THAT

7

WHILE THE COST OF THE AVERAGE P.C. SYSTEM SOLD TO CONSUMERS

8

WAS SLASHED ALMOST IN HALF, MICROSOFT'S OPERATING SYSTEM

9

REVENUE FROM THOSE SALES MORE THAN DOUBLED IN THAT

10 11

TIMEFRAME. THE REASON, YOUR HONOR, FOR THIS STARTLING

12

DISPARITY IS APPARENT. THERE IS ROBUST COMPETITION IN THE

13

MARKET FOR P.C. HARDWARE AND NONE IN THE MARKET FOR

14

OPERATING SYSTEMS. AS OUR EXPERT, DR. WARREN-BOLTON, WILL

15

TESTIFY, MICROSOFT, WHICH RANKS NUMBER ONE AMONG FORTUNE 500

16

COMPANIES IN PROFITS AS A PERCENTAGE OF REVENUES, ENJOYS

17

ENORMOUS MONOPOLY RETURNS. EXCESS PROFITS IN A COMPETITIVE

18

MARKET SHOULD BE RETURNED TO CONSUMERS IN THE FORM OF LOWER

19

PRICES.

20

IN ADDITION TO THEIR CONCERN ABOUT CONSUMER CHOICE

21

AND CONSUMER PRICES, THE ATTORNEYS GENERAL ARE CONCERNED

22

THAT MICROSOFT'S EXERCISE OF ITS MONOPOLY POWER HAS DETERRED

23

INNOVATION, STIFLING THE ENTREPRENEUR INITIATIVE OF

24

SOFTWARE DEVELOPERS IN SILICON VALLEY IN CALIFORNIA, IN

25

SILICON ALLEY IN NEW YORK CITY, AND IN SIMILAR AREAS OF

16 1 2

ILLINOIS, MINNESOTA, UTAH AND THE OTHER PLAINTIFF STATES. TO BE SURE, AS MICROSOFT NO DOUBT WILL ARGUE,

3

THERE HAS BEEN INNOVATION IN THE SOFTWARE INDUSTRY. BUT TOO

4

OFTEN IT IS ON MICROSOFT'S TERMS AND AT MICROSOFT'S PACE.

5

JUDGES WYZANSKI'S ORDERS, WRITTEN 35 YEARS AGO IN HIS

6

LANDMARK UNITED SHOE DECISION, ARE NO LESS TRUE TODAY, AND I

7

QUOTE THEM:

8

"WHAT APPEARS TO THE OUTSIDER TO BE A SENSIBLE,

9

PRUDENT, NAY EVEN A PROGRESSIVE POLICY OF A MONOPOLIST, MAY

10

IN FACT REFLECT A LOWER SCALE OF ADVENTUROUSNESS AND LESS

11

INTELLIGENT RISK-TAKING THAN WOULD BE THE CASE IF THE

12

ENTERPRISE WERE FORCED TO RESPOND TO A STRONGER INDUSTRIAL

13

CHALLENGE.

14

"SOME TRUTH LURKS IN THE CYNICAL REMARK THAT NOT

15

HIGH PROFITS BUT A QUIET LIFE IS THE CHIEF REWARD OF

16

MONOPOLY POWER. AND EVEN IF A PARTICULAR ENTERPRISE SEEKS

17

GROWTH AND NOT REPOSE, AN INCREASED RATE IN THE GROWTH OF

18

IDEAS DOES NOT FOLLOW FROM AN INCREASED CONCENTRATION OF

19

POWER; FOR CREATIVITY IN BUSINESS, AS IN OTHER AREAS, IS

20

BEST NOURISHED BY MULTIPLE CENTERS OF ACTIVITY, EACH

21

FOLLOWING ITS UNIQUE PATTERN IN DEVELOPING ITS OWN ESPRIT DE

22 23

CORPS TO RESPOND TO THE CHALLENGE OF COMPETITION. "THE DOMINANCE OF ANY ONE ENTERPRISE INEVITABLY

24

UNDULY ACCENTUATES THAT ENTERPRISE'S EXPERIENCE AND VIEWS AS

25

TO WHAT IS POSSIBLE, PRACTICAL, AND DESIRABLE."

17 1

WHAT JUDGE WYZANSKI OBSERVED ABOUT SHOE MAKING

2

MACHINES, YOUR HONOR, HAS EVEN MORE BEARING IN THE SOFTWARE

3

INDUSTRY. MICROSOFT'S DOMINANCE OVER API'S AND STANDARDS

4

MEANS THAT OTHER SOFTWARE COMPANIES MUST COMPETE ON

5

MICROSOFT'S PLAYING FIELD AND BY MICROSOFT'S RULES.

6

ANOTHER IMPORTANT REASON THE ATTORNEYS GENERAL ARE

7

HERE TODAY, YOUR HONOR, IS TO SECURE EFFECTIVE RELIEF FOR

8

THE INJURY THEY BELIEVE MICROSOFT'S PREDATORY CONDUCT HAS

9

INFLICTED ON THE COMPETITIVE PROCESS IN THE MARKETPLACE. IT

10

IS NOT SUFFICIENT THAT MICROSOFT SIMPLY BE ENJOINED FROM

11

CONTINUING TO ENGAGE IN THE FUTURE IN CONDUCT THAT HAS BEEN

12

INJURIOUS IN THE PAST. THE ATTORNEYS GENERAL BELIEVE THAT

13

THE HARM DONE MUST BE REMEDIATED AND THE MONOPOLY POWER THAT

14

HAS BEEN ABUSED MUST BE DISSIPATED.

15

WHILE IT IS PREMATURE AT THIS STAGE TO TALK ABOUT

16

THE PRECISE FORM OF RELIEF, IF THE COURT FINDS THAT

17

MICROSOFT HAS UNLAWFULLY MAINTAINED OR ACQUIRED MONOPOLY

18

POWER, THE COURT'S DUTY UNDER THE CASE LAW AS ARTICULATED BY

19

AREEDA AND TURNER AT PARAGRAPH 653 OF THEIR TREATISE IS TO

20

ASSURE ITS "COMPLETE EXTIRPATION."

21

ALTHOUGH THE INDUSTRY HERE IS A HIGH-TECH ONE, THE

22

ISSUES ARE ONES THAT HAVE TRADITIONALLY CONCERNED ANTITRUST

23

COURTS. THE STATES HAVE ASSERTED A VARIETY OF SHERMAN ACT

24

AND PENDENT STATE LAW CLAIMS. THE PRINCIPAL CLAIMS,

25

HOWEVER, SOUND IN SECTION 2 OF THE SHERMAN ACT. FIRST, THAT

18 1

MICROSOFT WILLFULLY ABUSED ITS MONOPOLY POWER IN THE P.C.

2

OPERATING SYSTEM MARKET FOR THE PURPOSE OF MAINTAINING ITS

3

MONOPOLY THERE. AND SECOND, THAT MICROSOFT ATTEMPTED TO

4

MONOPOLIZE THE MARKET FOR INTERNET BROWSERS THROUGH A

5

VARIETY OF ANTICOMPETITIVE MEANS.

6

THESE TWO CLAIMS ARE RELATED BECAUSE, AS WE

7

BELIEVE THE EVIDENCE WILL SHOW, MICROSOFT'S ANTICOMPETITIVE

8

PRACTICES IN THE BROWSER MARKET WERE UNDERTAKEN TO DEFEND

9

ITS WINDOWS MONOPOLY FROM THE CROSS-PLATFORM THREAT POSED BY

10 11

NETSCAPE'S BROWSER AND THE JAVA TECHNOLOGY IT TRANSMITTED. LET ME JUST PAUSE HERE BRIEFLY TO RESPOND TO

12

MICROSOFT'S ASSERTION THAT JAVA IS AN ISSUE RECENTLY

13

INJECTED INTO THE CASE BY THE GOVERNMENT. IT IS NOT. AT

14

PARAGRAPHS 36 AND 37 OF THE STATES' FIRST AMENDED COMPLAINT,

15

WE ASSERT THAT JAVA THREATENED TO UNDERMINE THE VALUE OF

16

WINDOWS BECAUSE IT ALLOWED APPLICATIONS WRITTEN FOR WINDOWS

17

TO RUN ON OTHER PLATFORMS.

18

THE STATES ALSO SPECIFICALLY ALLEGED THERE THAT

19

JAVA NOT ONLY POSED A CHALLENGE TO MICROSOFT IN ITS OWN

20

RIGHT, BUT MAGNIFIED THE CHALLENGE TO MICROSOFT POSED BY THE

21

BROWSER. IN SHORT, WE HAVE ALLEGED AND BELIEVE THE EVIDENCE

22

WILL SHOW THAT MICROSOFT VIEWED JAVA AS A BACILLUS DIRECTED

23

AT THE HEART OF THE WINDOWS MONOPOLY AND NETSCAPE'S

24

NAVIGATOR WAS VIEWED AS ITS PRINCIPAL DELIVERY MECHANISM.

25

IN A SECTION 2 CASE, AS YOUR HONOR KNOWS, A

19

1

PLAINTIFF MUST ESTABLISH TWO THINGS: ONE, DEFENDANT'S

2

MONOPOLY POWER IN A RELEVANT MARKET; AND TWO, DEFENDANT'S

3

WILLFUL ACQUISITION OR MAINTENANCE OF THAT POWER BY MEANS

4

OTHER THAN SKILL, FORESIGHT AND INDUSTRY. I WILL ADDRESS

5

THE MONOPOLY POWER ELEMENT AND MR. BOIES WILL PREVIEW SOME

6

OF THE CONSIDERABLE EVIDENCE WE EXPECT TO ADDUCE AS TO

7

MICROSOFT'S PREDATORY CONDUCT.

8 9

BEFORE DISCUSSING MONOPOLY POWER, I WANT TO STRESS THE CRITICAL IMPORTANCE HERE OF A PARTICULAR TYPE OF

10

EVIDENCE, DOCUMENTS; THAT IS, CONTEMPORANEOUS MICROSOFT

11

E-MAIL AND MEMORANDA. THE GOVERNMENT'S CASE IS BUILT, IN

12

LARGE PART, ON CANDID STATEMENTS FOUND IN BUSINESS DOCUMENTS

13

IN MICROSOFT'S FILES. AT HIS DEPOSITION, MR. GATES WAS VERY

14

CAREFUL TO DISTINGUISH BETWEEN E-MAIL AND MEMORANDA,

15

APPARENTLY, IN THE BELIEF THAT E-MAIL DOESN'T COUNT BECAUSE

16

IT'S INFORMAL. HE IS WRONG. E-MAIL IS A WINDOW INTO THE

17

ESSENCE OF AN INDIVIDUAL'S THINKING. AND THE E-MAIL EXISTS,

18

YOUR HONOR, HERE IN DAMNING ABUNDANCE.

19

MICROSOFT'S GENERAL COUNSEL WAS QUOTED IN THE

20

PRESS THE OTHER DAY AS SAYING THAT THE GOVERNMENT'S CASE IS

21

BUILT ON SNIPPETS FROM DOCUMENTS TAKEN OUT OF CONTEXT. THAT

22

IS MANIFESTLY NOT SO. INDEED, THE GOVERNMENT'S PRINCIPAL

23

DIFFICULTY IN GETTING READY FOR TRIAL HAS BEEN THE VOLUME OF

24

EVIDENCE, NOT ITS DEARTH, AND HOW TO MANAGE IT TO MAKE IT

25

PRESENTABLE TO THE COURT. WE WELCOME THE OPPORTUNITY TO

20 1

PRESENT OUR EVIDENCE IN TOTO IN OPEN COURT UNENCUMBERED BY

2

MICROSOFT'S BLANKET CONFIDENTIALITY DESIGNATIONS.

3

ONE IMPORTANT ELEMENT OF A MONOPOLIZATION CASE, AS

4

TO WHICH DOCUMENTS ARE PARTICULARLY CRITICAL, IS THE

5

DEFENDANT'S INTENT. AS THE SUPREME COURT CONFIRMED RECENTLY

6

IN THE KODAK CASE, DEFENDANT'S ACQUISITION OR MAINTENANCE OF

7

MONOPOLY POWER MUST BE WILLFUL. WHY IS EVIDENCE OF INTENT

8

IMPORTANT? BECAUSE IT ENABLES THE COURT TO UNDERSTAND WHAT

9

THE DEFENDANT WAS TRYING TO ACCOMPLISH AND WHETHER IT

10

SUCCEEDED.

11

AS JUSTICE BRANDEIS SAID MANY YEARS AGO IN BOARD

12

OF TRADE OF CITY OF CHICAGO VERSUS UNITED STATES, "KNOWLEDGE

13

OF INTENT MAY HELP THE COURT TO INTERPRET FACTS AND PREDICT

14

CONSEQUENCES."

15

IN ANALYZING THE EVIDENCE TO DETERMINE WHY IT WAS

16

THAT MICROSOFT ENGAGED IN CERTAIN CONDUCT AND WHAT ITS

17

INTENDED IMPACT WAS, I URGE YOUR HONOR TO TEST WHAT

18

MICROSOFT SAYS NOW AGAINST WHAT ITS EXECUTIVES WROTE WHEN

19

THE DECISIONS WERE ACTUALLY MADE. I THINK YOUR HONOR WILL

20

FIND THAT THE CONTEMPORANEOUS E-MAIL AND MEMORANDA PROVIDE

21

AN UNERRING ROAD MAP TO A PROPER UNDERSTANDING OF

22

MICROSOFT'S MOTIVES AND THE INTENDED AND ACTUAL CONSEQUENCES

23

OF ITS CONDUCT.

24

TO CITE ONE EXAMPLE, I THINK YOUR HONOR WILL FIND

25

THAT MICROSOFT'S OWN CONTEMPORANEOUS ACCOUNTS OF THE JUNE

21 1

1995 MEETING WITH NETSCAPE, THAT MR. BOIES WILL TELL YOU

2

MORE ABOUT, ARE CONSISTENT BOTH WITH NETSCAPE'S OWN

3

DOCUMENTS, AND WITH THE TESTIMONY OF NETSCAPE'S EXECUTIVES,

4

AND INDEED WITH THE TESTIMONY OF CHRIS JONES OF MICROSOFT,

5

WHO WAS DEPOSED BEFORE THE COMPLAINT WAS ACTUALLY FILED.

6

AND I URGE YOUR HONOR TO TEST THOSE DOCUMENTS AND THAT

7

TESTIMONY AGAINST WHAT YOUR HONOR HEARS FROM THE WITNESS

8

STAND FROM THE MICROSOFT WITNESSES DURING THE COURSE OF THIS

9

TRIAL.

10

THE GOVERNMENT'S INITIAL BURDEN IS TO ESTABLISH

11

THAT MICROSOFT HAS MONOPOLY POWER IN A RELEVANT MARKET.

12

THERE CAN BE NO DOUBT, YOUR HONOR, THAT MICROSOFT POSSESSES

13

A PERVASIVE AND PERSISTENT MONOPOLY IN THE MARKET FOR P.C.

14

OPERATING SYSTEMS.

15

INDEED, THE EVIDENCE WILL SHOW THAT MICROSOFT'S

16

MARKET SHARE IN THE OPERATING SYSTEM MARKET HAS BEEN

17

EXTRAORDINARILY HIGH FOR AN EXTENDED PERIOD OF TIME. A

18

CHART WE HAVE PREPARED THAT WILL BE OFFERED INTO EVIDENCE AS

19

GOVERNMENT EXHIBIT 1, AND WHICH I HOPE WILL APPEAR UP ON THE

20

SCREEN MOMENTARILY -- IT HAS -- SHOWS WHAT I AM TALKING

21

ABOUT. IT SHOWS THAT MICROSOFT'S SHARE OF THE P.C.

22

OPERATING SYSTEM MARKET HAS BEEN OVER 90 PERCENT FOR AT

23

LEAST SIX YEARS AND IS PREDICTED TO GO EVEN HIGHER.

24 25

WHY HAS MICROSOFT'S MARKET POWER AND MARKET SHARE BEEN SO PERSISTENT? AS DR. WARREN-BOLTON WILL EXPLAIN,

22 1

MICROSOFT'S MONOPOLY IS PROTECTED BY SIGNIFICANT BARRIERS TO

2

ENTRY, LIKE ECONOMIES OF SCALE AND NETWORK EFFECTS. WHAT

3

MR. GATES HIMSELF DESCRIBES IS THE POSITIVE FEEDBACK LOOP.

4

BECAUSE WINDOWS IS THE DOMINANT OPERATING SYSTEM, A VAST

5

STOCK OF APPLICATIONS HAVE BEEN WRITTEN FOR IT. AND THE

6

MORE APPLICATIONS THERE ARE, THE MORE POPULAR WINDOWS

7

BECOMES.

8

NOT ONLY DOES THIS POSITIVE FEEDBACK LOOP ATTRACT

9

NEW USERS, BUT WHAT ECONOMISTS CALL THE LOCK-IN EFFECT KEEPS

10

OLD USERS. IN OTHER WORDS, PEOPLE ARE RELUCTANT TO SWITCH

11

AWAY FROM AN OPERATING SYSTEM THAT SUPPORTS APPLICATIONS ON

12

WHICH THEY WERE TRAINED AND WITH WHICH THEY HAVE BECOME

13

FAMILIAR.

14

OUR EVIDENCE WILL SHOW THAT THE LAST DIRECT THREAT

15

TO WINDOWS DISSIPATED WITH THE FAILURE OF IBM'S OS/2

16

OPERATING SYSTEM SOFTWARE TO OBTAIN MORE THAN A FOOTHOLD IN

17

THE MARKET, DESPITE THE EXPENDITURE OF HUNDREDS OF MILLIONS

18

OF DOLLARS BY ONE OF THE WORLD'S LARGEST, MOST SOPHISTICATED

19

COMPUTER COMPANIES. NO OTHER OPERATING SYSTEM COMPANY IS

20

LIKELY TO ATTEMPT TO REPLICATE WHAT IBM TRIED TO DO AND

21

FAILED, YOUR HONOR.

22

BUT PERHAPS THE BEST EVIDENCE OF MICROSOFT'S

23

MONOPOLY POWER IS HOW MICROSOFT'S EXECUTIVES VIEWED THE

24

MARKET THEMSELVES. AS JUDGE GESELL WROTE IN FTC VERSUS

25

COCA-COLA (641 F.SUPP. 1132), "ANALYSIS OF THE MARKET IS A

23 1

MATTER OF BUSINESS REALITY -- A MATTER OF HOW THE MARKET IS

2

PERCEIVED BY THOSE WHO STRIVE FOR PROFIT IN IT."

3

LET'S LOOK, FOR EXAMPLE, AT WHAT WILL BE OFFERED

4

INTO EVIDENCE AS GOVERNMENT EXHIBIT 365. THIS IS A DECEMBER

5

1997 MEMORANDUM WRITTEN FOR BILL GATES WHICH DESCRIBES THE

6

STATE OF OPERATING SYSTEM COMPETITION FROM THE PERSPECTIVE

7

OF JOACHIM KEMPIN, THE HEAD OF MICROSOFT'S OEM SALES GROUP.

8

ON THE FIRST PAGE, HE CONFIRMS, AS I HAVE JUST SAID, THAT

9

MICROSOFT'S PRICES HAVE INCREASED OVER THE LAST TEN YEARS,

10

WHILE PRICES OF OTHER COMPONENTS OF THE OPERATING SYSTEM

11

HAVE COME DOWN.

12

MR. KEMPIN DISCUSSES PROPOSED PRICING STRATEGY AND

13

THEN, ON THE LAST PAGE, ASKS WHO CAN DERAIL MICROSOFT'S

14

PLANS? LET'S SEE WHAT HE ANSWERS. WHAT DOES HE ANSWER? I

15

WILL TELL YOU WHAT HE ANSWERS. WHAT HE DOES THERE, YOUR

16

HONOR, IS HE GOES THROUGH A VARIETY OF POTENTIAL CHALLENGES

17

TO MICROSOFT'S OPERATING SYSTEM MARKET SHARE -- OR MARKET

18

POSITION. AND YOUR HONOR WILL SEE WHEN YOU ACTUALLY TAKE A

19

LOOK AT THE EXHIBIT THAT PERHAPS THE MOST STRIKING THING

20

ABOUT IT IS THAT HE DOESN'T ALLUDE THERE TO ANY ACTUAL

21

DIRECT COMPETITION FROM ANY OPERATING SYSTEM VENDORS. HE

22

DOESN'T TALK ABOUT OS/2. HE DOESN'T TALK ABOUT UNIX. HE

23

DOESN'T TALK ABOUT LINUX. WHAT HE TALKS ABOUT REALLY IS

24

POTENTIAL COMPETITION, AND HE DISMISSES THAT.

25

AND HE MAKES HIMSELF A NUMBER OF POINTS THAT I

24 1

HAVE JUST MADE HERE. FOR EXAMPLE, HE TALKS ABOUT SUN AND

2

ONE OF THE REASONS HE BELIEVES THAT SUN IS NOT LIKELY TO BE

3

AN EFFECTIVE THREAT TO MICROSOFT IS BECAUSE OF WHAT HE

4

DESCRIBES AS A COMPATIBILITY BARRIER. AND BY THAT, HE MEANS

5

THE LARGE NUMBER OF APPLICATIONS THAT HAVE BEEN WRITTEN FOR

6

MICROSOFT'S WINDOWS SYSTEM AND DON'T EXIST FOR OTHER

7

SYSTEMS.

8

HE ALSO SPECULATES THERE ABOUT SOME POTENTIAL

9

COMPETITION FROM A COALITION OF OEM VENDORS. AND AGAIN, HE

10

DISMISSES THAT. HE HIMSELF IN HIS OWN WORDS DESCRIBES WHY

11

THAT IS NOT LIKELY TO EVENTUATE AND TALKS ABOUT WHAT I HAVE

12

TOLD YOU IS A LOCK-IN EFFECT. HE SAYS IT'S UNLIKELY THERE

13

THAT WE COULD CONVINCE CUSTOMERS TO -- HE SAYS, COULD THEY

14

CONVINCE CUSTOMERS TO CHANGE THEIR COMPUTING PLATFORM IS THE

15

REAL QUESTION. THE EXISTING INVESTMENTS IN TRAINING,

16

INFRASTRUCTURE AND APPLICATIONS IN WINDOWS COMPUTING ARE

17

LARGE AND WILL CREATE A LOT OF INERTIA. NO BUNDLING OF OS

18

IN THE LOW-END SYSTEMS WILL BE THE EASIEST WAY TO HURT US,

19

BUT WHO WOULD WANT TO START WITH THIS AND LOSE BUSINESS.

20

WHAT HE IS TALKING ABOUT THERE, JUDGE, IS THE

21

LOCK-IN EFFECT AND THE REAL POWER OF THE WINDOWS OPERATING

22

SYSTEM IS SOMETHING THAT OEM'S NEED. IF THEY DIDN'T HAVE

23

THEM ON THEIR COMPUTERS, THEY COULDN'T SELL THEM.

24

HE ALSO TALKS IN THE NEXT PARAGRAPH ABOUT A

25

POTENTIAL THREAT FROM NETSCAPE, FROM THE BROWSER SIDE, AND

25 1

AGAIN DISMISSES THAT. HE SAYS HE CONSIDERS THEM TOO WEAK TO

2

SUCCEED ALONE. AND BY THAT, HE MEANS TOO FINANCIALLY WEAK.

3

AS YOUR HONOR KNOWS, NETSCAPE IS A SMALL START-UP COMPANY,

4

ESPECIALLY COMPARED TO MICROSOFT. AND HE SAYS THEY ARE

5

DANGEROUS ONLY IF THEY TEAM UP WITH SUN. AND AGAIN, THAT IS

6

A POINT I MADE. YOUR HONOR WILL SEE OFTEN IN THE DOCUMENTS,

7

NETSCAPE AND SUN TWINNED TOGETHER. THEY WERE VIEWED THAT

8

WAY BY MICROSOFT AS A THREAT. AND THEN FINALLY, HE SAYS

9

THAT COMPATIBILITY AGAIN IS ANOTHER BIG INHIBITOR. AND BY

10 11

THAT HE MEANS THE APPLICATION BARRIER. I AM NOT GOING TO TALK ABOUT INTEL. HE RAISES A

12

POSSIBILITY THAT INTEL MIGHT AT SOME POINT GET INTO THE

13

OPERATING SYSTEM SOFTWARE. AND I THINK YOUR HONOR WILL HEAR

14

FROM MR. BOIES MORE ON THAT SUBJECT.

15

YOUR HONOR, IF MICROSOFT'S ECONOMIST, DR. RICHARD

16

SCHMALENSEE, TAKES THE STAND AND TESTIFIES AS HE DID AT HIS

17

DEPOSITION THAT THERE IS NO SUCH THING IS AS AN OPERATING

18

SYSTEM MARKET AND MICROSOFT LACKS MONOPOLY POWER, I URGE

19

YOUR HONOR TO TEST HIS WORDS AGAINST WHAT EXECUTIVES LIKE

20

MR. KEMPIN, EMPLOYED BY HIS OWN CLIENT, HAVE SAID IN THEIR

21

CONTEMPORANEOUS DOCUMENTS. IF YOUR HONOR CONCLUDES

22

PROFESSOR SCHMALENSEE LACKS CREDIBILITY ON THIS FUNDAMENTAL

23

ISSUE, I ENCOURAGE YOUR HONOR TO LISTEN TO WHAT ELSE HE SAYS

24

WITH A VERY SKEPTICAL AND CRITICAL EAR.

25

BEFORE TURNING THE PODIUM OVER TO MR. BOIES, I

26 1

WANT TO MAKE A COUPLE ADDITIONAL POINTS. THROUGHOUT THE

2

COURSE OF THIS TRIAL, YOUR HONOR WILL HEAR REPEATED

3

REFERENCES TO MR. GATES, "BILLG" AS HE IS REFERRED TO IN THE

4

E-MAIL. MR. GATES IS LEGENDARY FOR HIS HANDS-ON MANAGEMENT

5

STYLE, AND MUCH OF MICROSOFT'S CONSIDERABLE SUCCESS IS

6

ATTRIBUTABLE TO HIM.

7

BY THE SAME TOKEN, AS THE RECORD OF THIS CASE WILL

8

REVEAL, MR. GATES HAS PERSONALLY FORMULATED AND DIRECTED KEY

9

ELEMENTS OF MICROSOFT'S STRATEGY AT ISSUE HERE. THE

10

GOVERNMENT DOES NOT NEED TO PUT MR. GATES ON THE STAND

11

BECAUSE WE HAVE HIS E-MAIL AND MEMORANDA.

12

AMONG OTHER THINGS, THE DOCUMENTS WILL REVEAL

13

MR. GATES IDENTIFYING NETSCAPE'S BROWSER AS A THREAT TO

14

WINDOWS AND EXPLAINING WHY; IMPLORING HIS SUBORDINATES TO

15

BUILD BROWSER SHARE; PLANNING FOR THE MEETINGS WITH NETSCAPE

16

AND OTHERS THAT MR. BOIES WILL TELL YOUR HONOR MORE ABOUT;

17

TRYING TO DETERMINE NETSCAPE'S SOURCES OF REVENUE SO

18

MICROSOFT COULD CUT THEM OFF; AND PUBLICLY CALLING INTO

19

QUESTION NETSCAPE'S FINANCIAL VIABILITY AFTER HE HAD DECREED

20

THAT INTERNET EXPLORER WOULD BE FOREVER FREE. AND THE LIST

21

GOES ON.

22

WHEN THE GOVERNMENT'S CASE IS CONCLUDED, YOUR

23

HONOR SHOULD FEEL ENTITLED, I BELIEVE, TO HEAR MR. GATES'

24

EXPLANATIONS FOR HIS ACTIONS DIRECTLY FROM HIM IN THIS

25

COURTROOM IN THAT WITNESS STAND. YOUR HONOR SHOULD HAVE THE

27 1

OPPORTUNITY TO ASSESS FOR YOURSELF THE CREDIBILITY OF THE

2

SINGLE MOST IMPORTANT ACTOR IN THIS CASE.

3

TO BE SURE, YOUR HONOR WILL BE ABLE TO VIEW

4

VIDEOTAPES OF MR. GATES' DEPOSITION TESTIMONY, BUT THAT IS

5

NO SUBSTITUTE FOR LIVE TESTIMONY IN THE COURTROOM BEFORE

6

YOUR HONOR. AS YOUR HONOR WILL OBSERVE, WITHOUT A JUDGE

7

PRESENT, MR. GATES REPEATEDLY REFUSED TO RESPOND TO

8

QUESTIONS, IN ANY KIND OF RESPONSIVE WAY AT ALL PUT TO HIM

9

BY COUNSEL FOR THE GOVERNMENT, INSTEAD CHOOSING TO ANSWER

10 11

QUESTIONS OF HIS OWN DEVISING. WE SUBMIT THAT YOUR HONOR SHOULD NOT HESITATE TO

12

DRAW THE APPROPRIATE INFERENCES IF MR. GATES PERSISTS IN HIS

13

REFUSAL TO TAKE THE STAND. GIVEN MR. GATES' KEY ROLE IN

14

THESE EVENTS, HIS FAILURE TO APPEAR HERE CAN ONLY BE

15

EXPLAINED, WE BELIEVE, BY A LACK OF INTESTINAL FORTITUDE AND

16

A FEAR OF SUBJECTING HIS STORY TO THE CRUCIBLE OF

17

CROSS-EXAMINATION.

18

MR. GATES' RELUCTANCE TO COME FORWARD STANDS IN

19

MARKED CONTRAST TO THE WILLINGNESS OF NETSCAPE'S CEO, JAMES

20

BARKSDALE, TO APPEAR IN YOUR HONOR'S COURTROOM.

21

MR. BARKSDALE WILL TAKE THE STAND KNOWING FULL WELL THAT

22

MICROSOFT'S ATTORNEYS HAVE BEEN SCOURING THE LANDSCAPE FOR

23

MATERIALS TO ATTACK NETSCAPE, FROM PROFESSORS' NOTES IN

24

CAMBRIDGE, MASSACHUSETTS, TO NETSCAPE'S OWN INTERNAL

25

COMPLAINT BOX IN MOUNTAIN VIEW, CALIFORNIA.

28

1

MICROSOFT'S TACTICS SMACK OF THOSE SOMETIMES USED

2

BY DEFENDANTS IN CRIMINAL TRIALS, DIVERT THE TRIER OF FACT'S

3

ATTENTION FROM ONE'S OWN CONDUCT BY ATTACKING THE VICTIM.

4

MICROSOFT'S APPROACH MIGHT CONCEIVABLY HAVE SOME PLACE HERE

5

IF THIS WERE A LAWSUIT FOR MONETARY DAMAGES BY NETSCAPE. IT

6

IS NOT. THIS IS AN ACTION TO ENFORCE THE LAW BY 22

7

GOVERNMENT LAW ENFORCEMENT OFFICERS.

8

AT ISSUE IS THE PROPRIETY OF MICROSOFT'S CONDUCT,

9

ONE OF THE WEALTHIEST, MOST POWERFUL COMPANIES IN THE WORLD,

10

NOT WHETHER A SMALL START-UP COMPANY LIKE NETSCAPE MADE ALL

11

THE RIGHT RESPONSES TO THE LITANY OF PREDATORY ACTIONS

12

DIRECTED AGAINST THEM. THE STATES URGE YOUR HONOR NOT TO BE

13

DIVERTED BY THESE TACTICS FROM A CLOSE SCRUTINY OF

14

MICROSOFT'S OWN CONDUCT.

15

IN THE SAME VEIN, MICROSOFT WILL APPARENTLY TRY TO

16

DIVERT ATTENTION FROM ITS OWN WRONGDOING BY ARGUING THAT

17

OTHER SOFTWARE COMPANIES, COMPANIES THAT DON'T HAVE ITS

18

MARKET POWER, HAVE ENGAGED IN SIMILAR CONDUCT. YOUR HONOR,

19

EVEN MY 12-YEAR-OLD DAUGHTER KNOWS BETTER THAN TO ARGUE SHE

20

SHOULDN'T BE PUNISHED BECAUSE HER SISTER BROKE THE RULES

21

TOO.

22

AS I SAID AT THE OUTSET OF MY REMARKS, YOUR HONOR,

23

THE STATES' CASE RESTS LARGELY ON STATEMENTS MADE IN THE

24

REGULAR COURSE OF BUSINESS BY MICROSOFT'S OWN EXECUTIVES.

25

ONE OF THE MOST STRIKING STATEMENTS YOUR HONOR WILL HEAR

29 1

TESTIMONY ABOUT WAS A THREAT MADE BY ONE OF MR. GATES' TOP

2

LIEUTENANTS, THAT MICROSOFT WOULD, QUOTE UNQUOTE, CHOKE OFF

3

NETSCAPE'S AIR SUPPLY. THAT STATEMENT, OF COURSE, IS

4

EVIDENCE OF PREDATORY INTENT. BUT IT IS MORE THAN THAT. IT

5

IS EVIDENCE OF INTENT FOLLOWED BY ACTION.

6

MICROSOFT'S COUNSEL HAS DISMISSED THESE WORDS AS

7

MERE LOCKER ROOM TALK. HE IS WRONG ABOUT THAT. THIS WAS

8

NOT A BOASTFUL STATEMENT MADE BY ONE TEAM MEMBER TO ANOTHER

9

BEHIND CLOSED DOORS. IT WAS A PURPOSEFUL THREAT MADE BY A

10

SENIOR MICROSOFT EXECUTIVE TO SENIOR EXECUTIVES AT ANOTHER

11

COMPANY IN THE COMPUTER INDUSTRY DEPENDENT ON MICROSOFT'S

12

GOODWILL AND WITH WHOM NETSCAPE WAS TRYING TO DO BUSINESS.

13

BUT IN A LARGER SENSE, MICROSOFT'S COUNSEL WAS

14

RIGHT. I BELIEVE YOUR HONOR WILL FIND THAT MICROSOFT'S

15

SENIOR EXECUTIVES OFTEN ACTED LIKE TOO MANY OF OUR STAR

16

ATHLETES DO TODAY, AND THAT THEIR ATTITUDE PERMEATED

17

MICROSOFT'S CORPORATE CULTURE. THE RECORD OF THIS CASE WILL

18

SHOW, I SUBMIT, THAT EMBOLDENED BY THEIR SUCCESS AND WEALTH,

19

MICROSOFT'S EXECUTIVES FELT THAT THEY COULD BREAK RULES WITH

20

IMPUNITY. IT WILL SHOW ALSO THAT MICROSOFT'S EXECUTIVES HAD

21

NO COMPUNCTION ABOUT THROWING THEIR WEIGHT AROUND, BLUNTLY

22

USING THE POWER OF THE WINDOWS MONOPOLY TO INTIMIDATE RIVALS

23

AND STIFLE COMPETITION. INDEED, IT WILL SHOW THAT THEY

24

LACKED THE SAME RESPECT FOR BUSINESS NORMS AND LAWS BY WHICH

25

MOST COMPANIES OPERATE.

30 1

YOUR HONOR HAD SOME TASTE OF WHAT I WAS TALKING

2

ABOUT IN THE EARLIER CONSENT DECREE CASE AND MICROSOFT'S

3

REACTION TO THE ORDER ENTERED BY YOUR HONOR. THE SAME

4

ATTITUDE WAS MANIFEST IN THE WIDELY QUOTED STATEMENT OF

5

MICROSOFT'S PRESIDENT UPON THE FILING OF THAT CASE, "TO HECK

6

WITH JANET RENO."

7

I BELIEVE YOUR HONOR WILL FIND THE RECORD OF THIS

8

CASE REPLETE WITH SIMILAR EXAMPLES AND MICROSOFT'S RESPONSE

9

TO THE THREAT POSED BY THE NETSCAPE BROWSER AND JAVA, AND IN

10

ITS DEALINGS WITH OEM'S, ISP'S, INTEL, APPLE AND OTHERS IN

11

THE INDUSTRY.

12

YOUR HONOR, THE STATES RESPECTFULLY SUBMIT THAT ON

13

THE RECORD OF THIS CASE, IT WILL BE APPROPRIATE TO FASHION

14

RELIEF THAT WILL SUBJECT MICROSOFT AT LONG LAST TO THE SAME

15

RULE OF LAW THAT GOVERNS OTHER FIRMS, TO REPAIR THE DAMAGE

16

THAT MICROSOFT HAS DONE TO THE COMPETITIVE PROCESS, AND TO

17

RESTRAIN MICROSOFT FROM FUTURE VIOLATIONS OF STATE AND

18

FEDERAL ANTITRUST STATUTES. THE BENEFICIARIES WILL BE THE

19

CONSUMERS OF OUR STATES WHO CAN EXPECT TO SEE WIDER CHOICE,

20

LOWER PRICES AND INCREASED INNOVATION.

21

THANK YOU, YOUR HONOR.

22

THE COURT: THANK YOU, MR. HOUCK.

23

MR. BOIES?

24

MR. WARDEN: YOUR HONOR, BEFORE MR. BOIES BEGINS,

25

MAY I JUST SAY THAT WE RECEIVED THIS MORNING A HUGE BINDER

31 1

OF EXHIBITS APPARENTLY INTENDED TO BE USED IN THE OPENING,

2

MANY OF WHICH WE HAVE HAD IN OTHER FORMS FOR A LONG TIME,

3

BUT SOME OF WHICH WERE GRAPHICS AND SUMMARY CHARTS AND SO

4

FORTH THAT WE HAVE HAD NO ATTEMPT TO EXAMINE AT ALL. NOW,

5

OBVIOUSLY, SITTING THROUGH AN OPENING IS NOT ADMITTING THAT

6

SOMETHING IS ADMISSIBLE, BUT IF SOMETHING WERE REALLY OUT OF

7

ORDER, NORMALLY, I WOULD RAISE IT. ON THIS OCCASION, AS TO

8

SOME DOCUMENTS, WE HAVEN'T HAD THAT CHANCE.

9

THE COURT: I UNDERSTAND.

10

MR. WARDEN: THANK YOU.

11

OPENING STATEMENT ON BEHALF OF THE UNITED STATES

12

MR. BOIES: YOUR HONOR, JUST SO THE RECORD IS

13

CLEAR, ALL OF THE DOCUMENTS THAT I AM USING IN THE OPENING

14

WERE ON THE EXHIBIT LIST THAT WAS EXCHANGED WITH COUNSEL FOR

15

MICROSOFT. MR. MALONE HAS BEEN ATTEMPTING TO GET MICROSOFT

16

TO EXCHANGE COPIES OF THE EXHIBITS SINCE THAT DATE,

17

INCLUDING LEAVING VOICE MAIL MESSAGES AND I WAS PRESENT WHEN

18

HE DID IT. SO WE'RE HAPPY TO EXCHANGE EXHIBITS, ALL OF

19

THEM. WE GAVE THEM A COPY OF THIS EVEN THOUGH THEY HAVE NOT

20

GIVEN US A COPY OF ANY OF THEIRS. MAYBE THEY DON'T PLAN TO

21

USE ANY EXHIBITS IN THEIR OPENING STATEMENT.

22 23 24 25

BUT I DON'T THINK THERE IS ANY DOUBT ABOUT WHERE THESE DOCUMENTS HAVE COME FROM LARGELY. AS MR. HOUCK SAYS, I AM GOING TO ADDRESS THE MARKET PRACTICES SIDE OF OUR MONOPOLY CLAIM. BUT I WANT TO

32 1

BEGIN BY REMINDING THE COURT THAT, AS THE COURT KNOWS, WE

2

HAVE THREE CLAIMS TODAY. THE FIRST IS THE MONOPOLY CLAIM,

3

AND THE MONOPOLY CLAIM HAS TWO ELEMENTS TO IT. IT HAS THE

4

MONOPOLY POWER AND IT HAS MONOPOLY PRACTICES.

5

IN ADDITION, WE HAVE CLAIMS FOR ATTEMPTED

6

MONOPOLIZATION AND FOR VIOLATIONS OF SECTION 1. AND IF I

7

COULD GET UP ON THE SCREEN THE VIOLATIONS OF SECTION 1,

8

WHICH IS THE THIRD CLAIM, THE COURT WILL SEE THAT THERE ARE

9

FOUR BASIC CLAIMS THAT WE'RE MAKING HERE. ONE IS THE TYING

10

CLAIM. THAT HAS TWO PARTS, THE TYING OF THE BROWSER TO

11

WINDOWS 95 AND THE TYING OF THE BROWSER TO WINDOWS 98. BOTH

12

OF THESE, OF COURSE, PLAY IMPORTANT ROLES IN THE SECTION 2

13

CLAIMS, THE MONOPOLIZATION AND THE ATTEMPTED MONOPOLIZATION

14

CLAIMS. BUT IN ADDITION TO THAT ROLE, WE'RE ALLEGING THAT

15

THOSE ARE, IN AND OF THEMSELVES, SUCH UNREASONABLE

16

RESTRAINTS OF TRADE, THAT THEY VIOLATE SECTION 1 AS WELL.

17

WHAT I NEED TO DO IS I NEED TO GO TO THE NEXT PAGE

18

THAT HAS THE CLAIMS ON IT. AND IN ADDITION, THE THREE OTHER

19

CLAIMS ARE MICROSOFT'S SCREEN RESTRICTIONS, THE AGREEMENT

20

RESTRICTING OEMS' RIGHT TO REMOVE INTERNET EXPLORER, AND

21

MICROSOFT'S AGREEMENTS WITH THE INTERNET SERVICE PROVIDERS

22

AND INTERNET CONTENT PROVIDERS.

23

NOW, WITH RESPECT TO ALL OF THESE CLAIMS, THESE

24

ARE PART OF -- NOT ENTIRELY ALL OF -- BUT THEY ARE PART OF

25

THE SECTION 2 CLAIMS. BUT IN ADDITION, WE BELIEVE THAT

33 1

THESE ARE SUCH UNREASONABLE RESTRAINTS OF TRADE THAT THEY

2

ARE ILLEGAL UNDER SECTION 1 IN AND OF THEMSELVES.

3

NOW, MOST OF WHAT I AM GOING TO BE TALKING ABOUT

4

TODAY IS GOING TO RELATE TO THE SECTION 2 CLAIMS. AND I

5

MENTION THIS BECAUSE I JUST SIMPLY WANT THE COURT TO KEEP IN

6

MIND THAT SOME OF THE PRACTICES THAT I AM GOING TO BE

7

ADDRESSING ARE ALLEGED TO BE VIOLATIONS OF SECTION 1 AS

8

WELL.

9

LET ME GO BACK, IF I CAN, TO THE SECTION 2 CLAIMS,

10

AND IN PARTICULAR, TO THE THREAT. ONE OF THE THINGS THAT

11

HAPPENED IN 1994 -- AT THE END OF 1994 AND EARLY 1995 -- IS

12

THAT MICROSOFT RECOGNIZED THE WIDESPREAD USE OF NETSCAPE'S

13

INTERNET BROWSER AND JAVA THREATENED, OVER TIME, TO ERODE

14

THE APPLICATION'S PROGRAMMING BARRIER TO ENTRY. NOW, IT WAS

15

THAT APPLICATION'S PROGRAMMING BARRIER TO ENTRY THAT WAS AN

16

ESSENTIAL ELEMENT OF PROTECTING ITS MONOPOLY POWER.

17

YOU WILL FIND THAT IS SOMETHING THAT MICROSOFT

18

DOCUMENTS AGREE TO AND DOCUMENTS FROM OTHER COMPANIES AGREE

19

TO. THE WITNESSES WILL BE, I BELIEVE, IN COMMON AGREEMENT

20

THAT BECAUSE OF THE ENORMOUS APPLICATION'S BARRIER

21

PROGRAMMING ENTRY, IT IS VIRTUALLY IMPOSSIBLE FOR THERE TO

22

BE A SUCCESSFUL CHALLENGE TO THE MICROSOFT OPERATING SYSTEM.

23

BUT WHAT JAVA AND INTERNET EXPLORER, IN THE FIGHT BETWEEN

24

INTERNET EXPLORER AND NETSCAPE NAVIGATOR, DEMONSTRATED WAS

25

THAT MICROSOFT RECOGNIZED THAT THE BROWSER, IF IT CAME FROM

34 1

A COMPANY OTHER THAN MICROSOFT, AND JAVA, IF IT REMAINED

2

TRUE TO ITS CROSS-PLATFORM INTENTION, COULD UNDERMINE THAT

3

AND COULD ALLOW OTHER COMPANIES TO COMPETE.

4

NOW, WHAT WAS THE FIRST THING THAT MICROSOFT DID?

5

THE FIRST THING THEY TRIED TO DO WAS THEY HAD TRIED TO

6

OBTAIN NETSCAPE'S AGREEMENT NOT TO COMPETE. THEY TRIED TO

7

GO IN AND DIVIDE MARKETS. AND MR. HOUCK SAID THAT -- HE

8

ASKED THE COURT TO TAKE INTO ACCOUNT THE DIFFERENCE BETWEEN

9

WHAT MICROSOFT SAYS NOW AND WHAT MICROSOFT SAYS THEN. AND

10

WHAT I WANT TO DO IS TAKE THIS AS AN EXAMPLE OF THE KIND OF

11

APPROACH THAT MICROSOFT TAKES NOW AND TAKES THEN.

12

AND I HAVE GOT A CLIP FROM A DEPOSITION OF

13

MR. GATES THAT I WOULD LIKE TO PLAY WHERE MR. GATES IS ASKED

14

ABOUT THIS ALLEGED MARKET DIVISION MEETING. AND I WANT THE

15

COURT TO LISTEN TO WHAT HE SAYS.

16

(VIDEOTAPE WAS PLAYED AS FOLLOWS:)

17

QUESTION: YOU ARE AWARE THAT IT HAS BEEN ASSERTED

18

THAT AT THAT MEETING, THERE WAS AN ATTEMPT TO ALLOCATE

19

MARKETS BETWEEN NETSCAPE AND MICROSOFT, CORRECT, SIR?

20

ANSWER: MY ONLY KNOWLEDGE OF THAT IS THAT THERE

21

WAS AN ARTICLE IN THE WALL STREET JOURNAL VERY RECENTLY THAT

22 23

SAID SOMETHING ALONG THOSE LINES. OTHERWISE, NO. QUESTION: IS IT YOUR TESTIMONY THAT THE FIRST

24

TIME THAT YOU WERE AWARE THAT THERE WAS AN ASSERTION THAT

25

THERE HAD BEEN A MARKET ALLOCATION MEETING OR AN ATTEMPT TO

35 1

ALLOCATE MARKETS AT A MEETING BETWEEN REPRESENTATIVES OF

2

MICROSOFT'S AND NETSCAPE WAS A RECENT WALL STREET JOURNAL

3

ARTICLE?

4

THE WITNESS: WELL, I AM NOT SURE HOW TO

5

CHARACTERIZE IT. THE FIRST THING -- THE FIRST I HEARD

6

ANYTHING ABOUT THAT MEETING AND SOMEBODY TRYING TO

7

CHARACTERIZE IT IN SOME NEGATIVE WAY WAS AN ANDREESEN QUOTE

8

THAT WAS IN THE WALL STREET JOURNAL VERY RECENTLY. AND IT

9

SURPRISED ME.

10

QUESTION: ARE YOU AWARE OF ANY INSTANCES IN WHICH

11

REPRESENTATIVES OF MICROSOFT HAVE MET WITH COMPETITORS IN AN

12

ATTEMPT TO ALLOCATE MARKETS.

13

OPPOSING COUNSEL: OBJECTION.

14

ANSWER: I AM NOT AWARE OF ANY SUCH THING, AND I

15 16 17

KNOW IT'S VERY MUCH AGAINST THE WAY WE OPERATE. QUESTION: IT WOULD BE AGAINST COMPANY POLICY TO DO THAT?

18

ANSWER: THAT'S RIGHT.

19

QUESTION: NOW, HAVE YOU EVER READ THE COMPLAINT

20

IN THIS CASE?

21

ANSWER: NO.

22

QUESTION: HAVE YOU EVER RECEIVED A SUMMARY OF THE

23 24

COMPLAINT IN THIS CASE? ANSWER: I WOULDN'T SAY I HAVEN'T RECEIVED A

25

SUMMARY, NO. I HAVE TALKED TO MY LAWYERS ABOUT THE CASE,

36 1

BUT NOT REALLY THE COMPLAINT.

2

QUESTION: DO YOU KNOW WHETHER IN THE COMPLAINT

3

THERE IS AN ASSERTION -- I AM NOT TALKING ABOUT THE WALL

4

STREET JOURNAL ARTICLE. I AM TALKING ABOUT THE COMPLAINT

5

THAT WAS FILED LAST MAY. DO YOU KNOW WHETHER IN THAT

6

COMPLAINT THERE ARE ALLEGATIONS CONCERNING A 1995 MEETING

7

BETWEEN NETSCAPE AND MICROSOFT REPRESENTATIVES RELATING TO

8

ALLEGED MARKET DIVISION DISCUSSIONS?

9

ANSWER: I HAVEN'T READ THE COMPLAINT, SO I DON'T

10

KNOW FOR SURE. BUT I THINK SOMEBODY SAID THAT THAT IS IN

11

THERE.

12 13 14 15 16

QUESTION: DID YOU FIND THAT OUT BEFORE OR AFTER THE WALL STREET JOURNAL ARTICLE? ANSWER: THE FIRST TIME I KNEW ABOUT HIS ALLEGATIONS WAS THE WALL STREET JOURNAL ARTICLE. QUESTION: THAT IS -- THAT ARTICLE PRECEDED ANY

17

KNOWLEDGE THAT YOU HAD OR DIDN'T HAVE RELATED TO THE

18

COMPLAINT?

19

ANSWER: THAT'S RIGHT.

20

(END OF PLAYING OF VIDEOTAPE.)

21

MR. BOIES: NOW, MR. GATES NOT ONLY SAYS THAT HE

22

DIDN'T KNOW THAT THERE WAS ANY ALLEGATIONS OF NETSCAPE AND

23

MICROSOFT MEETING TO DISCUSS DRAWING A LINE BETWEEN WHERE

24

ONE WOULD COMPETE AND WHERE THE OTHER WOULD COMPETE, HE SAYS

25

HE WASN'T EVEN AWARE OF NETSCAPE BACK AT THE TIME THIS

37

1

MEETING WAS GOING ON. HE DIDN'T EVEN KNOW WHAT NETSCAPE WAS

2

DOING. HE DIDN'T HAVE AN UNDERSTANDING OF WHAT NETSCAPE WAS

3

DOING. I THINK I HAVE GOT A CLIP OF THAT AS WELL.

4

(VIDEOTAPE PLAYED AS FOLLOWS:)

5

QUESTION: IN THE PORTION OF THE E-MAIL

6

DENOMINATED NUMBER 2, WHICH IS MOVE NETSCAPE OUT OF

7

WIN 32/WIN 95; AVOID BATTLING THEM IN THE NEXT YEAR, THERE

8

APPEARS THE FOLLOWING STATEMENT IN THE SECOND PARAGRAPH.

9

QUOTE, THEY APPEAR TO BE MOVING FAST TO ESTABLISH THEMSELVES

10

IN THE VALUE-ADD APP. BUSINESS BY LEVERAGING NETSCAPE ITSELF

11

AS A PLATFORM.

12 13 14 15

DO YOU RECALL WHETHER YOU AGREED THAT THAT'S WHAT NETSCAPE WAS DOING BACK IN JUNE '95? ANSWER: AT THIS TIME, I HAD NO SENSE OF WHAT NETSCAPE WAS DOING.

16

(END OF PLAYING OF VIDEOTAPE.)

17

MR. BOIES: THAT ASSERTION BY MR. GATES THAT IN

18

JUNE OF 1995 HE HAD NO SENSE OF WHAT NETSCAPE WAS DOING IS A

19

CRITICAL PART OF THE DEFENSE THAT WE HAVE HEARD FROM

20

MICROSOFT. THEY SAY THEY WERE GOING ABOUT THEIR BUSINESS

21

DEVELOPING INTERNET EXPLORER, DESIGNING THEIR MARKETING AND

22

PRODUCT PLANS AND THEY WERE DOING THAT BECAUSE THAT'S THE

23

WAY THEY THOUGHT THE BEST BROWSER OUGHT TO BE MADE, NOT

24

BECAUSE OF WHAT NETSCAPE WAS DOING. OR, IN MR. GATES'

25

WORDS, AT THE TIME THAT THESE THINGS WERE GOING ON, HE

38 1

DIDN'T HAVE ANY UNDERSTANDING OF WHAT NETSCAPE WAS DOING.

2

NOW, LET'S LOOK AT WHAT THE WRITTEN RECORD FROM

3

MICROSOFT'S FILES DEMONSTRATES. I THINK THERE IS A MAY 20TH

4

OR MAY 26TH, 1995 -- MAY 26TH, 1995 MEMO. AND THIS IS A

5

MEMO FROM BILL GATES. AND IT IS FIVE DAYS BEFORE JUNE OF

6

1995. AND THIS IS ABOUT THE INTERNET TIDAL WAVE. AND

7

MR. GATES, AND WHAT THE RECORD WILL SHOW AND THE EVIDENCE

8

WILL SHOW, YOUR HONOR, IS THAT THIS IS A ONE OF A SERIES OF

9

DOCUMENTS AT ABOUT THIS TIME FROM AND TO MR. GATES IN WHICH

10

MICROSOFT, AND MR. GATES PERSONALLY, IS DIRECTLY CONCERNED

11

WITH A THREAT THAT NETSCAPE POSES.

12

AND THERE IS A QUOTATION -- ON, I THINK ABOUT THE

13

FOURTH PAGE OF THIS DOCUMENT IN WHICH -- AND THIS IS

14

MR. GATES WRITING: A NEW COMPETITOR BORN ON THE INTERNET IS

15

NETSCAPE. THEIR BROWSER IS DOMINANT WITH 70 PERCENT USAGE

16

SHARE, ALLOWING THEM TO DETERMINE WHICH NETWORK EXTENSIONS

17

WILL CATCH ON. THEY ARE PURSUING A MULTI-PLATFORM STRATEGY

18

WHERE THEY MOVE THE KEY API INTO THE CLIENT TO COMMODITIZE

19

THE UNDERLYING OPERATING SYSTEM.

20

AND THE THREAT THAT NETSCAPE WAS GOING TO, IN

21

MR. GATES' WORDS, COMMODITIZE THE WINDOWS OPERATING SYSTEM

22

BY MOVING THE KEY API'S INTO A POINT WHERE THEY COULD BE

23

WRITTEN TO ON A CROSS-PLATFORM BASIS AND ERODE THE

24

APPLICATION'S BARRIER TO ENTRY, WAS EXACTLY WHAT NETSCAPE

25

WAS DOING AND IS EXACTLY WHAT MR. GATES KNEW BACK IN 1995

39 1 2 3

THAT THEY WERE DOING AND WHAT CONCERNED HIM SO GREATLY. NOW, LET ME GO TO ANOTHER CLIP FROM HIS DEPOSITION.

4

(VIDEOTAPE PLAYED AS FOLLOWS:)

5

QUESTION: AS YOU SIT HERE TODAY, DO YOU HAVE ANY

6

RECOLLECTION AS TO WHAT YOUR UNDERSTANDING WAS BACK IN JUNE

7

1995 AS TO THE PRINCIPAL PURPOSE OF THE MICROSOFT EMPLOYEES'

8

MEETING WITH NETSCAPE?

9

ANSWER: I WASN'T INVOLVED IN SETTING UP THE

10

MEETING, SO I -- I CAN SEE WHAT REARDON SAID HERE. I CAN

11

SEE WHAT ROSEN SAID HERE. YOU'VE READ SOMETHING THAT

12

PURPORTS TO BE SOMETHING THAT JONES SAID. I MEAN --

13

(END OF VIDEOTAPE EXCERPT.)

14

MR. BOIES: NOW, ONE OF THE THINGS THAT YOU WILL

15

HEAR WHEN WE PUT IN ADDITIONAL PORTIONS OF MR. GATES'

16

TESTIMONY AT TRIAL IS MR. GATES SAYS THESE PEOPLE WHO WENT

17

TO THIS MEETING WEREN'T REALLY EXECUTIVES. THEY WERE JUST

18

EMPLOYEES. THEY HAD IMPORTANT TITLES, BUT THEY WEREN'T

19

REALLY EXECUTIVES. AND WHAT HE SAYS IS THAT HE DIDN'T EVEN

20

KNOW THAT THIS WAS GOING ON. HE CERTAINLY WASN'T INVOLVED

21

IN PLANNING FOR IT. THE IMPLICATION IS THAT THIS WAS

22

SOMETHING THAT WAS GOING ON WITHOUT THE TOP MANAGEMENT'S

23

INVOLVEMENT OR APPROVAL.

24 25

BUT LET'S LOOK AGAIN AT WHAT THE WRITTEN DOCUMENTATION FROM THAT POINT SAYS. MAY 31, 1995, FIVE DAYS

40 1

AFTER THE INTERNET TIDAL WAVE MEMO, MR. GATES WRITES TO PAUL

2

MARITZ, BRAD SILVERBERG, DAN ROSEN AND OTHERS, SUBJECT,

3

NETSCAPE DISCUSSIONS. AND HE BEGINS BY SAYING, I THINK

4

THERE IS A VERY POWERFUL DEAL OF SOME KIND WE CAN DO WITH

5

NETSCAPE. AND HE LAYS OUT WHAT THAT IS IN SUMMARY FORM.

6

THE CONCEPT IS THAT FOR 24 MONTHS, THEY AGREE TO DO CERTAIN

7

THINGS IN THE CLIENT AND WE AGREE TO MAKE THEIR SERVER

8

BUSINESS SUCCESSFUL.

9 10

AND WHAT THE COURT WILL SEE FROM LATER DOCUMENTS IS THAT WAS ULTIMATELY THE PROPOSAL THAT WAS MADE TO

11

NETSCAPE. YOU GET OUT OF THE CLIENT BUSINESS. YOU GET OUT

12

OF THE BROWSER BUSINESS FOR WINDOWS 95 AND WE'LL HELP YOU IN

13

OTHER AREAS. YOU WILL SEE DOCUMENTS ABOUT DRAWING A LINE

14

BETWEEN THE WINDOWS 95 CLIENT OR BROWSER AND THE SERVER

15

BUSINESS.

16

CAN I SEE THE NEXT PAGE? THIS IS THE LAST LINE OF

17

THAT MEMORANDUM FROM MR. GATES. "I WOULD REALLY LIKE TO SEE

18

SOMETHING LIKE THIS HAPPEN," WITH TWO EXCLAMATION POINTS.

19

NOW, TESTIFYING NOW IN THE CONTEXT OF THIS TRIAL, HE SAYS HE

20

WASN'T AT ALL INVOLVED IN SETTING UP THE MEETINGS WITH

21

NETSCAPE. BUT LOOKING BACK AT THE WRITTEN RECORD, IT IS

22

ABSOLUTELY CLEAR THAT THESE MEETINGS TOOK PLACE, NOT ONLY

23

WITH THE APPROVAL AND THE ENCOURAGEMENT, BUT AT THE EXPLICIT

24

DIRECTION AT THE VERY TOP MANAGEMENT OF MICROSOFT.

25

LET ME GO TO ONE MORE CLIP FROM MR. GATES'

41 1

DEPOSITION.

2

(VIDEOTAPE EXCERPT PLAYED AS FOLLOWS:)

3

QUESTION: DO YOU RECALL AS YOU SIT HERE TODAY,

4

APART FROM JUST READING THESE E-MAILS, ANYTHING THAT WAS

5

REPORTED BACK TO YOU BY ANY OF THE PARTICIPANTS FROM

6

MICROSOFT AT THIS JUNE 21ST MEETING?

7

ANSWER: I THINK SOMEWHERE ABOUT THIS TIME

8

SOMEBODY SAID TO ME THAT -- ASKED IF IT MADE SENSE FOR US TO

9

CONSIDER INVESTING IN NETSCAPE. AND I SAID THAT THAT DIDN'T

10

MAKE SENSE TO ME. I DIDN'T SEE THAT AS SOMETHING THAT MADE

11

SENSE.

12

QUESTION: DO YOU RECALL WHO SAID THAT TO YOU?

13

ANSWER: IT WOULD HAVE BEEN PROBABLY SUGGESTED IN

14

A PIECE OF E-MAIL FROM DAN, I THINK.

15 16

QUESTION: DO YOU RECALL WHEN YOU GOT THAT SUGGESTION, WHETHER IT WAS BEFORE OR AFTER THE MEETING?

17

ANSWER: OH, IT WOULD HAVE BEEN AFTER THE MEETING.

18

(END OF VIDEOTAPE EXCERPT.)

19

MR. BOIES: MR. GATES HERE IS AGAIN TRYING TO

20

DISTANCE HIMSELF FROM ONE OF THE PROPOSALS MADE AT THE

21

MEETING WHICH WAS THAT MICROSOFT TAKE AN EQUITY POSITION IN

22

NETSCAPE AS PART OF THE DEAL. AND HE SAYS, IT DIDN'T COME

23

FROM ME; WHEN I HEARD ABOUT IT, I THOUGHT IT WAS A BAD IDEA.

24

AND, IN ANY EVENT, NOBODY BROUGHT IT UP UNTIL AFTER THE

25

MEETING.

42 1

LET'S GO BACK TO THE EXHIBIT WE WERE JUST LOOKING

2

AT. REMEMBER, THIS IS THE MAY 31, 1995 MEMORANDUM FROM

3

MR. GATES HIMSELF. AT THE BOTTOM OF THE PAGE: OF COURSE,

4

OVER TIME, WE WILL COMPETE ON THE SERVERS, BUT WE CAN HELP

5

THEM A LOT IN THE MEANTIME. WE COULD EVEN PAY THEM MONEY AS

6

PART OF THE DEAL, BUYING SOME PIECE OF THEM OR SOMETHING.

7

AGAIN -- AND THIS IS NOT A CENTRAL POINT TO THE

8

ANALYSIS, YOUR HONOR -- BUT AGAIN, WHAT IT DEMONSTRATES IS,

9

EVEN DOWN TO THE DETAILS, THE TOP MANAGEMENT OF MICROSOFT

10

WAS DIRECTLY INVOLVED IN WHAT WAS GOING ON HERE. THIS IS

11

NOT SOMETHING THAT THEY CAN DISTANCE THEMSELVES FOR. THIS

12

IS NOT SOMETHING THAT THEY CAN SAY WAS MERELY BEING ENGAGED

13

IN BY EMPLOYEES, NOT EXECUTIVES.

14

THIS IS SOMETHING -- AND YOU'RE GOING TO HEAR FROM

15

SOME OF THESE EMPLOYEES, YOUR HONOR. YOU'RE GOING TO HEAR

16

FROM SOME OF THESE PEOPLE COME AND TESTIFY, AND OTHERS YOU

17

WILL HEAR THEIR DEPOSITIONS. AND YOU CAN SEE THE CENTRAL

18

ROLE THEY PLAYED AT MICROSOFT. BUT THESE DOCUMENTS

19

DEMONSTRATE THAT THIS WAS NOT SOMETHING THAT THEY WENT OUT

20

AND DID ON THEIR OWN WITHOUT AUTHORIZATION, WITHOUT APPROVAL

21

OR, IN MR. GATES' WORDS, AGAINST COMPANY POLICY. THIS IS

22

SOMETHING THAT THEY ARE BEING DIRECTED BY THE VERY TOP

23

MANAGEMENT OF MICROSOFT TO DO.

24 25

NOW, LET'S GO TO SOME ADDITIONAL DOCUMENTS THAT SHOW EXACTLY WHAT HAPPENED. NOW, THIS IS A JUNE 1

43 1

MEMORANDUM. THIS IS THE DAY AFTER MR. GATES' E-MAIL. AND

2

THIS IS A REPLY BY PAUL MARITZ TO, AMONG OTHERS, BILL GATES,

3

DATED JUNE 1, 1995. AND HE BEGINS BY SAYING, DAN -- AND

4

THAT'S DAN ROSEN -- BOB AND I -- AND I IS PAUL MARITZ -- MET

5

YESTERDAY TO REVIEW OUR RECENT DISCUSSIONS WITH NETSCAPE AND

6

FORM OUR NEXT FEW ACTION ITEMS. DAN IS MEETING WITH JIM

7

BARKSDALE, THEIR C.E.O., SHORTLY.

8 9

SO WHAT IS HAPPENING HERE IS MR. MARITZ, ONE OF THE VERY TOP EXECUTIVES OF MICROSOFT, IS KEEPING HIS BOSS,

10

BILL GATES, DIRECTLY INFORMED. AND WHAT IS STATED TO BE THE

11

WORKING GOALS OF THESE MEETINGS WITH NETSCAPE? NUMBER TWO,

12

MOVE NETSCAPE OUT OF THE WIN 32 INTERNET CLIENT ARENA.

13

NUMBER THREE, AVOID COLD OR HOT WAR WITH NETSCAPE. AND THAT

14

IS EXPLAINED DOWN HERE. MOVE NETSCAPE OUT OF

15

WIN 32/ WIN 95, AVOID BATTLING THEM IN THE NEXT YEAR.

16

THEIR GOALS GOING INTO THAT MEETING WERE -- AND I

17

EMPHASIZE, THIS COMES FROM MICROSOFT'S FILES; THIS IS

18

MICROSOFT'S STATEMENT OF THEIR GOALS -- WAS TO STOP THE

19

COMPETITION WITH NETSCAPE IN THE WIN 32/WIN 95 ENVIRONMENT

20

FOR BROWSERS. AND THAT IS EXACTLY WHAT THEY WENT TO DO.

21

THEY HAD A MEETING ON JUNE 2ND. THE VERY NEXT DAY, THEY

22

HAVE GOT A MEETING. AND IN THAT MEETING, DAN ROSEN REPORTS

23

THAT NETSCAPE IS DOING VERY WELL. THEY ARE SELLING

24

BROWSERS. THEY ARE SELLING SERVERS. THEY ARE SELLING A LOT

25

OF SITE LICENSES FOR BROWSERS. HE SAYS THEY ARE GOING TO

44 1

CONTINUE TO WAIVE LICENSE FEES FOR STUDENTS AND NONPROFIT

2

ORGANIZATIONS, BUT WILL CHARGE OTHERS.

3

NOW, THIS IS SOMETHING I AM GOING TO COME BACK TO,

4

YOUR HONOR, WHEN WE GET INTO THE PRICING AND PREDATORY

5

PRICING AREA, BECAUSE SOMETHING THAT THE COURT HAS HEARD

6

FROM TIME TO TIME FROM MICROSOFT IS, WELL, EVERYBODY WAS

7

GIVING THIS AWAY FREE. THEY KNEW PERFECTLY WELL THAT

8

NETSCAPE WAS CHARGING, INTENDING TO CHARGE AND, LIKE ANYBODY

9

PRODUCING A PRODUCT, NEEDED TO CHARGE FOR THEIR BROWSER IN

10 11

ORDER TO REMAIN VIABLE. THIS IS ANOTHER -- THIS IS A JUNE 9 MESSAGE WHERE

12

DAN ROSEN REPORTS TO HIS BOSSES, INCLUDING BILL GATES, ABOUT

13

THE PROGRESS WITH NETSCAPE DISCUSSIONS. NOW, THIS AGAIN IS

14

ILLUSTRATIVE OF THE FACT THAT THIS WAS GOING ON WITH THE

15

CONSTANT SUPERVISION OF BILL GATES, WHO HAD STARTED THIS BY

16

SAYING, I REALLY WANT TO SEE THIS HAPPEN.

17

WE THEN HAVE THE JUNE 21 MEETING. AND WE HAVE

18

CONTEMPORANEOUS NOTES OF THAT JUNE 21 MEETING FROM MARK

19

ANDREESEN, AND THEY ARE VERY DETAILED NOTES. AND

20

THROUGHOUT THE NOTES, IT IS CLEAR THAT WHAT MICROSOFT IS

21

SAYING IS, LET'S DRAW A LINE BETWEEN THE AREAS WHERE WE'RE

22

GOING TO COMPETE AND THE AREAS WHERE WE DON'T COMPETE.

23 24

ONE PARTICULAR TELLING PORTION IS WHERE MR. ANDREESEN'S NOTES READ, WOULD YOU BE INTERESTED IN

25

HAVING A PARTNERSHIP WHERE NETSCAPE GETS ALL THE NON-WIN 95

45 1

STUFF, AND MICROSOFT GETS ALL THE WIN 95 STUFF? WOULD YOU

2

BE INTERESTED IN DIVIDING THE MARKET WHERE NETSCAPE GETS ALL

3

OF THE NON-WINDOWS 95 STUFF AND MICROSOFT GETS ALL OF THE

4

WINDOWS 95 STUFF? THEY SAY, IF NETSCAPE DOESN'T WANT TO,

5

THEN THAT'S ONE THING. IF NETSCAPE DOES WANT TO, THEN WE

6

CAN HAVE OUR SPECIAL RELATIONSHIP. AND THERE ARE A LOT OF

7

OFFERS HERE. THEN -- AND THE BOLD TYPING IS

8

MR. ANDREESEN'S -- THREAT THAT MICROSOFT WILL OWN THE

9

WINDOWS 95 CLIENT MARKET AND THAT NETSCAPE SHOULD STAY AWAY.

10

BEFORE GOING ON TO THE NOTES FROM MICROSOFT, THERE

11

IS A PAGE IN HERE IN WHICH MR. ANDREESEN TALKS ABOUT SOME

12

OF THE THINGS THEY MIGHT BE ABLE TO GET. ONE OF THE THINGS

13

THAT NETSCAPE, LIKE OTHER PEOPLE IN THE INDUSTRY, NEEDED,

14

WAS ACCESS AND KNOWLEDGE ABOUT CERTAIN API'S IN WINDOWS.

15

AND MICROSOFT, AS THE EVIDENCE WILL SHOW, PLAYS A LOT OF

16

GAMES WITH THAT. AND THEY USE THE PRESSURE OF NOT GETTING

17

ACCESS TO THAT TO GET PEOPLE TO DO WHAT THEY WANT THEM TO DO

18

IN THE INDUSTRY.

19

AND ONE OF THE THINGS THAT JIM BARKSDALE -- THAT'S

20

JB -- FROM NETSCAPE ASKS ABOUT, WELL, WHAT ABOUT THE RAS

21

API. AND HE'S TOLD, WELL, WITH A SPECIAL RELATIONSHIP WITH

22

YOU, YOU WILL BE THE FIRST TO PLUG INTO IT. OTHERS WILL BE

23

IN THE FUTURE. THAT IS, IF YOU PLAY BALL WITH US, IF YOU

24

AGREE TO DIVIDE THE BROWSER MARKET, WE'LL GIVE YOU A SPECIAL

25

RELATIONSHIP IN WHICH WE DISCRIMINATE IN YOUR FAVOR IN TERMS

46

1 2

OF MAKING API'S AVAILABLE. DAN ROSEN GOES ON TO SAY THAT THERE IS INTERNAL

3

STUFF THAT IMPLEMENTS INTERNAL API'S, AND THOSE API'S ARE

4

ONLY KNOWN INSIDE MICROSOFT. THEY HAVEN'T DECIDED HOW TO

5

DISTRIBUTE THAT, BUT JB, JIM BARKSDALE, CAN GAIN AN

6

ADVANTAGE IF THEY AGREE. DAN ROSEN: IF WE HAD A SPECIAL

7

RELATIONSHIP, YOU WOULDN'T BE IN THIS POSITION. J. ALLARD,

8

-- ALSO FROM MICROSOFT -- DEPENDING ON HOW WE WALK OUT OF

9

THIS ROOM TODAY, WE HAVE A SOLUTION FOR YOUR PROBLEM, OR

10

ELSE IN THREE MONTHS.

11

NOW, LET ME GO TO THE MICROSOFT CONTEMPORANEOUS

12

DOCUMENTS THAT DESCRIBE THIS MEETING, YOUR HONOR. THIS

13

ACTUALLY ISN'T A MICROSOFT DOCUMENT, BUT IT'S A GOOD

14

DOCUMENT. AND I WOULD HAVE GONE HERE ANYWAY, SO THIS IS A

15

GOOD TIME TO GET HERE. THIS IS A DOCUMENT THAT COMES FROM

16

AMERICA ONLINE'S FILES.

17

ONLINE, ONE OF THE DOCUMENTS THAT WE GOT WAS A JUNE 22, 1995

18

MEMORANDUM PREPARED THE DAY AFTER THE MARKET DIVISION

19

MEETING BETWEEN MICROSOFT AND NETSCAPE. AND THIS IS BASED

20

ON A REPORT FROM NETSCAPE TO AOL. AND IN THAT SENSE, YOUR

21

HONOR, IT IS HEARSAY.

22

WHEN WE TOOK DISCOVERY OF AMERICA

BUT ONE OF THE THINGS THAT THIS SHOWS IS THAT THE

23

DESCRIPTION OF THAT MEETING IS NOT ANYTHING THAT HAS BEEN

24

DEVELOPED, AS MICROSOFT HAS FROM TIME TO TIME SUGGESTED,

25

AFTER THE FACT BY NETSCAPE. THIS IS NOT ANYTHING, LIKE

47 1

MICROSOFT HAS FROM TIME TO TIME SUGGESTED, WAS SOMETHING

2

THAT MICROSOFT ONLY CAME TO SEE IN A SINISTER LIGHT AFTER

3

MICROSOFT HAD BEGUN TO HAVE PROBLEMS IN THE MARKETPLACE.

4

THIS WAS A SITUATION THE DAY AFTER THAT MEETING. AND HOW

5

WAS THAT DESCRIBED THE DAY AFTER THE MEETING? MICROSOFT

6

WENT TO NETSCAPE AND MICROSOFT WANTED A BOARD SEAT, NETSCAPE

7

TO ANNOUNCE THE NETWORK AS A PLATFORM, NETSCAPE TO DISCLOSE

8

ALL PLANS TO MICROSOFT, NETSCAPE TO LIMIT ACCESS TO API'S.

9

AND IN RETURN, NETSCAPE WOULD BE MICROSOFT'S

10

SPECIAL PARTNER, GET INSIDE INFORMATION, AND IF NETSCAPE

11

DIDN'T DO THE DEAL, MICROSOFT WOULD CRUSH THEM. THAT WAS

12

THE CONTEMPORANEOUS RECOLLECTION OF THE NETSCAPE PEOPLE OF

13

WHAT THEY WERE BEING TOLD. NOW, LET ME SEE IF I CAN GO TO

14

WHAT MICROSOFT SAYS.

15

THE THING THAT IS REMARKABLE, YOUR HONOR, IS THAT

16

WE HAVE THREE CONTEMPORANEOUS DOCUMENTS, ONE FROM NETSCAPE,

17

ONE FROM AOL, ONE FROM MICROSOFT, AND THEY ALL SAY

18

ESSENTIALLY THE SAME THING.

19

THIS IS A MEMORANDUM ON JUNE 22, THE DAY AFTER THE

20

MEETING, FROM DAN ROSEN TO BILL GATES AND OTHERS. SEVEN OF

21

US MET WITH JIM BARKSDALE, C.E.O., AND OTHER EXECUTIVES OF

22

NETSCAPE FOR FOUR HOURS. OUR GOALS GOING INTO THE MEETING

23

WERE, IN PRIORITY ORDER, ONE, ESTABLISH MICROSOFT OWNERSHIP

24

OF THE INTERNET CLIENT PLATFORM FOR WINDOWS 95. LATER ON,

25

MR. ROSEN REPORTS, CHRIS JOE, OR CHRIS JONES SUMMED UP THE

48 1

PURPOSE NICELY. QUOTE, WE NEED TO UNDERSTAND IF YOU WILL

2

ADOPT OUR PLATFORM AND BUILD ON TOP OF IT OR IF YOU ARE

3

GOING TO COMPETE WITH US ON A PLATFORM LEVEL. THAT IS

4

EXACTLY WHAT THEY DID, YOUR HONOR. THEY WENT IN AND THEY

5

SAID, WE WANT TO GET YOU OUT OF THE WINDOWS 95 AREA AND

6

BROWSERS. IF YOU DO, WE'LL GIVE YOU A SPECIAL RELATIONSHIP.

7

IF YOU DON'T, WE'RE GOING TO CRUSH YOU. AND YOU HAVE GOT TO

8 9

TELL US. ARE YOU GOING TO COMPETE WITH US OR NOT? NOW, I THINK THAT THIS ILLUSTRATION IS SOMETHING

10

THAT DEMONSTRATES TWO THINGS. FIRST, BY ITSELF, YOUR HONOR,

11

THIS MAKES OUT A VIOLATION OF SECTION 2, ATTEMPTED

12

MONOPOLIZATION OF THE BROWSER MARKET. THERE IS NO DOUBT

13

THAT THESE WERE THE TWO LEADING COMPETITORS AND POTENTIAL

14

COMPETITORS IN THE BROWSER MARKET. IF THEY HAD AGREED TO

15

DIVIDE THE MARKET, THAT WOULD HAVE BEEN FAR BEYOND A

16

DANGEROUS PROBABILITY OF SUCCESS. WHAT YOU HAVE HERE IS, IN

17

AND OF ITSELF, AN ATTEMPT AT MONOPOLIZATION.

18

IN ADDITION, THIS SHOWS WHAT THE MOTIVE WAS AND

19

WHAT THE CONTEXT WAS FOR THE ACTIONS THAT ARE GOING TO

20

FOLLOW. BECAUSE WHEN MICROSOFT SAID, NO, OR WHEN NETSCAPE

21

SAID NO TO MICROSOFT, MICROSOFT SET OUT TO DO EXACTLY WHAT

22

THEY HAD TOLD NETSCAPE THEY WOULD DO, WHICH IS TO CRUSH

23

THEM. AND THEY STARTED OFF WITH A PREDATORY PRICING

24

CAMPAIGN THAT WAS DESIGNED TO DEPRIVE NETSCAPE OF THE

25

REVENUES THAT MICROSOFT KNEW NETSCAPE NEEDED TO RELY ON.

49 1

YOU WILL RECALL THE JUNE 2ND MEMORANDUM IN WHICH

2

DAN ROSEN REPORTS THAT NETSCAPE IS DOING VERY WELL AT MAKING

3

MONEY FROM BROWSER LICENSES, AND WHAT THE EVIDENCE IS GOING

4

TO SHOW IS THAT AT THE SPECIFIC DIRECTION OF MR. GATES,

5

MICROSOFT BEGAN TO STUDY EXACTLY WHERE NETSCAPE WAS GOING TO

6

GET -- WAS GETTING ITS MONEY AND HOW TO TURN THAT MONEY OFF.

7

AND WHAT THEY FOUND OUT WAS THAT NETSCAPE WAS MAKING A

8

CRITICAL PART OF ITS MONEY FROM LICENSING BROWSERS; THAT IS,

9

CHARGING OEM'S IN PARTICULAR, AND INTERNET SERVICE PROVIDERS

10

TO SOME EXTENT, FOR THE RIGHT TO USE THE BROWSER.

11

AND IN THAT CONNECTION, THERE IS A CHART,

12

EXHIBIT 9, THAT SHOWS WHAT NETSCAPE WAS GETTING. THIS IS

13

NETSCAPE'S QUARTERLY REVENUES FROM BROWSER LICENSES. AND IT

14

STARTS BACK IN THE FIRST QUARTER OF 1995. AND YOU CAN SEE

15

HOW RAPIDLY IT IS INCREASING. BY THE SECOND QUARTER OF

16

1996 -- OR THIRD QUARTER OF 1996, NETSCAPE IS MAKING ALMOST

17

$60 MILLION A QUARTER. THAT'S ALMOST $250 MILLION A YEAR,

18

ALMOST A QUARTER OF A BILLION DOLLARS A YEAR, FROM LICENSING

19

BROWSERS.

20

NOW, THE COURT WILL ALSO SEE WHAT HAPPENED TO

21

THOSE REVENUES AS MICROSOFT'S EFFORTS TO CUT OFF NETSCAPE'S

22

AIR SUPPLY BEGAN TO HAVE EFFECT. BUT UNTIL THAT HAPPENED,

23

NETSCAPE HAD A VERY SUCCESSFUL BUSINESS AND ONE, FACING FAIR

24

COMPETITION ON THE MERITS, COULD HAVE CONTINUED TO BE

25

SUCCESSFUL.

50 1

NOW, LET'S GO TO THE DOCUMENTS THAT RELATE TO THE

2

PREDATORY PRICING CAMPAIGN THAT MICROSOFT INTRODUCED.

3

FIRST, THERE IS A SUGGESTION THAT MICROSOFT ALWAYS INTENDED

4

TO GIVE THE WEB BROWSER AWAY FOR FREE. AND ALWAYS,

5

INCIDENTALLY, INTENDED TO HAVE IT INTEGRATED INTO WINDOWS

6

AND A PART OF WINDOWS. THIS IS A DOCUMENT FROM OCTOBER OF

7

1994. AND IT SAYS O'HARE IS THE CODE NAME FOR THE INTERNET

8

CLIENT FOR WINDOWS 95 PROJECT. THAT IS, O'HARE ULTIMATELY

9

BECAME INTERNET EXPLORER.

10

AND IT SAYS, OUR GOAL IS TO BE IN BETA BY FEBRUARY

11

1995 AND SHIP NO MORE THAN THREE MONTHS AFTER WIN 95 IN A

12

FROSTING VERSION 2 PACKAGE. NOW, WHAT DOES THAT MEAN, YOUR

13

HONOR? WELL, FIRST OF ALL, IT MEANS THAT THEY WERE PLANNING

14

TO SHIP IT SEPARATE FROM AND LATER THAN WINDOWS 95.

15

SECOND, THOUGH, AND VERY IMPORTANT FROM THE

16

QUESTION OF PRICING, THEY WERE PLANNING TO SHIP IT IN A

17

PACKAGE, THAT THEY INTERNALLY REFERRED TO AS FROSTING

18

VERSION 2, THAT THEY WERE GOING TO CHARGE FOR. THAT IS,

19

THEY WERE GOING TO CHARGE -- THEY HAD A VALUABLE PRODUCT

20

AND, LIKE ANYBODY WITH A VALUABLE PRODUCT, THEY WERE GOING

21

TO CHARGE FOR IT.

22

IN FACT, THEY EVEN TRIED TO ANALYZE HOW MUCH THEY

23

WOULD GET FROM IT. THIS IS JANUARY 31, 1995, THREE OR FOUR

24

MONTHS LATER: BASED ON QUICK AND DIRTY ANALYSIS, FROSTING

25

WITHOUT O'HARE -- THAT IS, THIS UPGRADE PACKAGE WITHOUT THE

51 1

BROWSER -- REPRESENTS A $63 MILLION OPPORTUNITY, AND WITH

2

O'HARE, $120 MILLION OPPORTUNITY. WE'RE TALKING ABOUT $57

3

MILLION DIFFERENCE. IT APPEARS THAT AS MANY AS 1.5 MILLION

4

FROSTING CUSTOMERS WILL BUY IT FOR THE INTERNET ACCESS.

5

IN OTHER WORDS, WHAT MICROSOFT IS SAYING IS, YES,

6

WEB BROWSERS ARE POPULAR. THEY ARE VALUABLE. WE CAN SELL

7

THEM. AND WE CAN USE THEM TO HELP SELL THIS FROSTING

8

PACKAGE. AND IN FACT, THEY ESTIMATE THAT O'HARE, THE

9

BROWSER, COULD MEAN AS MUCH AS $120 MILLION IN INCREMENTAL

10

REVENUE FROM FROSTING.

11

AND THIS IS THE NEXT MONTH, FEBRUARY 1995. A

12

RECOMMENDATION: COMMIT TO O'HARE IN THE FROSTING BOX,

13

PERIOD. THE EXTENSIONS AND CLIENTS IN THEMSELVES ARE

14

COMPELLING, EVEN WITHOUT ONE BUTTON SIGN-UP. WE SHOULDN'T

15

JUST GIVE YOUR STUFF AWAY. IT'S BETTER THAN THE FREE STUFF,

16

AND IT'S THE ONLY 100 PERCENT INTEGRATED INTO WINDOWS 95

17

INTERNET CLIENTS OUT THERE. SO AS LATE AS FEBRUARY 1995,

18

PEOPLE ARE STILL SAYING, YOU OUGHT TO CHARGE FOR THE

19

BROWSER. YOU CAN MAKE MONEY DOING THAT.

20

HERE IS A JULY 17, 1995 MEMORANDUM FROM CHRIS

21

JONES TO A LOT OF PEOPLE, INCLUDING THOMAS REARDON AND DAN

22

ROSEN AND OTHER PEOPLE THAT YOU'RE GOING TO HEAR TESTIMONY

23

FROM. IT'S TALKING ABOUT INTERNET EXPLORER: FIGURE OUT

24

PRICING AND PROMOTE AGGRESSIVELY. WE NEED SOMEONE WHO WILL

25

GO AND SELL THIS THING. WE HAVE NO OWNER FOR THIS.

52 1

NOW, CONTRAST THAT WITH WHAT HAPPENED OVER THE

2

NEXT FEW MONTHS. AFTER MICROSOFT RECEIVED A BLUNT NO FROM

3

NETSCAPE -- THIS IS JANUARY 21, 1996. THIS IS A MEETING

4

THAT MR. GATES HAD WITH AMERICA ONLINE. AND MR. GATES WAS

5

MEETING WITH AMERICA ONLINE AND TELLING THEM THAT NOT ONLY

6

WOULD THEY GIVE THE MICROSOFT BROWSER AWAY FOR FREE, THEY

7

WOULD ACTUALLY PAY AOL TO TAKE IT. THEY WOULD GIVE AOL

8

THINGS TO GET AOL TO TAKE THIS FREE PRODUCT. OR, AS AOL

9

DESCRIBED IT IN THIS CONTEMPORANEOUS MEMORANDUM, QUOTE,

10

GATES DELIVERED A CHARACTERISTICALLY BLUNT QUERY. HOW MUCH

11

WE NEED TO PAY YOU TO SCREW NETSCAPE? THIS IS YOUR LUCKY

12

DAY.

13

LET'S SEE WHAT ELSE WAS GOING ON ABOUT THAT TIME.

14

THIS IS AN APRIL 1996 -- TWO OR THREE MONTHS LATER --

15

PLANNING MEMORANDUM FROM BRAD CHASE, AND IT WENT TO ALL OF

16

THE MICROSOFT EXECUTIVES AT THIS PLANNING CONFERENCE. BY

17

THIS TIME, THEY HAD MADE A DECISION FOR SOME TIME NOW THAT

18

THEY ARE NOT GOING TO CHARGE FOR BROWSERS. AND SO HE IS

19

ADDRESSING THE ISSUE OF WHY SHOULD YOU CARE ABOUT BROWSER

20

MARKET SHARE. THIS IS A NO-REVENUE PRODUCT, BUT YOU SHOULD

21

WORRY ABOUT YOUR BROWSER SHARE AS MUCH AS BILL GATES,

22

BECAUSE WE WILL LOSE THE INTERNET PLATFORM BATTLE IF WE DO

23

NOT HAVE A SIGNIFICANT USER-INSTALLED BASE. THE INDUSTRY

24

WOULD SIMPLY IGNORE OUR STANDARDS. FEW WOULD WRITE WINDOWS

25

AP'S WITHOUT THE WINDOWS USER BASE.

53 1

SO THEY ARE GOING TO GIVE THE BROWSER AWAY FOR

2

FREE. AND WHAT DOES MICROSOFT SAY IS THE REASON? THIS IS A

3

QUOTE FROM MR. GATES -- WHAT YOU'RE GOING TO SEE IS SEVERAL

4

QUOTES FROM MR. GATES THAT WERE ACTUALLY PUBLISHED IN JUNE

5

AND JULY OF 1996, AND THE EVIDENCE WILL SHOW, YOUR HONOR,

6

THAT NOT ONLY DID THEY MAKE THESE DECISIONS INTERNALLY, BUT

7

THEY WENT OUT AND THEY BROADCAST THEM TO THE WORLD SO THAT

8

THE WORLD WOULD KNOW THAT NETSCAPE'S BUSINESS MODEL WAS IN

9

TROUBLE. BECAUSE THEY BELIEVED THAT BY GETTING FINANCIAL

10

ANALYSTS TO QUESTION NETSCAPE'S VIABILITY, THEY COULD

11

UNDERCUT NETSCAPE'S LIFE LINE. QUOTE: OUR BUSINESS MODEL

12

WORKS EVEN IF ALL INTERNET SOFTWARE IS FREE, SAYS MR. GATES.

13

WE ARE STILL SELLING OPERATING SYSTEMS.

14

WHAT DOES NETSCAPE'S BUSINESS MODEL LOOK LIKE IF

15

THAT HAPPENS? NOT VERY GOOD. OR, A FEW WEEKS LATER, QUOTE:

16

OUR BUSINESS MODEL WORKS EVEN IF ALL INTERNET SOFTWARE IS

17

FREE, SAYS MR. GATES. WE ARE STILL SELLING OPERATING

18

SYSTEMS. NETSCAPE IN CONTRAST, IS DEPENDENT ON ITS INTERNET

19

SOFTWARE FOR PROFITS, HE POINTS OUT.

20

LATER THAT MONTH, QUOTE: ONE THING TO REMEMBER

21

ABOUT MICROSOFT, SAYS CHAIRMAN WILLIAM H. GATES, III, WE

22

DON'T NEED TO MAKE ANY REVENUE FROM INTERNET SOFTWARE.

23

WHICH BUSINESS WEEK SAYS, WHO COULD FORGET?

24

AND MR. BALLMER GETS INTO THE ACT AS WELL A FEW

25

MONTHS LATER. QUOTE: WE'RE GIVING AWAY A PRETTY GOOD

54 1

BROWSER AS PART OF THE OPERATING SYSTEM. HOW LONG CAN THEY

2

SURVIVE SELLING? CLOSE QUOTE.

3

NOW, DESPITE THE DECISION TO PRICE THE BROWSER AT

4

ZERO, OR INDEED AT A NEGATIVE PRICE, PAYING PEOPLE TO TAKE

5

IT, THERE IS INEVITABLY SOME PRESSURE WITHIN MICROSOFT TO

6

TRY TO RECOVER SOME AMOUNT OF MONEY FOR THIS ENORMOUS

7

DEVELOPMENT EFFORT THAT WAS GOING ON. AND HERE IS PAUL

8

MARITZ IN JULY OF 1997 RESPONDING TO THAT. HE SAYS, HE IS

9

NOT PUTTING ANY SUCH PRESSURE ON FOLKS. THERE IS TALK ABOUT

10

HOW WE GET MORE DOLLARS FROM THE THOUSAND-PLUS PEOPLE WE

11

HAVE WORKING ON BROWSER-RELATED STUFF. BUT THEN HE ADDS,

12

BUT I HAVE NOT LOST SIGHT OF THE FACT THAT BROWSER SHARE IS

13

STILL AN OVERWHELMING OBJECTIVE. YOU MAY NOTICE THAT I HAVE

14

KEPT I.E. MARKETING SPENDING AT A VERY HIGH LEVEL -- AND HE

15

UNDERSCORES "VERY" -- TO FISCAL YEAR 98 AND RESISTED

16

PRESSURE TO REDUCE THIS OR SWITCH IT TO OTHER PRODUCTS.

17

I HAVE ALSO SAID NO ON THE PROPOSAL TO CHARGE

18

SEPARATELY FOR THE SHELL. NOW, WE'RE GOING TO COME TO THAT

19

SHELL IN A MINUTE, BUT BEFORE WE DO, WHAT MARITZ IS SAYING

20

IS THAT THEY ARE GOING TO SPEND A VERY HIGH LEVEL OF MONEY

21

MARKETING THIS THING THEY DON'T GET ANY MONEY FOR. THEY ARE

22

GOING TO SPEND A HUNDRED MILLION DOLLARS A YEAR -- THAT

23

COMES FROM THEIR INTERROGATORY ANSWERS -- TO DEVELOP THIS

24

PRODUCT. THEY ARE GOING TO SPEND MARKETING. THEY ARE GOING

25

TO GIVE IT AWAY FREE. AND THEY ARE DOING THAT BECAUSE

55

1

EXPLICITLY THEY KNOW THEY CAN DO THAT AND NETSCAPE, IN THEIR

2

OWN WORDS, CAN'T SURVIVE.

3

NOW, THIS IS AN INTERESTING SERIES OF DOCUMENTS.

4

BECAUSE YOU WILL REMEMBER IN THE PREVIOUS EXHIBIT, THERE WAS

5

A -- MARITZ WAS SAYING, I SAID NO TO THE PROPOSAL TO CHARGE

6

FOR THE SHELL. NOW, HERE IS A PROPOSAL TO MR. GATES,

7

MR. MARITZ AND OTHERS IN JULY OF 1997 THAT IT WOULD BE A

8

REALLY GOOD IDEA TO SELL THE SHELL WITH THE BROWSER

9

SEPARATELY. HE SAYS, IT WOULD CERTAINLY INCREASE

10

SIGNIFICANTLY WIN 98 UPGRADE SALES.

11

HE THEN GOES ON TO SAY, I KNOW THERE IS A BROWSER

12

SHARE COUNTER-ARGUMENT, THAT IS, OBVIOUSLY PUTTING A CHARGE

13

ON IT WOULD REDUCE THE DISTRIBUTION, WOULD REDUCE THE SHARE.

14

BUT HE SAYS IT'S AN INTRIGUING THOUGHT. NOW, THE SAME DAY,

15

LATER IN THE DAY, PAUL MARITZ WRITES BACK, IT IS TEMPTING,

16

BUT WE HAVE TO REMEMBER THAT GETTING BROWSER SHARE UP TO 50

17

PERCENT OR MORE IS STILL A MAJOR GOAL.

18

AND LATER THAT YEAR, CAMERON MYHRVOD WRITES TO A

19

NUMBER OF PEOPLE ASKING FOR SOME STUDIES DONE. NUMBER ONE,

20

IS, NETSCAPE'S CLIENT REVENUE, IS IT RISING? HOPE NOT.

21

FALLING, I THINK SO. AND DO WE THINK THEY ARE GETTING ANY

22

MONEY FROM ISP'S NETOPS FOR THEIR BROWSERS? IF SO, WHICH

23

NETOPS ARE STILL PAYING THEM AND CONSTRUCT A HUNTING LIST

24

FOR US TO GO AFTER.

25

SO THAT NOT ONLY WERE THEY TRYING TO DISTRIBUTE

56 1

THIS FOR FREE OR AT A NEGATIVE PRICE, BUT THEY WERE DIRECTLY

2

TARGETING NETSCAPE AND NETSCAPE'S REVENUES IN AN ATTEMPT TO

3

DEPRIVE NETSCAPE OF THE REVENUES NECESSARY TO REMAIN VIABLE,

4

EVEN AT THE EXPENSE OF VERY SUBSTANTIAL SHORT-TERM LOSSES.

5

AND THEY WERE DOING SO BECAUSE THEY KNEW THAT THIS WAS THE

6

WAY TO PRESERVE THEIR MONOPOLY OVER WINDOWS, THE

7

PROFIT-GENERATING ENGINE THAT GAVE THEM THE ENORMOUS

8

PROFITABILITY THAT MR. HOUCK TALKED ABOUT.

9

NOW, THERE IS A DOCUMENT -- IF I CAN FIND IT IN

10

JUST A MINUTE, YOUR HONOR -- I WOULD LIKE TO SHOW YOU; IT'S

11

EXHIBIT 332, BECAUSE IT SHOWS THE RECOGNITION OF MICROSOFT

12

THAT NOT ONLY WAS IT IMPORTANT TO EXTEND ITS MONOPOLY

13

CONTROL OVER THE BROWSERS TO PROTECT ITS EXISTING MONOPOLY,

14

BUT THAT THE BROWSER REPRESENTED, IN MICROSOFT'S WORDS, THE

15

CHOKE-HOLD ON THE INTERNET PLATFORM. THAT IS, THAT BY

16

GAINING CONTROL OF THE BROWSER, NOT ONLY DO THEY PROTECT

17

THEIR EXISTING MONOPOLY, BUT THEY GAIN A CHOKE-HOLD ON THE

18

INTERNET PLATFORM. AND IT IS THOSE DUAL CONSEQUENCES OF

19

MICROSOFT'S CONDUCT THAT MAKE THIS SUCH AN IMPORTANT CASE.

20

SO ONE OF THE THINGS THEY DID --

21 22

THE COURT: WOULD THIS BE AN APPROPRIATE TIME TO TAKE A BRIEF RECESS?

23

MR. BOIES: YES, IT WOULD, YOUR HONOR.

24

THE COURT: WE'LL TAKE ABOUT A TEN-MINUTE RECESS.

25

MR. BOIES: THANK YOU VERY MUCH.

57 1

(A RECESS WAS TAKEN.)

2

(AFTER RECESS)

3

MR. BOIES: THANK YOU, YOUR HONOR.

4

MICROSOFT'S EFFORTS TO DEFEAT NETSCAPE DID NOT END

5

WITH SIMPLY THE PREDATORY PRICING CAMPAIGN. WHAT MICROSOFT

6

SET OUT TO DO WAS TO FORECLOSE THE TWO PRIMARY CHANNELS OF

7

DISTRIBUTION THAT BROWSERS HAD: OEM'S AND INTERNET SERVICE

8 9

PROVIDERS. AND LET ME GO TO THE OEM CHANNEL FIRST. AND LET

10

ME GO TO A DOCUMENT IN WHICH BILL GATES RECOGNIZED IN

11

JANUARY OF 1996 BOTH THE IMPORTANCE OF THE OEM CHANNEL TO

12

BROWSERS AND HOW IT RELATED TO THE OVERRIDING GOAL OF

13

WINNING INTERNET BROWSER SHARE.

14

THIS IS BILL GATES TO HIS TOP EXECUTIVES ON

15

JANUARY 5, 1996. "WINNING INTERNET BROWSER SHARE IS A VERY,

16

VERY IMPORTANT GOAL FOR US," AS IF THEY DIDN'T KNOW IT.

17

"APPARENTLY, A LOT OF OEM'S ARE BUNDLING NON-MIRCOSOFT

18

BROWSERS AND COMING UP WITH OFFERINGS TOGETHER WITH INTERNET

19

SERVICE PROVIDERS THAT ARE GETTING DISPLAYED ON THEIR

20

MACHINES IN A FAR MORE PROMINENT WAY THAN MSN OR OUR

21

INTERNET BROWSER."

22

WHAT HE IS CONCERNED ABOUT, YOUR HONOR, IS THAT

23

OEM'S, WHETHER THEY BE COMPAQ OR IBM, WHO YOU'RE GOING TO

24

HEAR FROM, OR HEWLETT PACKARD, OR GATEWAY OR NEC, WHOSE

25

DEPOSITIONS YOU'RE GOING TO HEAR, WERE ABLE TO TAKE THEIR

58 1

MACHINES THAT THEY BUILT AND CONFIGURE THEM SO THEY COULD

2

INCLUDE NONMICROSOFT BROWSERS.

3

NOW, IN ONE OF THE MORE INTERESTING PORTIONS OF

4

MR. GATES' DEPOSITION THAT THE COURT'S IS GOING TO HEAR

5

DURING THE TRIAL, YOU WILL HEAR HIM SAY HE DOESN'T KNOW WHAT

6

"NON-MIRCOSOFT BROWSERS" MEANS, BUT HE OBVIOUSLY KNEW IT AND

7

HIS TOP EXECUTIVES OBVIOUSLY KNEW IT IN JANUARY OF 1996.

8

AND WHAT THEY WERE CONCERNED ABOUT IS THAT THE OEM'S COULD

9

DISPLAY NONMICROSOFT BROWSERS AND GIVE THEM DISTRIBUTION.

10

AND INDEED, CHRIS JONES, WHO YOU HAVE HEARD

11

REFERENCE TO BEFORE, WROTE IN JULY THAT SOME OEM'S WANT TO

12

REMOVE THE ICON FROM THE DESKTOP AND THE RESPONSE SHOULD BE

13

THAT THIS IS NOT ALLOWED.

14

THAT IS, AS THE COURT IS AWARE, THE BROWSER CAME

15

WITH A DESKTOP ICON AND WHAT SOME OF THE OEM'S WANTED TO DO

16

WAS REMOVE THAT ICON SO THEY COULD SUBSTITUTE A DIFFERENT

17

BROWSER. AND MICROSOFT'S RESPONSE TO ITS CUSTOMERS, THE

18

OEM'S, IS "YOU CAN'T DO THAT."

19

NOW, MR. REARDON WHO MICROSOFT PUT ON ITS WITNESS

20

LIST, ON SEPTEMBER 6TH, 1996, BEGINS TO WORRY THAT NETSCAPE

21

MAY TRY TO REPLACE THE WIN95 LOGO SCREEN. THAT IS, AGAIN,

22

THAT THIS WOULD BE A WAY OF USING THE OEM CHANNEL TO

23

DISTRIBUTE THE NETSCAPE BROWSER. MR. REARDON WANTS TO KNOW

24

WHETHER MICROSOFT'S OEM AGREEMENTS REQUIRE THAT THIS NOT BE

25

REPLACED.

59 1

"MIGHT WE THINK ABOUT CHANGING THE LOGO SCREEN

2

FORMATS SO THAT WINDOWS CHECKS FOR A SIGNATURE ON THE LOGO

3

FILE?"

4

WHAT HE IS SAYING IS THAT NETSCAPE, TOGETHER WITH

5

THE OEM'S, MAY TRY TO REPLACE THE WINDOWS 95 LOGO SCREEN

6

SOME WAY THAT FEATURES NETSCAPE'S BROWSER.

7

A REPLY THE SAME DAY. "I THINK IT IS TECHNICALLY

8

POSSIBLE FOR AN APP. TO REPLACE THE SCREEN FOR LATER BOOTS.

9

JOHN, DO YOU THINK WE SHOULD LOOK AT MAKING THIS HARDER"?

10

RESPONSE FROM MR. KEMPIN, WHO THE COURT IS GOING TO HEAR

11

FROM. "I WOULD LOVE THAT, BUT I DOUBT YOU EASILY CAN." IN

12

OTHER WORDS, I WOULD LIKE TO MAKE IT HARDER FOR THE OEM'S

13

AND FOR NETSCAPE TO PUT ON ANOTHER LOGO, BUT IT'S GOING TO

14

BE HARD TO DO THIS TECHNICALLY.

15

THE FINAL REPLY IS, "WE'LL DO SOMETHING TO MAKE

16

THIS HARD IN MEMPHIS." WINDOWS 98. WE'RE GOING TO MAKE IT

17

HARD TO DO. WE'RE GOING TO MANIPULATE THE TECHNOLOGY, NOT

18

FOR INNOVATION, NOT FOR CONSUMER BENEFIT, NOT FOR

19

TECHNOLOGICAL ADVANCES. WE'RE GOING TO MANIPULATE THE

20

TECHNOLOGY, AND WE'RE GOING TO CHANGE THE CONTRACTS TO MAKE

21

IT HARD FOR THE OEM TO PUT WHAT THE OEM WANTS TO PUT ON THE

22

SCREEN OF THE PERSONAL COMPUTER THE OEM IS SELLING.

23

THAT WAS IN 1995 AND 1996. AND BY SEPTEMBER OF

24

1996, NETSCAPE WAS ALREADY REPORTING THAT MICROSOFT WAS

25

ADDING RESTRICTIONS -- SO-CALLED SCREEN RESTRICTIONS.

60 1

THIS IS THE NETSCAPE REPORT. "ROD SMITH FROM IBM

2

INDICATED TODAY THAT MICROSOFT HAS CREATED NEW RESTRICTIONS

3

IN THE WINDOWS 95 LICENSE AGREEMENT WHICH PREVENT ANY OEM

4

FROM MODIFYING THE DEFAULT DESKTOP OR SHELL. THIS

5

EFFECTIVELY LOCKS OEM'S INTO NASHVILLE AND SHUTS OUT OEM

6

SPECIFIC SHELLS, SUCH AS THE PACKARD BELL INTERFACE, THE IBM

7

APTIVA INTERFACE AND, OF COURSE, PROJECT 197.

8

AND WHAT THEY ARE COMPLAINING OR NETSCAPE IS

9

COMPLAINING ABOUT IS THAT THESE SCREEN RESTRICTIONS ARE

10

GOING TO PREVENT THEM FROM WORKING WITH OEM'S IN ORDER TO

11

EFFECTIVELY DISTRIBUTE THE NETSCAPE BROWSER.

12

AND ONE OF THE THINGS THAT IS GOING TO BE VERY

13

INTERESTING, YOUR HONOR, IS THAT AS THE EVIDENCE COMES IN,

14

YOU WILL SEE MICROSOFT RELAXING THE SCREEN RESTRICTIONS FROM

15

TIME TO TIME. IF THEY CAN RELAX THEM IN A WAY THAT DOESN'T

16

ALLOW THE OEM'S TO DISTRIBUTE NETSCAPE, THEY ARE WILLING TO

17

DO IT. YOU'RE GOING TO HEAR A LOT OF TALK ABOUT THE

18

SO-CALLED WINDOWS EXPERIENCE AND ABOUT HOW EVERYBODY HAS GOT

19

TO HAVE THE SAME WINDOWS EXPERIENCE. WHAT YOU'RE GOING TO

20

FIND IS THAT MICROSOFT DOESN'T INSIST ON A UNIFORM WINDOWS

21

EXPERIENCE. IT IS WILLING TO MAKE EXCEPTIONS WHEN THE OEM'S

22

PUSH THEM, AS LONG AS THE OEM IS WILLING TO COOPERATE AND

23

NOT DISTRIBUTE NETSCAPE'S BROWSER.

24

SO WHAT YOU HAVE IS A SERIES OF PRETEXTUAL

25

ARGUMENTS: PRETEXTUAL THAT TECHNOLOGY DRIVES US AND

61 1 2

PRETEXTUAL THAT WINDOWS EXPERIENCE DRIVES US. IN FACT, WHAT IS BEING IN THE DRIVER'S SEAT HERE

3

IS THE DESIRE TO SHUT OUT THE NETSCAPE NAVIGATOR, AND AS THE

4

COURT WILL SEE WHEN WE TALK ABOUT AOL, THEY WERE PREPARED TO

5

DO THAT, EVEN AT THE EXTENT OF DISFAVORING THEIR OWN MSN

6

NETWORK IN COMPETITION WITH AOL, BECAUSE WINNING THE BROWSER

7

BATTLE WAS OF PARAMOUNT IMPORTANCE AND WAS OF PARAMOUNT

8

IMPORTANCE, I WILL REPEAT, FOR TWO REASONS.

9

ONE, IT REPRESENTED AN ABILITY TO REERECT THE

10

APPLICATIONS PROGRAMMING BARRIER TO ENTRY AND, SECOND, IT

11

ALLOWED THEM TO GAIN CONTROL OF THE BROWSER, WHICH WAS, AS

12

THEY HAVE THEMSELVES RECOGNIZED, THE CHOKE-HOLD ON THE

13

INTERNET.

14

NOW, THE OEM'S RESPONDED TO THESE NEW

15

RESTRICTIONS. THIS IS A HEWLETT PACKARD RESPONSE TO

16

MICROSOFT. "WE'RE VERY DISAPPOINTED IN YOUR RESPONSE TO OUR

17

LONG AND DRAWN OUT REQUEST TO MODIFY THE STANDARD MICROSOFT

18

WINDOWS 95 BOOT-UP SEQUENCE."

19

IT SAYS THAT MICROSOFT'S REQUIREMENTS RESULT IN

20

SIGNIFICANT AND COSTLY PROBLEMS. IT SAYS, "FROM THE

21

CONSUMER PERSPECTIVE, WE ARE HURTING OUR INDUSTRY AND OUR

22

CUSTOMERS." AND IT SAYS, "WE STRONGLY PROTESTED THE CHANGES

23

LAST FALL AND WERE FLATLY REFUSED ANY LEEWAY."

24 25

THIS IS NOT A BETTER PRODUCT CONSUMER-DRIVEN APPROACH, YOUR HONOR. THIS IS A MONOPOLIST, ABLE TO IGNORE

62 1

THE DEMANDS AND THE COMPLAINTS AND THE PROTEST OF THEIR

2

CUSTOMERS BECAUSE THEY DON'T HAVE ANY PLACE ELSE TO GO, AND

3

TO DO IT IN A WAY SO THAT THEY CAN STOP THIS GROWING

4

COMPETITIVE THREAT REPRESENTED BY NETSCAPE AND JAVA.

5

HEWLETT PACKARD PUT IT PRETTY WELL. "IF WE HAD A

6

CHOICE OF ANOTHER SUPPLIER, BASED ON YOUR ACTIONS IN THIS

7

AREA, I ASSURE YOU, YOU WOULD NOT BE OUR SUPPLIER OF

8

CHOICE."

9

UNFORTUNATELY, AS HEWLETT PACKARD RECOGNIZED, THEY

10

DIDN'T HAVE A CHOICE AND THEY HAD TO CONTINUE TO DEAL WITH

11

MICROSOFT AND THEY HAD TO CONTINUE TO DEAL WITH MICROSOFT

12

AND MICROSOFT'S TERMS. AND WHAT THOSE TERMS WERE WAS IF YOU

13

COOPERATE WITH US IN THE BROWSER AREA -- IF YOU DO WHAT WE

14

WANT WITH RESPECT TO BROWSERS, THEN, WE WILL ALLOW YOU SOME

15

FLEXIBILITY IN OTHER AREAS" -- FLEXIBILITY THAT WAS VERY

16

IMPORTANT TO THE OEM'S. THAT WAS HEWLETT PACKARD.

17

THIS IS GATEWAY -- GATEWAY FEEDBACK ON WINDOWS 98.

18

DISCUSSIONS WITH MICROSOFT ON APRIL 7, 1998. GATEWAY ASKS,

19

"WHERE CAN WE OFFER A BROWSER CHOICE? THIS IS SOMETHING WE

20

CAN DO TECHNICALLY, BUT IT'S NOT ALLOWED IN LICENSING

21

TERMS." THEY WANT TO DO BROWSER CHOICE. GATEWAY BELIEVES

22

THEY CAN DO IT TECHNICALLY, BUT IT'S NOT ALLOWED IN

23

LICENSING TERMS.

24

THEY SAY, WE WANT THE POTENTIAL TO OFFER THIS

25

CHOICE BEFORE THE WELCOME SCREEN. WE ARE CONCERNED THAT THE

63 1

INSTALLATION OF FULL MS PRODUCTS, INCLUDING CHANNELS,

2

RESULTS IN A MUCH SLOWER SYSTEMS PERFORMANCE IF THE CUSTOMER

3

CHOOSES AN ALTERNATIVE BROWSER AFTER FULL INSTALLATION ON

4

IE 4.

5

AGAIN, A RESTRICTION ON CONSUMER CHOICE, A

6

RESTRICTION ON THE APPROPRIATE TECHNICAL SOLUTION, AND

7

IMPOSITION ON SLOWER PERFORMANCE AND ADDITIONAL COSTS, ALL

8

IN SERVICE OF THE OVERRIDING GOAL OF WIDE DISTRIBUTION OF

9

THIS PRODUCT FOR WHICH THEY ARE GETTING NO REVENUE.

10

NOW, WHAT IS THE SIGNIFICANCE OF THAT OEM CHANNEL?

11

YOUR HONOR, HERE IS A DOCUMENT DISTRIBUTED IN JANUARY OF

12

1998, AND IT REFLECTS DATA GATHERED IN OCTOBER AND NOVEMBER

13

OF 1997, ABOUT A YEAR AGO. AND IT TALKS ABOUT WHERE THE

14

PEOPLE WHO USED BROWSERS GOT THEM AND WHAT YOU CAN SEE IS

15

TWO-THIRDS -- SLIGHTLY MORE THAN TWO-THIRDS OF ALL OF THE

16

PEOPLE WHO GOT A BROWSER, GOT IT EITHER THROUGH AN ISP -- 25

17

PERCENT -- OR THROUGH THEIR OWN COMPUTER -- 20 PERCENT -- OR

18

GOT IT AT WORK OR SCHOOL, WHICH IN TURN WOULD LARGELY HAVE

19

COME THROUGH AN ISP OR WITH A COMPUTER THAT THE SCHOOL OR

20

WORK GOT.

21

ONLY 19 PERCENT OF THEM HAD DOWNLOADED. YOU'RE

22

GOING TO HEAR SOME TALK, OR YOU HAVE ALREADY HEARD SOME TALK

23

FROM MICROSOFT THAT SAID, "WELL, THERE REALLY WASN'T

24

FORECLOSURE. SURE WE CHOKED OFF THE OEM CHANNEL, AND WE

25

CHOKED OF THE ISP CHANNEL, BUT THEY COULD STILL

64

1

`CARPETBOMB'. THEY COULD STILL MAIL IT OUT." WELL, FOUR

2

PERCENT GOT IT FROM THE MAIL. NINETEEN PERCENT OF IT

3

DOWNLOADED, AND EVERY YEAR THAT GOES ON, AS THE BROWSER GETS

4

LARGER AND LARGER, DOWNLOADING BECOMES MORE AND MORE

5

DIFFICULT.

6

SO THESE CHANNELS, EVEN BACK A YEAR AGO, WERE NOT

7

EFFECTIVE CHANNELS. IF YOU CHOKE OFF TWO-THIRDS OF THE

8

BUSINESS BY CHOKING OFF ISP'S AND THE OEM CHANNEL, YOU HAVE

9

CHOKED OFF THE LIFE BLOOD OF ANY BROWSER DISTRIBUTION.

10

IN ADDITION TO THE SCREEN RESTRICTIONS, THEY ALSO,

11

OF COURSE, TIED THE BROWSER TO THE OPERATING SYSTEM. AND

12

THE SCREEN RESTRICTIONS AND THE TYING ARE TWO OF THE

13

APPROACHES THAT THEY TOOK TO FORECLOSING THE OEM CHANNEL,

14

BECAUSE THEY KNEW THAT IF THEY TIED THE BROWSER TO THE

15

OPERATING SYSTEM, BECAUSE THE OPERATING SYSTEM WAS A

16

MONOPOLY, THE OEM'S HAD NO CHOICE. THEY HAD TO TAKE THE

17

OPERATING SYSTEM. AND IF THEY TIED THE BROWSER TO IT, THEY

18

NECESSARILY HAD TO TAKE THEIR BROWSER. AND ONCE MOST OEM'S

19

HAD A FUNCTIONING BROWSER, THEY DIDN'T WANT TO HAVE A SECOND

20

ONE. THEY DIDN'T NEED TO HAVE A SECOND ONE. A FEW MIGHT

21

FOR PARTICULAR PURPOSES, BUT, BY AND LARGE, THEY WERE GOING

22

TO FORECLOSE 75 PERCENT OR MORE OF THE OEM CHANNEL, IF THEY

23

COULD SIMPLY SUCCEED IN TYING A FUNCTIONING BROWSER TO THE

24

OPERATING SYSTEM.

25

NOW, BACK IN APRIL OF 1994, WHEN THEY WERE TALKING

65 1

ABOUT WINDOWS 95, THEY DIDN'T EXPECT TO HAVE A BROWSER

2

INCLUDED. IN FACT, AS THEY PUT IT, "COOL APPS., LIKE

3

MOSAIC, ARE STUFF YOU NEED TO OBTAIN FROM THIRD PARTIES."

4

BACK IN APRIL OF 1994, THEIR CONTEMPLATION WAS

5

THAT BROWSERS, WHICH THEY ALREADY KNEW ABOUT BACK THEN --

6

THEY KNEW ABOUT MOSAIC. NETSCAPE WAS IN THE PROCESS OF

7

BEING FORMED, BUT THAT WAS WHEN THEY DIDN'T RECOGNIZE

8

NETSCAPE AS A SERIOUS THREAT, AND SO IT WAS PERFECTLY FINE

9

TO HAVE THEM GET THE BROWSER FROM SOMEBODY ELSE.

10

AND THE COURT IS GOING TO HEAR, I THINK, BECAUSE

11

IT'S IN THEIR PAPERS -- MAYBE THEY WILL ABANDON IT, BUT THUS

12

FAR IN THEIR PAPERS, THEY ARGUE THAT, WELL, THE REASON WE

13

WANTED TO DO ALL OF THIS TO DISTRIBUTE THE BROWSER WAS NOT

14

BECAUSE WE REALLY CARED ABOUT BROWSER MARKET SHARE, BUT

15

BECAUSE WE WANTED TO SELL MORE WINDOWS, AND IF MORE PEOPLE

16

HAD BROWSERS, THEY WOULD WANT MORE P.C.'S."

17

THE PROBLEM WITH THAT ARGUMENT IS, FIRST, IT'S

18

INCONSISTENT WITH THEIR DOCUMENTS. THE SECOND PROBLEM WITH

19

IT IS THAT IF THE BROWSER IS SIMPLY A GOOD COMPLEMENT TO THE

20

OPERATING SYSTEM, THEN THEY OUGHT TO WANT TO HAVE NETSCAPE

21

OUT THERE AS MUCH AS POSSIBLE. THEY OUGHT TO WANT ANYBODY

22

WHO HAS A GOOD BROWSER TO GET OUT THERE AND SURVIVE AND SELL

23

MORE GOOD BROWSERS, BECAUSE THAT IS GOING TO MAKE OPERATING

24

SYSTEMS MORE PROFITABLE, AND THEY ARE GOING TO SELL MORE.

25

BUT THE FACT OF THE MATTER IS THEY WEREN'T

66 1

THINKING OF THE BROWSER AS A COMPLEMENT, BECAUSE IF THEY

2

HAD, THEY WOULDN'T BE TRYING TO SQUELCH NETSCAPE. THEY WERE

3

THINKING OF A BROWSER AS A WAY OF ERODING APPLICATIONS

4

PROGRAMMING BARRIER TO ENTRY.

5

IN THE BEGINNING, WHEN THEY THOUGHT OF IT AS A

6

COMPLEMENT, THEY WEREN'T THREATENED BY IT. IT WAS WHEN THEY

7

BEGAN TO SEE IT AS A MEANS OF BREAKING DOWN THE APPLICATIONS

8

PROGRAMMING "BARRIER TO ENTRY," THAT THEY BEGAN TO PERCEIVE

9

IT AS A THREAT.

10

THIS IS JUNE OF 1994. "WE DO NOT CURRENTLY PLAN

11

ON ANY OTHER CLIENT SOFTWARE, ESPECIALLY SOMETHING LIKE

12

MOSAIC OR CELLO."

13

THIS, AGAIN, IS SIMPLY PART OF THE RECORD THAT

14

DEMONSTRATES THAT BACK IN THIS PERIOD OF TIME, THE

15

IMPERATIVE THAT YOU'RE GOING TO HEAR FROM SOME OF THE

16

MICROSOFT WITNESSES THAT THEY MADE A DECISION THAT LONG

17

PRECEDED NETSCAPE'S FORMATION THAT THEY WERE GOING TO DO

18

WHAT THEY DID, SIMPLY IS NOT CONSISTENT WITH THE WRITTEN

19

RECORD.

20

IN JANUARY OF 1995, THEY ARE TALKING ABOUT A

21

RELEASE -- A PRESS RELEASE IN WHICH THEY ARE GOING TO

22

ANNOUNCE THAT THEY'RE LICENSING MOSAIC'S CODE. AND THIS IS

23

SENT AROUND TO A NUMBER OF EXECUTIVES BY JAMES ALLARD. IT

24

SAYS, "THIS IS THE PRELIMINARY VERSION OF RELEASE AND

25

QUESTIONS AND ANSWERS FOR BILL'S" -- BILL GATES' --

67 1

"ANNOUNCEMENT TONIGHT. WE'RE GOING TO BE ANNOUNCING EQUITY

2

STAKES IN INTERNET PROVIDER AND A LICENSING DEAL WITH

3

SPYGLASS FOR A WEB CLIENT, NOT RELATED DIRECTLY TO BSD, BUT

4

IF QUESTIONS COME UP THROUGH HERE, HERE IS THE PARTY LINE."

5

WHAT'S THE PARTY LINE BACK IN JANUARY OF 1995? I

6

WILL TELL YOU WHAT THE PARTY LINE WAS. THE PARTY LINE --

7

AND WE'LL PUT THE QUESTION AND ANSWER INTO EVIDENCE, BUT THE

8

PARTY LINE WAS THAT THEY COULDN'T EXPECT TO GET A BROWSER

9

WITH THE OPERATING SYSTEM. AND THIS WAS AS LATE AS JANUARY

10

OF 1995.

11

LET ME GO BACK TO THE ONE, IF I COULD. HERE IS

12

ANOTHER REFERENCE TO "FROSTING." THIS IS FEBRUARY, 1995.

13

"O'HARE IS THE CODE NAME FOR OUR INTERNET CLIENT, AND WE

14

PLAN TO SHIP IT IN THE WIN95 FROSTING PACKAGE, WHICH SIM

15

SHIPS WITH WINDOWS 95."

16

AGAIN, THEY ARE STILL TALKING ABOUT O'HARE IN

17

FEBRUARY OF 1995 BEING A FROSTING PACKAGE, BEING SEPARATE

18

AND BEING SOMETHING THEY ARE GOING TO CHARGE FOR.

19

YOU STILL HAVE PEOPLE, EVEN AS LATE AS OCTOBER OF

20

1996, TALKING ABOUT A STAND-ALONE BROWSER STRATEGY. BY THAT

21

TIME, OF COURSE, THE PARTY LINE IS NOW THAT WINDOWS AND

22

BROWSERS ARE ALL THE SAME AND, INDEED, AT SOME POINT,

23

BROWSERS DROPPED OUT OF THE LEXICON. SOMETIME IN LAST FEW

24

MONTHS, BROWSERS BECOME A NONWORD. AND THEY TALK ABOUT

25

BROWSING BITS OR BROWSING TECHNOLOGY.

68 1

BACK IN 1996, THEY ARE STILL TALKING ABOUT A NEED

2

TO HAVE A STAND-ALONE-BROWSER STRATEGY. AND ONE OF THE

3

THINGS THAT GOES THROUGH THE ARGUMENTS THAT MICROSOFT MAKES,

4

YOUR HONOR, IS NOT ONLY THE INCONSISTENCY WITH THE WRITTEN

5

RECORD, BUT ALSO THE FACT THAT THEIR DOCUMENTS ARE

6

INTERNALLY INCONSISTENT AND THEIR ARGUMENTS ARE INTERNALLY

7

INCONSISTENT.

8 9

ON THE ONE HAND, THEY SAY, "ALL WE WANTED TO DO WAS TO IMPROVE THE OPERATING SYSTEM," AND YET THEY ARE

10

SPENDING HUGE AMOUNTS OF MONEY TO INDUCE AND FORCE PEOPLE TO

11

TAKE STAND-ALONE VERSIONS OF INTERNET EXPLORER: STAND-ALONE

12

VERSIONS FOR WINDOWS AND STAND-ALONE VERSIONS FOR MACINTOSH.

13

THEIR GOAL WAS NOT TO IMPROVE WINDOWS.

14

THEIR GOAL WAS TO PREVENT THE DEVELOPMENT OF A

15

COMPETITIVE PLATFORM THAT WOULD ERODE THE APPLICATIONS

16

PROGRAMMING BARRIER TO ENTRY FOR WINDOWS. AND THAT IS

17

CRYSTAL CLEAR AS YOU LOOK AT THESE DOCUMENTS.

18

THIS IS MR. ALLCHIN TO MR. MARITZ, DECEMBER 20,

19

1996. "THE FIRST PRIORITY IS INSURING THAT WE LEVERAGE

20

WINDOWS."

21

NOW, HERE HE IS NOT TALKING ABOUT, "WE'RE GOING TO

22

USE INTERNET EXPLORER TO MAKE WINDOWS BETTER." HE IS NOT

23

SAYING, "WE NEED TO GET INTERNET EXPLORER OUT THERE, BECAUSE

24

THAT WAY PEOPLE WILL BUY WINDOWS." WHAT HE IS SAYING IS,

25

"WE NEED TO LEVERAGE WINDOWS IN ORDER TO MAKE INTERNET

69 1

EXPLORER A SUCCESS. THAT IS, WE HAVE TO LEVERAGE OUR

2

MONEY-MAKING, PROFIT-MAKING MACHINE TO MAKE OUR NO-REVENUE

3

PRODUCT A SUCCESS."

4

"I DON'T UNDERSTAND HOW I.E. IS GOING TO WIN," HE

5

SAYS. "MY CONCLUSION, WE MUST LEVERAGE WINDOWS MORE.

6

TREATING IE AS JUST AN ADD-ON TO WINDOWS, WHICH IS CROSS

7

PLATFORM, LOSES OUR BIGGEST ADVANTAGE -- WINDOWS MARKET

8

SHARE. WE SHOULD THINK FIRST ABOUT AN INTEGRATED SOLUTION.

9

THAT IS OUR STRENGTH."

10

INTEGRATION OR COMBINATION COMES NOT BECAUSE IT IS

11

A TECHNOLOGICAL IMPERATIVE, NOT BECAUSE IT'S EFFICIENT, NOT

12

BECAUSE IT IS GOING TO RESULT IN A BETTER PRODUCT OR MORE

13

INNOVATION, BUT BECAUSE THAT IS WAY THEY LEVERAGE WINDOWS,

14

THEIR STRENGTH, THEIR MARKET SHARE, AND THEIR MONOPOLY, IN

15

ORDER TO MAKE INTERNET EXPLORER DOMINANT.

16 17

HERE IS MR. ALLCHIN ON JANUARY 2, 1997. YOU SEE BROWSER SHARE AS JOB 1. THE REAL ISSUE DEALS WITH NOT

18

LOSING CONTROL OF THE API'S ON THE CLIENT AND NOT LOSING

19

CONTROL OF THE END USER EXPERIENCE. FOR NETSCAPE, THIS IS

20

SYNONYMOUS WITH WINNING THE BROWSER BATTLE. THAT IS BECAUSE

21

THEY DON'T HAVE WINDOWS. WE HAVE AN ASSET WHICH HAS API'S

22

AND CONTROL THE END-USER EXPERIENCE: WINDOWS."

23

AND THEN, JUST TO BE CLEAR, WHEN HE TALKS ABOUT

24

LEVERAGE, HE IS NOT TALKING ABOUT ANYTHING TECHNOLOGICAL, HE

25

SAYS, "WE ARE NOT LEVERAGING WINDOWS FROM A MARKETING

70 1

PERSPECTIVE. WE DO NOT USE OUR STRENGTH -- WHICH IS THAT WE

2

HAVE AN INSTALLED BASE OF WINDOWS, AND WE HAVE A STRONG OEM

3

SHIPMENT CHANNEL FOR WINDOWS."

4

"I AM CONVINCED WE HAVE TO USE WINDOWS. THIS IS

5

THE ONE THING THEY DON'T HAVE. WE HAVE TO BE COMPETITIVE

6

WITH FEATURES, BUT WE NEED SOMETHING MORE -- WINDOWS

7

INTEGRATION."

8

IN OTHER WORDS, WE HAVE TO TIE WINDOWS TO THE

9

OPERATING SYSTEM. WE HAVE TO TIE INTERNET EXPLORER TO THE

10

OPERATING SYSTEM IN ORDER FOR INTERNET EXPLORER TO SUCCEED

11

IN THEIR GOAL.

12

HERE IS A MESSAGE FROM MR. MARITZ TO MR. ALLCHIN.

13

"I AGREE THAT WE HAVE TO MAKE WINDOWS INTEGRATION OUR BASIC

14

STRATEGY."

15

THIS IS IN RESPONSE TO MR. ALLCHIN SAYING, "YOU

16

HAVE GOT TO INTEGRATE WINDOWS OR WE'RE GOING TO LOSE THE

17

BROWSER WAR."

18

DOES MR. MARITZ SAY, "THAT IS A REALLY GREAT IDEA,

19

BECAUSE IF WE INTEGRATE WINDOWS IN IE, WE'RE GOING TO HAVE A

20

REALLY GREAT PRODUCT"? NO. HE SAYS, "THE PAIN OF THIS

21

STRATEGY IS WE HAVE TO SUBORDINATE OTHER OEM WINDOWS

22

OBJECTIVES TO THIS.

23

DECLARE THAT WE WILL SYNC IE4 IN MEMPHIS, EVEN IF IT MEANS

24

MISSING 6/97 OEM WINDOW WITH MEMPHIS.

25

HOWEVER, I SEE LITTLE OPTION BUT TO

SO IN ORDER TO TIE IE AND WINDOWS TOGETHER, THEY

71 1

ARE PREPARED EVEN TO INFLICT PAIN ON THEIR CORE MONOPOLY

2

ASSET. AND THEY CAN AFFORD TO DO THAT, YOUR HONOR, BECAUSE

3

THEY KNOW THE OEM'S HAVE NOWHERE ELSE TO GO. AND YOU'RE

4

GOING TO HEAR THAT FROM OEM, AFTER OEM, IN THE DEPOSITION

5

TESTIMONY -- THAT THEY HAVE NO OTHER VIABLE ALTERNATIVE.

6

AND IT IS ONLY BECAUSE OF THEIR MONOPOLY POWER THAT THEY CAN

7

AFFORD TO USE THAT MONOPOLY POWER IN A WAY THAT THEY HAVE IN

8

ORDER TO STOP NETSCAPE'S DISTRIBUTION AND ENFORCE IE'S

9

DISTRIBUTION.

10

MR. BOIES: HERE IS PAUL MARITZ IN JANUARY OF

11

1997. QUOTE: "TO COMBAT NETSCAPE, WE HAVE TO POSITION THE

12

BROWSER AS, QUOTE, GOING AWAY, CLOSE QUOTE, AND DO DEEPER

13

INTEGRATION ON WINDOWS" -- IN OTHER WORDS, INTEGRATE IT SO

14

DEEPLY AND COMBINE IT IN SUCH A WAY THAT NOBODY CAN FIND

15

WHERE THE BROWSER IS, AND POSITION IT AS, QUOTE, GOING AWAY.

16

THEY HAVE GOT TWO SEPARATE PRODUCTS: AN OPERATING

17

SYSTEM AND A BROWSER. THEY HAVE GOT A MAJOR COMPETITOR IN

18

THE BROWSER MARKET THAT DOESN'T HAVE AN OPERATING SYSTEM,

19

BECAUSE NOBODY ELSE HAS A COMPETITIVE OPERATING SYSTEM. AND

20

THEY KNOW THAT IF THEY CAN TIE THESE TWO TOGETHER -- IF THEY

21

CAN TELL PEOPLE THE BROWSER IS SIMPLY GOING AWAY AND IT'S

22

BECOMING PART OF THE OPERATING SYSTEM, THAT IS THE WAY THAT

23

THEY COMBAT NETSCAPE. AND WHAT YOU SEE HERE IS CLEAR

24

EVIDENCE THAT WHAT THEY ARE DOING IS DESIGNED TO COMBAT

25

NETSCAPE, TO DO THE INTEGRATION TO ACCOMPLISH THIS

72 1 2

PARTICULAR GOAL. THIS IS A FEBRUARY 24, 1997 MEMORANDUM TO

3

MR. GATES AND MR. MARITZ AND MR. ALLCHIN. AND IT IS

4

REPORTING ON HOW DO THEY GET PEOPLE WHO ARE NOW USING

5

NAVIGATOR TO SWITCH.

6

AND MR. HOUCK -- I MENTIONED THE SPECTACLE OF

7

MICROSOFT RUNNING AROUND THE COUNTRY AND TRYING TO FIND

8

PEOPLE TO SAY NEGATIVE THINGS ABOUT NETSCAPE AND SUING

9

M.I.T. AND HARVARD TO SEE IF THEY CAN GET SOME AUTHORS TO

10

REVEAL SOME TAPES THAT HAVE SOME CRITICAL THINGS ABOUT

11

NETSCAPE ON THEM.

12

WHEN BUSINESS WAS BEING DONE OR WHEN PEOPLE WERE

13

ACTUALLY ENGAGED IN EVALUATING NETSCAPE AS A COMPANY AND A

14

BROWSER AS A PRODUCT, THEY KNEW HOW EFFECTIVE NETSCAPE WAS,

15

AND THEY KNEW HOW GOOD THE BROWSER WAS, AND THEY KNEW THAT

16

THE NAVIGATOR USERS WOULD NOT SWITCH -- WOULD NOT WANT TO

17

DOWNLOAD IE 4 TO REPLACE THEIR NAVIGATOR BROWSER. HOWEVER,

18

MICROSOFT EXECUTIVES ARE TOLD, "ONCE EVERYTHING IS IN THE OS

19

AND RIGHT THERE INTEGRATED IN THE OS -- IN THEIR FACE, SO TO

20

SPEAK, THEN THEY SAID THEY WOULD USE IT BECAUSE THERE WAS NO

21

MORE NEED TO USE SOMETHING SEPARATE.

22

THE STUNNING INSIGHT IS THIS: "TO MAKE THEM

23

SWITCH AWAY FROM NETSCAPE, WE NEED TO MAKE THEM UPGRADE TO

24

MEMPHIS. THAT IS, WE NEED TO MAKE THEM UPGRADE TO A PRODUCT

25

WHERE WE HAVE COMBINED, OR INTEGRATED, OR PACKAGED THE

73

1

BROWSER AND THE OPERATING SYSTEM TOGETHER SO THAT WHEN THEY

2

GET THE NEW OPERATING SYSTEM, THEY GET THE BROWSER. AND NOW

3

THEY HAVE NO NEED FOR NETSCAPE'S BROWSER.

4

THE SAME DAY, A SIMILAR MEMO, CHRISTIAN WILDFEUER.

5

"IT SEEMS CLEAN THAT IT WOULD BE VERY HARD TO INCREASE

6

BROWSER MARKET SHARE OR THE MERITS OF IE 4 ALONE. IT WILL

7

BE MORE IMPORTANT TO LEVERAGE THE OS ASSET TO MAKE PEOPLE

8

USE IE INSTEAD OF NAVIGATOR."

9

IN OTHER WORDS, THEY INTERNALLY KNEW THEY WEREN'T

10

GOING TO INCREASE BROWSER MARKET SHARE ON THE MERITS OF

11

IE 4 ALONE. IT WAS ONLY BY TYING TO THE OS ASSET -- THE

12

MONOPOLY ASSET AND MAKING PEOPLE USE IE WERE THEY GOING TO

13

SUCCEED.

14

NOW, WE HAD A CHANNEL OF THE OEM'S. THEY

15

APPROACHED THE OEM CHANNEL BY ELIMINATING SCREEN

16

RESTRICTIONS AND BY TYING. THE SECOND MAJOR CHANNEL IS

17

ISP'S. HOW WERE THEY GOING TO CLOSE OFF THE ISP CHANNEL?

18

WELL, THEY HAD SEVERAL TOOLS TO WORK WITH. THE

19

FIRST TOOL WAS SIMPLY GIVING IT AWAY FREE, AND THAT HAD AN

20

EFFECT. BUT THE NEXT TOOL WAS TO GO TO THE ISP'S AND SAY,

21

WE'LL GRANT YOU FAVORABLE ACCESS TO WINDOWS BOX, THE WINDOWS

22

MONOPOLY DISPLAY, THE THING NOBODY ELSE HAS, IF YOU WILL

23

AGREE TO GIVE OUR BROWSER PREFERRED STATUS."

24 25

AND HERE IS A REPORT ON AT&T. AT&T -- THEY REALLY LIKE TO BE BROWSER-NEUTRAL AND ARE STRONGLY MOTIVATED TO

74 1

PRESERVE THEIR PARTNERSHIP WITH NETSCAPE. IN OTHER WORDS,

2

THEY DON'T WANT TO SWITCH. BUT BRAD SILVERBERG HAS TOLD

3

THEM THAT TO GET IN THE BOX, THEY NEED TO GIVE US PREFERRED

4 5 6 7

STATUS. THEN IT GOES ON TO SAY, "IT IS VERY CLEAR THAT THEY REALLY, REALLY WANT TO BE IN THE WINDOWS BOX." OF COURSE THEY DID. IT WAS AN ESSENTIAL ELEMENT

8

OF THEIR SURVIVAL, BECAUSE IF YOU PUT CERTAIN ISP'S IN THE

9

BOX AND NOT OTHERS, THOSE ISP'S HAD A TREMENDOUS ADVANTAGE

10

OVER THEIR COMPETITORS. AND BECAUSE WINDOWS HAD A MONOPOLY,

11

BECAUSE THERE WAS NO SUBSTITUTE FOR WINDOWS, MICROSOFT HAD

12

THE ABILITY TO TRADE OFF THAT ADVANTAGE TO DISCRIMINATE AND

13

TO USE ITS MONOPOLY POWER TO FORCE ISP'S TO GIVE PREFERRED

14

STATUS TO THEIR BROWSER.

15

AT&T IS STILL FIGHTING THE BATTLE. THIS IS MARCH

16

15, 1996. THEY ARE TELLING MICROSOFT THAT THEY WANT TO TALK

17

SEPARATELY ABOUT IE. THEY WOULD LIKE TO TALK SEPARATELY.

18

THEY DON'T WANT TO TIE THESE TWO THINGS TOGETHER. THEY WANT

19

TO HAVE A SEPARATE NEGOTIATION. THEY WANT TO VERY BADLY BE

20

IN THE WINDOWS BOX, BUT THEY DON'T WANT TO TIE THAT DECISION

21

TO TAKING IE.

22

WHAT DOES MR. SILVERBERG REPORT? I HAVE TOLD THEM

23

THAT THE ONLY WAY WE CAN EVEN CONSIDER AT&T BEING IN THE

24

WINDOWS BOX IS IF AT&T GIVES IE EXCLUSIVE OR VERY, VERY

25

PREFERENTIAL TREATMENT, ALA WHAT WE HAVE WITH AOL. PARITY

75 1

IS COMPLETELY UNACCEPTABLE FOR THEM TO BE IN THE BOX." HE

2

GROANED, "I TOLD HIM IT WAS COMPLETELY NONNEGOTIABLE AND HE

3

HAD TO DECIDE."

4

BECAUSE MICROSOFT HAS A MONOPOLY, THEY CAN AFFORD

5

TO SAY, "THESE ARE NONNEGOTIABLE DEMANDS." AND BECAUSE THEY

6

HAVE A MONOPOLY, ISP'S ARE STRONGLY MOTIVATED TO GIVE THEM

7

WHAT THEY WANT.

8 9

HERE IS A DESCRIPTION OF WHAT THE PREFERRED LICENSE MEANS. IT MEANS THAT THE ISP AGREES THAT IE WILL BE

10

THE PREFERRED AND DEFAULT BROWSER THEY DISTRIBUTE TO THEIR

11

CUSTOMERS. THEY WILL ANNOUNCE THAT PUBLICLY. AND AS AN

12

ENFORCEMENT MECHANISM, THEY ARE GOING TO REPORT TO MICROSOFT

13

ON A QUARTERLY BASIS HOW MANY BROWSERS THEY SHIP AND THEY

14

WILL ALSO DISPLAY THE IE LOGO ON THEIR HOME PAGE.

15

NOW, THIS IS A PRODIGY DOCUMENT THAT TALKS ABOUT

16

THE MICROSOFT INTERNET EXPLORER AGREEMENT. AND IT SAYS IT

17

IS ABSOLUTELY CRITICAL.

18

COULD WE HAVE A BLOWUP OF THIS FIRST GRAPH HERE?

19

AS YOU KNOW, IT WAS ABSOLUTELY CRITICAL TO THE

20

PRODIGY AGREEMENT THAT PRODIGY OBTAIN MICROSOFT'S AGREEMENT

21

TO INCLUDE PRODIGY'S ICON IN THE ONLINE SERVICE DESKTOP

22

FOLDER, WHICH APPEARS IN WINDOWS 95. THIS WAS ESSENTIAL IN

23

ORDER TO REMAIN COMPETITIVE.

24 25

AND THEN IF WE CAN BLOW THIS ONE UP, ON MOST MAJOR ISSUES, MICROSOFT IS NOT WILLING TO NEGOTIATE.

76 1

IN ANY EVENT, WHAT IT SAYS IS WHAT MICROSOFT

2

WOULDN'T DO -- MOST ISSUES THEY WOULDN'T NEGOTIATE ON AND

3

WHAT THEY PARTICULARLY WOULDN'T NEGOTIATE ON WAS THE

4

BROWSER.

5

ARE WE ABLE TO PULL THAT UP?

6

THE COURT: TELL ME WHAT IT SAYS.

7

MR. BOIES: WHAT IT SAYS IS THAT IT WON'T

8 9 10

NEGOTIATE ON THE BROWSER. IT IS NON-NEGOTIABLE. LET ME SHOW YOU THIS. "THERE WERE MANY OBJECTIONABLE PROVISIONS IN THE ORIGINAL DRAFT OF THE

11

AGREEMENT WHICH MICROSOFT FORWARDED TO PRODIGY.

12

CONSEQUENTLY, WE REQUESTED NUMEROUS CHANGES TO THE MICROSOFT

13

DRAFT, BUT ON MOST ISSUES, MICROSOFT WAS NOT WILLING TO

14

NEGOTIATE. FOR EXAMPLE, THE ORIGINAL DRAFT CONTAINED A

15

PROVISION THAT" -- AND I CAN'T READ THIS. I WAS DOING JUST

16

FINE.

17

ANYWAY, I FIGURE IF WINDOWS CAN CRASH FOR BILL

18

GATES -- WELL, LET'S GO ON TO ICP'S, BECAUSE NOT ONLY DID

19

THEY DO THIS WITH THE INTERNET SERVICE PROVIDERS, BUT THEY

20

WENT ON TO INTERNET CONTENT PROVIDERS AND IMPOSED A VARIETY

21

OF RESTRICTIONS. AND ONE OF THE MOST IMPORTANT INTERNET

22

CONTENT PROVIDERS IS INTUIT. AND INTUIT HAS A NUMBER OF

23

DIFFERENT FUNCTIONS. IT'S OBVIOUSLY WIDELY KNOWN AS THE

24

MOST SUCCESSFUL AND MOST WIDELY USED FINANCIAL SERVICES

25

SOFTWARE.

77 1

IT WAS VERY IMPORTANT TO INTUIT TO GET ACCESS TO

2

WINDOWS SO THAT IT COULD BE UPDATED THROUGH THE INTERNET

3

EASILY. THERE WERE MANY OTHER THINGS THAT ONLY MICROSOFT

4

COULD OFFER INTUIT. AND MICROSOFT CAME TO INTUIT, MUCH AS

5

THEY CAME TO AOL, SAYING, "WHAT DO WE HAVE TO PAY YOU? WHAT

6

DO WE HAVE TO DO FOR YOU TO GET YOU TO SCREW NETSCAPE?" AND

7

WHAT MICROSOFT AND INTUIT ENTERED INTO WAS AN AGREEMENT.

8

AND IN THAT AGREEMENT, INTUIT AGREED TO BUNDLE IE 3 AND IE 4

9

WITH ALL NEW '97 AND '98 RELEASES AND TO NOT ENTER INTO ANY

10

MARKETING OR PROMOTION AGREEMENTS WITH OTHER BROWSER

11

MANUFACTURES FOR DISTRIBUTION OR PROMOTION OF INTUIT

12

CONTENT. IN OTHER WORDS, AS A PRICE OF GETTING ACCESS TO

13

WHAT INTUIT NEEDED, INTUIT HAD TO AGREE TO BOYCOTT NETSCAPE,

14

AND INTUIT HAD TO AGREE TO CREATE A DIFFERENTIATED CONTENT

15 16

AREA FOR INTUIT CHANNEL THAT IS AVAILABLE TO ONLY IE USERS. NOW, AFTER SHUTTING OFF THE OEM AND THE ISP

17

CHANNELS, OR CONTEMPORANEOUS WITH DOING THAT, MICROSOFT ALSO

18

WENT TO OTHER MAJOR INDUSTRY PLAYERS, INTEL AND APPLE, AND

19

TRIED TO GET THEM TO AGREE NOT TO SUPPORT NETSCAPE'S BROWSER

20

OR JAVA.

21

AND HERE IS AN AUGUST 2, 1995 MEMO -- INTEL

22

MEMO -- WHERE GATES IS SAYING TO INTEL THAT THERE IS A

23

FUNDAMENTAL PROBLEM WITH FREE SOFTWARE FROM AN INTEL

24

SOFTWARE GROUP. WE'RE GOING TO COME BACK TO THAT.

25

AND THEN HE SAYS, "MICROSOFT IS VERY SENSITIVE TO

78 1

WHAT INTEL MIGHT DO ON THE CLIENT SIDE. FOR EXAMPLE, JAVA

2

IS A SHOW STOPPER." AND BILL GATES SAYS, "SUPPORTING

3

CERTAIN THIRD PARTY DEALS WOULD BE A PROBLEM. WE NEED TO

4

CONSIDER THE CONTEXT OF THEIR PERVASIVE INTERNET PROGRAM TO

5

ASSURE WE ARE NOT UNKNOWINGLY STEPPING ON ONE OF THEIR KEY

6

STRATEGIES."

7 8 9

AND, OF COURSE, THEIR MOST KEY STRATEGY OF ALL WAS BROWSERS. AND THIS IS BILL GATES IN JUNE OF 1996. THIS IS

10

REPORTING ON A CONVERSATION THAT HE HAD WITH ANDY GROVE, THE

11

CHIEF EXECUTIVE OFFICE OF INTEL.

12

"ON JAVA," GATES WRITES, "I TOLD ANDY IT'S

13

INAPPROPRIATE FOR THEIR GROUP TO TAKE ANYTHING RESEMBLING A

14

WINDOWS API AND WRAP IT AS A JAVA API."

15

THE NEXT PARAGRAPH DOWN -- THIS IS THE NEXT MEMO.

16

IT'S BLOWUP NUMBER TEN, WHICH IS ON THE PREVIOUS PAGE. NINE

17

WAS ABOUT JAVA. TEN IS ABOUT THE BROWSER.

18

"I THANK ANDY FOR PUSHING HIS WEB PEOPLE IN OUR

19

DIRECTION. I SAID IT WAS IMPORTANT FOR US THAT THEY NOT" --

20

CAPITALIZATION BY MR. GATES -- "EVER PUBLICLY SAY THEY ARE

21

STANDARDIZING ON NETSCAPE BROWSERS."

22

NOW, WHAT YOU HAVE HERE IS USING THAT RELATIONSHIP

23

TO STOP INTEL FROM SUPPORTING NETSCAPE'S BROWSER OR JAVA.

24

THIS IS, AGAIN, GATES ON FEBRUARY 20, 1997. HERE

25

IS A SITUATION IN WHICH MICROSOFT IS BEING ASKED BY A

79 1

COMPETITOR OF INTEL, AMD, TO -- MICROSOFT IS BEING ASKED BY

2

A COMPETITOR OF INTEL, AMD, TO SUPPORT AN AMD TECHNOLOGY.

3

AND GATES DOESN'T THINK THAT INTEL IS GOING TO WANT THAT.

4

SO WHEN GATES WRITES TO HIS TOP EXECUTIVES, IT IS THAT MAYBE

5

THEY CAN USE THIS AS A BARGAINING CHIP IN ORDER TO GET INTEL

6

TO BACK OFF OF JAVA.

7

BILL GATES WRITES, "IF INTEL HAS A REAL PROBLEM

8

WITH US SUPPORTING THIS" -- THAT IS THE AMD TECHNOLOGY --

9

"THEN THEY WILL HAVE TO STOP SUPPORTING THE JAVA MULTIMEDIA

10

THE WAY THEY ARE. I WOULD GLADLY GIVE UP SUPPORTING THIS IF

11

THEY WOULD BACK OFF FROM THEIR WORK ON JAVA, WHICH IS

12

TERRIBLE FOR INTEL. I HAVE A CALL WITH ANDY ON THIS TOPIC

13

COMING UP ON MONDAY."

14

IN OTHER WORDS, MR. GATES IS SUGGESTING A DEAL

15

WITH INTEL. "YOU STOP SUPPORTING MY COMPETITOR, AND I WILL

16

STOP SUPPORTING YOUR COMPETITOR." A CLEARER EXAMPLE OF THE

17

KIND OF THING THE ANTITRUST LAWS ARE DESIGNED TO PREVENT --

18

INDEED TO CRIMINALIZE -- IS DIFFICULT TO IMAGINE.

19

THIS IS A MEMORANDUM ON MAY 27, 1997 IN WHICH ERIC

20

ENSTROM, WHO I BELIEVE MICROSOFT HAS ADDED TO THEIR WITNESS

21

LIST, AND YOU WILL BE ABLE TO ASK MR. ENSTROM ABOUT THIS

22

DOCUMENT WHEN HE COMES -- SAYS THAT HE IS MOVING

23

AGGRESSIVELY WITH INTEL ON THREE FRONTS: ONE IS INTEL TO

24

STOP HELPING SUN CREATE JAVA MULTIMEDIA API'S, ESPECIALLY

25

ONES THAT RUN WELL IE NATIVE IMPLEMENTATION ON WINDOWS.

80 1

WHY IN THE WORLD, YOUR HONOR, WOULD THE SELLER OF

2

WINDOWS WANT TO STOP INTEL FROM CREATING SOMETHING THAT RUNS

3

ON WINDOWS, ESPECIALLY THE BETTER THEY RUN, THE MORE THEY

4

WANT TO STOP IT? AND THE ANSWER IS BECAUSE THE NEED AND THE

5

DESIRE TO STOP JAVA AND NON-MIRCOSOFT BROWSERS FROM

6

FULFILLING THEIR PROMISE OF CREATING CROSS PLATFORM

7

SOLUTIONS THAT WOULD ERODE THE APPLICATIONS BARRIER TO ENTRY

8

WAS SOMETHING THAT WAS GIVEN PRIMARY IMPORTANCE MY MICROSOFT

9

AT THIS POINT IN TIME.

10

NOW, THAT WAS INTEL. MICROSOFT DID THE SAME THING

11

WITH APPLE. THAT IS, THEY USED THEIR RELATIONSHIP WITH

12

APPLE IN ORDER TO GET APPLE TO STOP USING THE NETSCAPE

13

BROWSER OR STOP PROMOTING TO MAKE THE INTERNET EXPLORER

14

BROWSER THE DEFAULT BROWSER AND TO REDUCE THE COMMITMENT

15

THAT APPLE HAD TO JAVA.

16

JUNE 23, 1996. THIS IS A MEMO FROM MR. GATES,

17

TALKING ABOUT HOW LAST TUESDAY NIGHT HE MET WITH TOP APPLE

18

EXECUTIVES, AND HE SAYS, "I HAVE TWO KEY GOALS IN INVESTING

19

IN THE APPLE RELATIONSHIP. ONE IS "RETAIN OUR APPLICATION

20

SHARE ON THE PLATFORM," AND TWO "IS SEE IF WE CAN GET THEM

21

TO EMBRACE INTERNET EXPLORER IN SOME WAY."

22

HE GOES ON TO SAY THAT THIS E-MAIL IS GOING TO

23

FOCUS EXCLUSIVELY ON NUMBER 2. HE IS TALKING EXCLUSIVELY

24

ABOUT HOW HE CAN GET APPLE TO EMBRACE INTERNET EXPLORER IN

25

SOME WAY. AND HE SAYS HE OFFERED THEM A DEAL, AND THE DEAL

81 1

WOULD LOOK LIKE THIS. THEN HE SPELLS OUT WHAT MICROSOFT

2

GETS.

3

"APPLE ENDORSES MICROSOFT INTERNET EXPLORER

4

TECHNOLOGY. APPLE AGREES TO MAINTAIN ACTIVEX SUPPORT IN THE

5

BROWSER FOR A PERIOD. THEY AGREE TO IMMEDIATELY SHIP IE ON

6

ALL OF THEIR SYSTEMS AS THE STANDARD BROWSER."

7

SO THEY ARE TRYING TO GET APPLE TO HELP THEM

8

DISTRIBUTE IE. AND WHAT IS WRONG WITH THAT? LET'S GO TO

9

WHAT'S WRONG WITH THAT, YOUR HONOR, BECAUSE WHAT'S WRONG

10

WITH THAT IS IN PART WHAT THEY DID AND IN PART HOW THEY DID

11

IT.

12

JUNE 27, 1997: THE PACE OF OUR DISCUSSIONS WITH

13

APPLE, AS WELL AS THEIR RECENT UNSATISFACTORY RESPONSE, HAS

14

CERTAINLY FRUSTRATED A LOT OF PEOPLE AT MICROSOFT. THE

15

THREAT TO CANCEL MACOFFICE 97 IS CERTAINLY THE STRONGEST

16

BARGAINING POINT WE HAVE, AS DOING SO WILL DO A GREAT DEAL

17

OF HARM TO APPLE IMMEDIATELY.

18

NOW, WHEN I QUESTIONED MR. GATES ABOUT THIS AT HIS

19

DEPOSITION, HE SAID, "WELL, WHY WOULD WE EVER CANCEL

20

MACOFFICE? THAT WAS A PROFITABLE PRODUCT FOR US."

21

WHAT THIS SHOWS IS THEY WERE PREPARED TO THREATEN

22

TO CANCEL PROFITABLE PRODUCTS IN ORDER TO PUT PRESSURE ON

23

COMPANIES TO DO WHAT THEY WANTED THEM TO DO.

24

THE COURT: I THINK WE WILL TAKE OUR NOONTIME

25

RECESS NOW. WE'RE GOING TO RESUME AT 2:00 O'CLOCK.

82

1

MR. BOIES: THANK YOU, YOUR HONOR.

2

(WHEREUPON, THE ABOVE-ENTITLED MATTER WAS

3

ADJOURNED.)

4 5 6 7 8

CERTIFICATE OF REPORTER THIS RECORD IS CERTIFIED BY THE UNDERSIGNED REPORTER TO BE THE OFFICIAL TRANSCRIPT OF THE PROCEEDINGS INDICATED.

9

______________________________

10

PHYLLIS MERANA

October 19, 1998 (P.M. Session) 1 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA - - - - - - - - - - - - - - - - - -X : UNITED STATES OF AMERICA,

:

: PLAINTIFF,

: :

V.

: C.A. NO. 98-1232 :

MICROSOFT CORPORATION,

:

: DEFENDANT.

:

- - - - - - - - - - - - - - - - - -X STATE OF NEW YORK, ET AL.,

:

: PLAINTIFFS,

: :

V.

: C.A. NO. 98-1223 :

MICROSOFT CORPORATION,

:

: DEFENDANT.

:

- - - - - - - - - - - - - - - - - -X MICROSOFT CORPORATION, : COUNTERCLAIM-PLAINTIFF, : : V.

: :

:

DENNIS C. VACCO, ET AL.,

:

: COUNTERCLAIM-DEFENDANTS. : - - - - - - - - - - - - - - - - - -X WASHINGTON, D.C. OCTOBER 19, 1998 2:03 P.M. (P.M. SESSION) VOLUME I TRANSCRIPT OF TRIAL BEFORE THE HONORABLE THOMAS P. JACKSON

2 FOR THE PLAINTIFFS:

CHRISTOPHER S. CROOK, ESQ.

DAVID BOIES, ESQ. STEPHEN D. HOUCK, ESQ. RICHARD L. SCHWARTZ, ESQ.

ALAN R. KUSINITZ, ESQ. A. DOUGLAS MELAMED, ESQ. ANTITRUST DIVISION U.S. DEPARTMENT OF JUSTICE P.O. BOX 36046 SAN FRANCISCO, CA 94102 FOR THE DEFENDANT:

JOHN L. WARDEN, ESQ.

STEVEN L. HOLLEY, ESQ. WILLIAM H. NEUKOM, ESQ. RICHARD J. UROWSKY, ESQ. MICHAEL LACOVARA, ESQ. SULLIVAN & CROMWELL 125 BROAD STREET NEW YORK, NY 10004 DAVID A. HEINER, ESQ. THOMAS W. BURT, ESQ. MICROSOFT CORPORATION ONE MICROSOFT WAY REDMOND, WA 98052-6399 COURT REPORTER:

DAVID A. KASDAN, RPR

MILLER REPORTING CO., INC. 507 C STREET, N.E. WASHINGTON, D.C. 20003 (202) 546-6666

3 INDEX PAGE CONTINUED OPENING STATEMENT BY MR. BOIES

4

4 1 2

PROCEEDINGS THE COURT: MR. WARDEN, I DON'T KNOW HOW LONG

3 YOUR OPENING IS GOING TO BE, BUT I HAVE AN INVESTITURE 4 THAT I HAVE TO GO TO THIS AFTERNOON OF A NEW COLLEAGUE AT 5 4:00, SO MY THOUGHT WOULD BE THAT I WOULD PUT YOU OVER 6 UNTIL TOMORROW MORNING AND LET MR. BOIES FINISH UP THIS 7 AFTERNOON. 8

MR. WARDEN: THAT'S FINE, YOUR HONOR.

9

THE COURT: ALL RIGHT.

10

CONTINUED OPENING STATEMENT BY COUNSEL FOR PLAINTIFFS

11

MR. BOIES: THANK YOU, YOUR HONOR.

12

BEFORE THE LUNCHEON BREAK, YOUR HONOR, WE WERE

13

TALKING ABOUT THE EXTENT TO WHICH, AND THE WAYS IN WHICH,

14

MICROSOFT USED ITS POWER TO INDUCE AND THREATEN AND

15

REQUIRE COMPANIES TO AGREE TO FAVOR INTERNET EXPLORER AND

16

DISFAVOR NAVIGATOR AND DISFAVOR JAVA. AND WE WERE TALKING

17

ABOUT APPLE, AND I THINK WE HAD JUST LOOKED AT A JUNE 27,

18

1997, MEMORANDUM TO MR. GATES FROM MR. WALDMAN, IN WHICH

19

THEY WERE TALKING ABOUT THE STRONGEST BARGAINING POINT

20

THAT MICROSOFT HAD WAS THE THREAT TO CANCEL MACOFFICE '97

21

AS DOING SO WOULD DO A GREAT DEAL OF HARM TO APPLE

22

IMMEDIATELY.

23

AND THE COURT IS GOING TO HEAR THE TESTIMONY OF

24

MR. TEVANIAN FROM APPLE, AND MR. TEVANIAN WILL TESTIFY

25

ABOUT THE NATURE OF THAT THREAT AND ABOUT HOW SERIOUSLY

5 1

APPLE TOOK THAT THREAT. BUT HERE AGAIN, WE HAVE

2

CONTEMPORANEOUS MICROSOFT EVIDENCE THAT CONFIRMS THAT THAT

3

THREAT WAS MADE AND THAT THEY KNEW THE SERIOUSNESS OF IT.

4

NOW, HERE IS A DOCUMENT DATED AUGUST 8, 1997,

5

FROM MR. GATES. AND THIS IS A PARTICULARLY SIGNIFICANT

6

DOCUMENT BECAUSE IN THIS DOCUMENT, MR. TEVANIAN FIRST

7

WRITES TO MR. GATES COMPLAINING THAT QUICKTIME, AN APPLE

8

PRODUCT, IS NOT WORKING BECAUSE WINDOWS BREAKS

9

APPLE--APPLE'S QUICKTIME. AND MR. GATES SENDS THIS

10

MEMORANDUM ON TO HIS CHIEF EXECUTIVE. HE'S GOT THREE

11

LINES.

12

FIRST LINE, "I WANT TO GET AS MUCH MILEAGE AS

13

POSSIBLE OUT OF OUR BROWSER AND JAVA RELATIONSHIP HERE."

14

TWO, "IN OTHER WORDS, A REAL ADVANTAGE AGAINST

15 16

SUN AND NETSCAPE." THIRD LINE, "WHO SHOULD AVI"--THAT'S

17

MR. TEVANIAN--"BE WORKING WITH? DO WE HAVE A CLEAR PATH

18

ON WHAT WE WANT APPLE TO DO TO UNDERMINE SUN?"

19

SO AGAIN, YOU HAVE AN ATTEMPT TO USE THE POWER

20

THAT MICROSOFT HAS IN TERMS OF THE APPLE RELATIONSHIP TO

21

GET APPLE TO AGREE TO DO THINGS THAT WILL UNDERMINE

22

NETSCAPE AND JAVA.

23

AUGUST 21, 1997, THIS IS A MEMORANDUM THAT

24

DISCUSSES MR. GATES'S PRIORITIES. FIRST PARAGRAPH SAYS,

25

"BILL'S TOP PRIORITY IS FOR US TO GET THE BROWSER IN THE

6 1

OCTOBER OS RELEASE FROM APPLE. WE SHOULD DO WHATEVER IT

2

TAKES TO MAKE THIS HAPPEN. IF WE ARE GETTING SHUT OUT, WE

3

SHOULD ESCALATE TO BILL. YOU SHOULD MAKE SURE THAT WE ARE

4

ENGAGING DEEPLY WITH APPLE ON THIS ONE AND RESOLVING ANY

5

AND ALL ISSUES.

6

SO, WHAT YOU HAVE IS, AGAIN, MICROSOFT BEING

7

WILLING TO DO WHATEVER IT TAKES TO REQUIRE APPLE TO PREFER

8

THE MICROSOFT BROWSER TO THE NETSCAPE BROWSER, USE THAT

9

RELATIONSHIP TO USE THE POWER OF MACOFFICE TO USE ALL OF

10

THE RELATIONSHIP THAT THEY HAVE.

11

AND, INDEED, THE SIGNIFICANCE OF THAT, IN PART,

12

IS POINTED OUT BY THE LAST PARAGRAPH, WHERE IT SAYS, THE

13

LAST THREE LINES, "BILL WAS CLEAR THAT HIS WHOLE GOAL HERE

14

IS TO KEEP APPLE AND SUN SPLIT. HE DOESN'T CARE THAT MUCH

15

ABOUT BEING ALIGNED WITH APPLE. HE JUST WANTS THEM SPLIT

16

FROM OTHER POTENTIAL ALLIES."

17

THIS IS NOT BUSINESS AS USUAL, YOUR HONOR. THIS

18

IS AN ATTEMPT BY A COMPANY, MICROSOFT, WITH MONOPOLY

19

POWER, TO USE THAT POWER AND TO USE ALL OF THE INDUCEMENTS

20

THAT IT HAS AVAILABLE, TO TRY TO GET ONE GROUP OF

21

CUSTOMERS TO AGREE NOT TO WORK WITH OTHER CUSTOMERS.

22

IT'S ALWAYS COMPETITION ON THE MERITS THAT THE

23

ANTITRUST LAWS FOSTER, WHERE TWO COMPANIES ARE OFFERING

24

COMPETING PRODUCTS ON THE MERITS, OFFERING BETTER PRODUCTS

25

AND LOWER PRICES, NOT WHERE THEY'RE GETTING TOGETHER IN

7 1

PRIVATE MEETINGS AND THREATENING ONE COMPANY AND INDUCING

2

ANOTHER COMPANY TO AGREE TO DISFAVOR A THIRD COMPETITOR'S

3

PRODUCTS. THIS IS NOT A SITUATION OF COMPETITION ON THE

4

MERITS. THIS IS A SITUATION, I RESPECTFULLY SUGGEST, YOUR

5

HONOR, OF CLEAR RESTRAINT OF TRADE.

6

AGAIN, THIS IS THE DOCUMENT, THE DATE I CAN'T

7

READ, BUT IT'S SUBSEQUENT TO THE IMMEDIATELY PRECEDING

8

ONE, AND AGAIN IT REPEATS, "MACOFFICE IS THE BIGGEST APPLE

9

CARROT. FROM A BROWSER, MAIL CLIENT AND JAVA PERSPECTIVE,

10

APPLE HAS OTHER OPTIONS AND WILL TRY TO SIT ON THE FENCE.

11

NEGOTIATING FROM A SINGLE POINT CENTERED AROUND MACOFFICE

12

WILL GIVE US BETTER LEVERAGE. BELIEVE APPLE WOULD HAVE A

13

STRONG NEGATIVE REACTION TO IE MOVING INTO THE WINDOWS

14

ORGANIZATION FROM A GENERAL PRINCIPLE AND NDA

15

PERSPECTIVE."

16

AGAIN, WHAT YOU SEE HERE IS MICROSOFT BEING

17

UNWILLING TO COMPETE ON THE MERITS WITH RESPECT TO THE

18

BROWSER OR THE MAIL CLIENT OR THE JAVA. WHAT THEY WANT TO

19

DO IS THEY WANT TO TIE THE RESOLUTION OF THOSE ISSUES TO

20

THE THREAT TO CANCEL MACOFFICE. THEY WANT TO USE THE

21

THREAT THAT THEY HAVE OF CANCELING MACOFFICE TO REQUIRE

22

APPLE TO AGREE TO MAKE IE THE DEFAULT BROWSER AND

23

DISADVANTAGE NETSCAPE.

24 25

HERE AS LATE AS FEBRUARY 13, 1998--THIS IS FEBRUARY OF THIS YEAR--APPLE WANTS TO KEEP BOTH NETSCAPE

8 1

AND MICROSOFT DEVELOPING BROWSERS FOR MAC, BELIEVING THAT

2

IF ONE DROPS OUT THE OTHER WILL LOSE INTEREST, AND ALSO

3

NOT REALLY WANTING TO PICK UP THE DEVELOPMENT BURDEN.

4

PERFECTLY LOGICAL SENSIBLE POSITION FOR APPLE, AS A

5

CUSTOMER, TO BE IN. THEY WANT TO HAVE TWO SUPPLIERS.

6

"GETTING APPLE TO DO ANYTHING THAT SIGNIFICANTLY

7

MATERIALLY DISADVANTAGES NETSCAPE WILL BE TOUGH. DO AGREE

8

THAT APPLE SHOULD BE MEETING THE SPIRIT OF OUR

9

CROSS-LICENSE AGREEMENT AND THAT MACOFFICE IS THE PERFECT

10 11

CLUB TO USE ON THEM." AGAIN, EXPLICIT, YOUR HONOR. APPLE DOESN'T WANT

12

TO DISADVANTAGE NETSCAPE. IT WANTS TO KEEP NETSCAPE. IT

13

WANTS TO KEEP THAT PRODUCT. THEY WERE COMPETING ON THE

14

MERITS. IT'S PERFECTLY CLEAR THAT APPLE WOULD STAY WITH

15

BOTH NETSCAPE AND MICROSOFT. MICROSOFT RECOGNIZES THAT

16

GETTING THEM TO CHANGE IS TOUGH, AND MACOFFICE IS THE

17

PERFECT CLUB TO USE ON THEM.

18

LET ME TURN TO ANOTHER AREA, YOUR HONOR, AND THIS

19

IS, AGAIN, RELATING TO INTEL, AND THIS RELATES TO AN INTEL

20

EFFORT IN ITS SO-CALLED ARCHITECTURE LABS, A PART OF INTEL

21

THAT HAS 750 ENGINEERS DEALING IN SOFTWARE.

22

THIS IS AN INTEL MEMO DATED AUGUST 2, 1995. IT

23

SAYS, "ON AUGUST 2, 1995, IN A MEETING OF INTEL AND

24

MICROSOFT EXECUTIVES, BILL GATES TOLD INTEL CEO ANDY GROVE

25

TO SHUT DOWN INTEL ARCHITECTURE LABS. GATES DIDN'T WANT

9 1

IAL'S 750 ENGINEERS INTERFERING WITH HIS PLANS FOR

2

DOMINATION OF THE PC INDUSTRY. GATES MADE VAGUE THREATS

3

ABOUT SUPPORT FOR OTHER PLATFORMS, AND ON THE SAME DAY HE

4

ANNOUNCED A MAJOR PROGRAM TO SUPPORT DIGITAL EQUIPMENT'S

5

ALPHA MICROPROCESSOR, AN INTEL COMPETITOR. GATES WAS

6

LIVID ABOUT IAL'S INVESTMENTS IN THE INTERNET AND WANTED

7

THEM STOPPED. ALL OF THIS WAS SAID IN THE PRESENCE OF

8

EXECUTIVES FROM BOTH COMPANIES."

9

AGAIN, YOUR HONOR, NOT LOW-LEVEL PEOPLE, BUT THE

10

VERY HIGHEST LEVEL OF MICROSOFT GOING TO THE HIGHEST LEVEL

11

OF A COMPETITOR AND TELLING THE COMPETITOR TO SHUT DOWN A

12

COMPETING SOFTWARE OPERATION, AND THREATENING THAT IF THEY

13

DIDN'T, THERE WAS GOING TO BE RETALIATION.

14 15

HERE IS BILL GATES'S WRITING AN E-MAIL TO ANDY GROVE, AGAIN COMPLAINING ABOUT SOME OF INTEL'S ACTIVITIES

16

HERE RELATING TO SOMETHING CALLED NSP, NATIVE SINGLE

17

PROCESSING. AND GATES IS COMPLAINING TO GROVE, "I DON'T

18

UNDERSTAND WHY INTEL FUNDS A GROUP THAT IS AGAINST

19

WINDOWS 95."

20

NOW, OF COURSE, IN A COMPETITIVE INDUSTRY WHERE

21

COMPANIES ARE FREE TO MAKE THEIR OWN CHOICES, COMPANIES

22

ARE ALWAYS FREE TO FUND GROUPS, WHETHER IT'S IN FAVOR OF

23

WINDOWS 95 OR NOT. BUT WHAT GATES IS SAYING TO INTEL, AS

24

YOU SAW MICROSOFT SAY TO APPLE AND INTEL BEFORE AND

25

INTUIT, "YOU CANNOT FUND THINGS THAT COMPETE WITH US OR WE

10 1 2

WILL RETALIATE." HERE IS SOMETHING THAT'S EVEN CLEARER. JULY 7,

3

1995. THE PRIOR MEMO WAS FROM MR. GATES TO MR. GROVE.

4

HERE IS MR. GATES REPORTING TO HIS CHIEF EXECUTIVES ABOUT

5

AN IN-PERSON DINNER THAT HE HAD WITH ANDY GROVE. IT

6

BEGINS BY SAYING, "I SPENT THREE HOURS IN SAN JOSE

7

WEDNESDAY NIGHT HAVING DINNER WITH ANDY GROVE."

8

HE GOES ON TO SAY, "THE MAIN PROBLEM BETWEEN US

9

RIGHT NOW IS NSP"--THE NATIVE SINGLE PROCESSING FROM THE

10

PREVIOUS DOCUMENT--"WE ARE TRYING TO CONVINCE THEM TO

11

BASICALLY NOT SHIP NSP."

12

AGAIN, WHAT YOU HAVE IS MICROSOFT TRYING TO TELL

13

ANOTHER COMPANY WHAT PRODUCTS IT CAN AND CANNOT SHIP.

14

NOW, ULTIMATELY, INTEL AGREED, AND PART OF THE

15

PRESSURE WAS THAT--AND THE EVIDENCE WILL SHOW THAT

16

MICROSOFT WENT AROUND TO ALL THE OEM'S, AND AS WE SAW IN

17

CONNECTION WITH THE TIE-IN AND THE OEM FORECLOSURE

18

DOCUMENTS, THE OEM'S ARE DEPENDENT ON MICROSOFT. AND IN

19

THE DOCUMENTS THAT WE PREVIOUSLY SAW, WHAT MICROSOFT TOLD

20

THE OEM'S WAS, "YOU GOT TO START FAVORING THE MICROSOFT

21

BROWSER AND SHUTTING OUT THE NETSCAPE BROWSER." HERE,

22

WHAT MICROSOFT DID WAS WENT TO THE OEM'S AND SAID, "WE

23

DON'T WANT YOU TO HAVE ANYTHING TO DO WITH INTEL AND NSP,"

24

AND THE OEM'S FELL INTO LINE, AND INTEL BACKED OFF.

25

AND YOU HAVE A GATES MEMORANDUM--AGAIN, THIS IS A

11 1

MEMORANDUM FROM MR. GATES PERSONALLY--OCTOBER 18, 1995,

2

AND HE SAYS, "PAUL," DIRECTING THIS TO PAUL MARITZ, "INTEL

3

FEELS WE HAVE ALL THE OEM'S ON HOLD WITH OUR NSP CHILL."

4

THAT'S REFERRING TO WHAT THEY DID.

5

MR. GATES CONTINUES, QUOTE, "FOR EXAMPLE, THEY

6

FEEL HEWLETT-PACKARD IS UNWILLING TO DO ANYTHING RELATIVE

7

TO MMX EXPLOITATION OR THE NEW AUDIO SOFTWARE INTEL IS

8

DOING USING WINDOWS 95 UNLESS WE SAY IT'S OKAY."

9

WHAT MICROSOFT HAS DONE IS IT HAS GOTTEN THE

10

OEM'S, AND IT HAS TOLD THEM THEY'RE NOT SUPPOSED TO DO

11

ANYTHING IN CONNECTION WITH SOFTWARE AND INTEL UNLESS

12

MICROSOFT APPROVES.

13

MR. GATES GOES ON. HE DOESN'T SAY, "WELL, THIS

14

IS AGAINST COMPANY POLICY." HE DOESN'T SAY, "THAT'S A BAD

15

THING TO DO." IT WOULD BE WRONG, THAT'S FOR SURE. WHAT

16

HE SAYS IS, "THIS IS GOOD NEWS BECAUSE IT MEANS OEM'S ARE

17

LISTENING TO US."

18

AND THEN HE GOES ON--THIS IS VERY

19

INTERESTING--"ANDY," REFERRING TO ANDY GROVE, "BELIEVES

20

INTEL IS LIVING UP TO ITS PART OF THE NSP BARGAIN," ITS

21

PART OF THE NSP BARGAIN--THAT IS, THE BARGAIN THAT THEY

22

WON'T SHIP NSP--"AND THAT WE SHOULD LET OEM'S KNOW THAT

23

SOME OF THE NEW SOFTWARE WORK INTEL IS DOING IS OKAY."

24

IN OTHER WORDS, YOUR HONOR, AS MR. GATES IS

25

ADMITTING, THEY MADE THIS BARGAIN WITH INTEL, AND NOW WHAT

12 1

INTEL IS SAYING IS, "OKAY, WE HAVE AGREED TO GIVE YOU WHAT

2

YOU WANT, NOW WILL YOU TELL THE OEM'S IT'S OKAY TO WORK

3

WITH US IN SOME OTHER SOFTWARE."

4

AND MR. GATES FINISHES, "IF INTEL IS NOT STICKING

5

TOTALLY TO ITS PART OF THE DEAL, LET ME KNOW."

6

THE BURDEN OF THE ANTITRUST LAWS IS THE

7

COMPETITORS ARE NOT SUPPOSED TO GO AND MAKE BARGAINS AND

8

MAKE DEALS AS TO WHAT THEY WILL SHIP AND WHAT THEY WILL

9

NOT SHIP, WHO THEY WILL COMPETE WITH AND WHO THEY WILL

10

COMPETE AGAINST, WHAT COMPETITOR THEY FAVOR AND WHAT

11

COMPETITOR THEY DISFAVOR. AND YET, WHAT YOU SEE IS A

12

CONSISTENT PATTERN OF MICROSOFT DOING THIS WITH OEM'S,

13

WITH ISP'S, WITH ICP'S, WITH INTEL, WITH APPLE, WITH

14

INTUIT, USING ITS MONOPOLY POWER, USING ITS LEVERAGE, AND

15

USING EVERYTHING THAT IT HAS TO THREATEN AND INDUCE

16

COMPETITORS AND CUSTOMERS TO AGREE NOT TO DO WHAT THE

17

ANTITRUST LAWS SAY THEY ARE SUPPOSED TO DO, WHICH IS TO

18

COMPETE AND MAKE PURCHASING DECISIONS ON THE MERITS.

19

NOW, ONE OF THE THINGS THAT YOU MAY HEAR FROM

20

MICROSOFT, AND I CERTAINLY SUGGESTED THIS WHEN THEY WERE

21

ARGUING THAT THEY OUGHT TO TAKE THE DEPOSITIONS OF THOSE

22

PROFESSORS UP AT HARVARD AND MIT, IS THAT THERE WERE SOME

23

MISTAKES MADE BY NETSCAPE. AND I SUPPOSE IT IS PROBABLY

24

SO THAT EVERY COMPANY MAKES MISTAKES. NO COMPANY IS

25

PERFECT. AND WE HAVE CERTAINLY SEEN A LOT OF DOCUMENTS

13 1

FROM MICROSOFT ABOUT THE BUGS IN THE MICROSOFT SYSTEMS,

2

BUT I THOUGHT IT WAS USEFUL TO JUST KEEP IN PERSPECTIVE

3

WHAT MICROSOFT WAS SAYING ABOUT NETSCAPE, NOT IN THIS

4

LITIGATION, BUT WHILE THEY WERE COMPETING AGAINST

5

NETSCAPE.

6

AND FIRST--AND THIS IS KIND OF INTERESTING FOR

7

THE DATE--JANUARY 11TH, 1995, THE COURT WILL RECALL

8

MR. GATES SAYING AT HIS DEPOSITION THAT WE PLAYED AT THE

9

BEGINNING, THAT HE JUST DIDN'T HAVE ANY IDEA ABOUT WHAT

10

NETSCAPE WAS DOING IN THE FIRST HALF OF 1995. HE WAS

11

ACTUALLY FOLLOWING IT, AS THE DOCUMENTS WILL SHOW, QUITE

12

CLOSELY.

13

INDEED, HERE IS A SITUATION WHERE DAN ROSEN

14

REPORTS TO HIM ABOUT JIM BARKSDALE, WHO IS GOING TO BE OUR

15

FIRST WITNESS, LEAVING AT&T WIRELESS TO GO TO WORK AS

16

CHIEF EXECUTIVE OFFICER OF NETSCAPE. AND DAN ROSEN WRITES

17

TO GATES THAT THIS IS GOING TO MAKE NETSCAPE AN EVEN

18

BIGGER COMPETITIVE THREAT THAN THEY HAD ANTICIPATED.

19

THAT'S IMPORTANT FOR TWO REASONS: ONE, IT MAKES CLEAR

20

THEY ARE ALREADY ANTICIPATING IN JANUARY OF 1995 NETSCAPE

21

AS A COMPETITIVE THREAT; AND SECOND, IT'S RECOGNIZING THAT

22

THE INCREASED MANAGEMENT DEPTH THAT'S BEING BROUGHT IN IS

23

GOING TO BE IMPORTANT.

24 25

AND BILL GATES WRITES BACK NOT "I DON'T CARE ABOUT NETSCAPE," BUT "I AM REALLY SURPRISED. BARKSDALE IS

14 1

A VERY GOOD MANAGER AND VERY EXPERIENCED. NETSCAPE IS

2

GETTING MORE AND MORE IMPORTANT FOR US TO WATCH."

3

THIS IS STEVE BALLMER, NOT NECESSARILY A PERSON

4

KNOWN TO GIVE OUT COMPLIMENTS TO COMPETITORS TOO FREELY,

5

QUOTE, "HAVE NO CONFUSION IN YOUR HEAD: JOB ONE FOR US

6

RIGHT NOW IS THE INTERNET AND DEFEATING NETSCAPE, SAYS

7

MICROSOFT EXECUTIVE VICE PRESIDENT STEVE BALLMER. THEY

8

ARE SIMPLY OUR SMARTEST COMPETITOR."

9

THIS IS BILL GATES WRITING TO HIS TOP EXECUTIVES,

10

"DURING THIS THINKWEEK, I HAD A CHANCE TO PLAY WITH A

11

NUMBER OF NETSCAPE PRODUCTS. THIS REINFORCED THE

12

IMPRESSION THAT I THINK ALL OF US SHARE, THAT NETSCAPE IS

13

QUITE AN IMPRESSIVE COMPETITOR. THEY ARE MOVING AT FULL

14 15

SPEED." AND IN DECEMBER OF 1996, AGAIN, BILL GATES, "I

16

THINK ON THE UI"--USER INTERFACE--"FRONT AND THE

17

TECHNOLOGY FRONT, NETSCAPE HAS TAKEN THE BASIC IE 4 IDEA

18

AND IS EXECUTING ON IT FAR BETTER THAN WE ARE."

19

SO, YOU HAVE A FORMAL COMPETITOR IN NETSCAPE,

20

COMPETITOR WITH A GOOD PRODUCT, WITH A BIG HEAD START, AND

21

THEN YOU HAVE THE EFFECTS OF MICROSOFT'S CONDUCT. I WANT

22

TO SHOW THE COURT JUST A FEW CHARTS THAT DEMONSTRATE SOME

23

OF THAT EFFECT.

24

LET ME GO TO EXHIBIT 5.

25

EXHIBIT 5 SHOWS NETSCAPE'S SHARE AT THE TOP AND

15 1

MICROSOFT'S SHARE AT THE BOTTOM. AND THIS IS SOME DATA

2

ACCORDING TO A COMPANY CALLED ADKNOWLEDGE, AND IT RELATES

3

TO BROWSER USAGE.

4 5

AND WHAT YOU SEE IS STARTING IN JANUARY OF 1997 UNTIL AUGUST OF 1995, NETSCAPE'S SHARE STARTS HIGH AND

6

COMES DOWN, STARTS AROUND 75 PERCENT, COMES DOWN TO ABOUT

7

50 PERCENT. MICROSOFT STARTS ABOUT 20 PERCENT AND GOES

8

UP.

9 10 11 12

NOW, THAT'S IMPORTANT. AND THE NEXT CHART WILL ALSO SHOW MICROSOFT'S OWN ESTIMATE OF ESSENTIALLY THE SAME THING. THIS IS MICROSOFT'S ESTIMATE, AND THIS IS

13

GOVERNMENT EXHIBIT 14, AND IT SHOWS BOTH ACTUAL AND

14

PROJECTED MARKET SHARES THAT MICROSOFT HAS FOR BROWSER,

15

AND IT SHOWS MICROSOFT'S SHARE CLIMBING SHARPLY AND THEN

16

CONTINUING TO CLIMB AS IT'S PROJECTED TO GO UP TO

17

SOMEWHERE BETWEEN 59 AND 67 PERCENT, DEPENDING ON THE

18

INTERNAL ESTIMATE.

19 20 21

NOW, THAT'S IMPORTANT, YOUR HONOR, BUT EVEN MORE IMPORTANT IS TO SHOW HOW THAT SHARE BREAKS DOWN. THE COURT WILL REMEMBER THAT WHEN WE WERE TALKING

22

ABOUT AMERICA ONLINE AND ISP'S, WE TALKED ABOUT HOW

23

MICROSOFT WAS PREPARED TO DO WHATEVER IT TOOK TO GET AOL,

24

IN PARTICULAR, TO SIGN AN EXCLUSIVE OR ALMOST EXCLUSIVE

25

AGREEMENT. AND THE COURT WILL RECALL THAT ONE OF THE

16 1

MICROSOFT PEOPLE SAID THAT THEY GAVE AWAY SO MUCH ACCESS

2

TO AOL THAT IT WAS LIKE, QUOTE, "PUTTING A BULLET THROUGH

3

THE HEAD OF MSN," WHICH WAS MICROSOFT'S ONLINE SERVICE

4

PROVIDER, AND WHAT YOU HAD WAS MICROSOFT BEING WILLING TO

5

SACRIFICE ONE OF ITS CHILDREN, MSN, IN ORDER TO GAIN AN

6

ADVANTAGE IN THE BROWSER WAR, AND THIS SHOWS YOU WHY

7

MICROSOFT WAS PREPARED TO DO THAT.

8

THE BOTTOM BLUE LINE IS MICROSOFT'S SHARE OF THE

9

BROWSER MARKET, ACCORDING TO ADKNOWLEDGE, FOR ISP'S THAT

10

MICROSOFT CLASSIFIES--NOT ME OR SOMEBODY ELSE, BUT

11

MICROSOFT CLASSIFIES--AS HAVING IE PARITY; THAT IS,

12

INTERNET EXPLORER AND NAVIGATOR ARE TREATED IN PARITY.

13

WHAT YOU SEE IS A LITTLE CHANGE BUT NOT A HECK OF

14

A LOT OF CHANGE, CERTAINLY NOT COMPARED TO THE OTHER

15

LINES. THE RED LINE IS WHAT SHOWS WHAT HAPPENS WITH

16

MICROSOFT'S SHARE OF ALL ISP'S; AND THE TOP LINE, THE

17

SOLID BLUE LINE, SHOWS MICROSOFT'S SHARE OF AOL AND

18

COMPUSERVE, THE TWO BIGGEST ONLINE SERVICE PROVIDERS, THE

19

ONES THAT MICROSOFT GAVE THE BEST DEAL TO, GOT THE MOST

20

EXCLUSIVE DEALING ARRANGEMENTS FROM, THE SERVICE PROVIDERS

21

THAT THEY WERE PREPARED TO PUT A BULLET THROUGH THE HEAD

22

OF MSN IN ORDER TO GET IT.

23

NOW, THIS REFLECTS THE SAME KIND OF DATA IN A

24

DIFFERENT CHART. THAT CAME FROM ADKNOWLEDGE. THIS COMES

25

FROM MICROSOFT'S INTERNAL DOCUMENTS.

17 1

AND YOU WILL REMEMBER THAT MICROSOFT, WHEN IT WAS

2

DEALING WITH ISP'S, REQUIRED THEM TO REPORT REGULARLY ON

3

WHAT THEIR SHIPMENTS WERE, AND THE PURPOSE WAS TO ALLOW

4

MICROSOFT TO KEEP TRACK OF HOW PEOPLE WERE SHIPPING ITS

5

BROWSER COMPARED TO NETSCAPE'S BROWSER.

6

NOW, FIRST, THESE FIRST TWO BARS RIGHT HERE, WHAT

7

THAT COMPARES IS THE WEIGHTED AVERAGE MICROSOFT SHARE OF

8

BROWSER SHIPMENTS FROM ISP'S. ALL THE ISP'S THAT ARE

9

TRACKED IN THESE PARTICULAR MICROSOFT DOCUMENTS TAKE A

10

WEIGHTED AVERAGE. IF YOU LOOK AT ISP'S WHERE IE WAS THE

11

DEFAULT BROWSER--THAT IS, WHERE THERE WAS AN EXCLUSIVE OR

12

NEAR EXCLUSIVE ARRANGEMENT TO MAKE IE THE DEFAULT

13

BROWSER--94 PERCENT OF THE BROWSERS THOSE ISP'S SHIP ARE

14

INTERNET EXPLORER. ON THE OTHER HAND, FOR PEOPLE WHERE IE

15

WAS NOT THE DEFAULT BROWSER, THEY ONLY SHIP LESS THAN 14

16

PERCENT.

17

SAME THING WITH BROWSER USAGE. OVER 60 PERCENT

18

IE BROWSER USAGE AMONG CUSTOMERS OF ISP'S WERE THEY HAVE A

19

SPECIAL DEAL, LESS THAN 20 PERCENT WHERE THEY DON'T HAVE A

20

SPECIAL DEAL.

21

AND THIS CHART, TOGETHER WITH THE PREVIOUS

22

EXHIBIT, YOUR HONOR, DEMONSTRATES IN ONE WAY--IT DOESN'T

23

TAKE ALL THE THINGS INTO ACCOUNT, BUT IT DEMONSTRATES ONE

24

IMPACT THAT MICROSOFT'S CONDUCT IS HAVING, AN IMPACT THAT

25

ISN'T RELATED TO WHETHER THEY MADE MISTAKES, ISN'T RELATED

18 1

TO THE QUALITY OF THE BROWSERS. IT'S RELATED TO THE

2

NATURE OF THE RESTRICTIONS THAT MICROSOFT WAS IMPOSING.

3

NOW, WE SAID FROM THE BEGINNING, YOUR HONOR, THAT

4

THERE IS AN URGENCY HERE, AND THE REASON WE SAID THERE IS

5

AN URGENCY, EVEN THOUGH THESE LINES ARE NOT MOVING

6

PARTICULARLY--WELL, THEY ARE ACTUALLY MOVING PRETTY

7

SHARPLY, BUT THEY'RE NOT MOVING AS SHARPLY AS THESE LINES

8

ARE, AND THE REASON IS THE ORIGINAL MARKET SHARE CHARTS,

9

AND IN MOST OF THE MARKET SHARE CHARTS THAT THE COURT HAS,

10

ARE CHARTS THAT MEASURE TOTAL BROWSER USAGE. THAT MEANS

11

THAT IT'S AN INSTALLED-BASE MEASUREMENT. WHAT THAT MEANS

12

IS THAT IT INCLUDES IN THE MARKET SHARE FOR NETSCAPE

13

EVERYBODY THAT GOT THE BROWSER ONE, TWO, THREE YEARS AGO,

14

WHEN NETSCAPE'S SHARE WAS VERY HIGH.

15

WHAT'S IMPORTANT, OF COURSE, IS WHAT'S HAPPENING

16

FOR PEOPLE WHO ARE GETTING THEIR BROWSERS NOW. AND WHAT

17

THIS SHOWS, FROM MICROSOFT'S OWN DOCUMENTS, TAKING WHAT

18

MICROSOFT CLASSIFIES AS THE TOP ACCOUNTS, 76 PERCENT ARE

19

GETTING THE MICROSOFT BROWSER AS OF MAY, AND THEY PROJECT

20

THAT AT THE END OF THIS YEAR THAT WILL GO TO 88 PERCENT,

21

SO THAT IF YOU JUST LOOK AT NEW USERS, THESE ARE THE

22

PEOPLE THAT ARE BEING FORECLOSED BY THE BUNDLING, BY THE

23

TIE-IN, BY THE SCREEN RESTRICTIONS, BY THE FORECLOSURE OF

24

THE OEM CHANNEL, BY THE FORECLOSURE OF THE ISP CHANNEL;

25

WHEN YOU STRIP OUT THE INSTALLED-BASE EFFECT OF HAVING THE

19 1

OLD PEOPLE WHO HAVE BEEN USING NETSCAPE FOR A LONG TIME

2

AND HAVEN'T SHIFTED--AND REMEMBER: THE MICROSOFT

3

DOCUMENTS ALL SAID, "WE ARE NOT GOING TO GET THESE PEOPLE

4

TO SHIFT ON THE MERITS. WE ARE ONLY GOING TO GET THEM TO

5

SHIFT AS WE UPGRADE THEM TO A NEW OPERATING SYSTEM TO

6

WHICH WE HAVE BUNDLED OR TIED THE BROWSER."

7

BUT AS THAT HAPPENS OVER TIME, WHAT HAPPENS IS

8

THAT MICROSOFT GETS THE OVERWHELMING MAJORITY OF ALL NEW

9

USERS, AND NETSCAPE IS RELEGATED TO A SMALLER SHARE OF AN

10

EVER DECLINING GROUP OF PEOPLE; THAT IS, PEOPLE WHO HAVE

11

HAD THEIR COMPUTERS FOR MORE THAN A COUPLE OF YEARS.

12

MICROSOFT GOT A COMPANY CALLED GIGA INFORMATION

13

GROUP RESEARCH TO DO SOME RESEARCH ON ACTUAL AND PROJECTED

14

MARKET SHARES, AND THEY THEN TOOK THESE MARKET SHARES, AND

15

THEY GAVE THEM TO PERSPECTIVE CUSTOMERS TO CONVINCE THE

16

CUSTOMERS THAT THEY OUGHT TO GO WITH MICROSOFT BECAUSE

17

MICROSOFT IS GOING TO PREVAIL, AND NOT TO NETSCAPE. AND

18

WHAT THIS CHART DEMONSTRATES IS WHERE THE FUTURE OF THE

19

BROWSER MARKET IS GOING IN THE ABSENCE OF SOME KIND OF

20

INTERVENTION. AND WHAT THE PREVIOUS CHART SHOWS IS IT'S

21

GOING THERE VERY, VERY FAST.

22

WHAT I HAVE TRIED TO DO, YOUR HONOR, IS GO

23

THROUGH, IN AN AMOUNT OF TIME APPROPRIATE FOR AN OPENING,

24

SOME OF OUR EVIDENCE. THERE IS A GREAT DEAL MORE

25

EVIDENCE. I THINK FOR EVERY DOCUMENT THAT WE USED THERE

20 1

ARE MANY MORE. CERTAINLY, FOR EVERY DEPOSITION CLIP THAT

2

WE HAVE USED THERE ARE MANY MORE.

3

WHAT WE ARE GOING TO BE DOING OVER THE TRIAL IS

4

TRYING TO SHOW THE COURT THE EVIDENCE THAT EXISTS, THE

5

DOCUMENTS, THE TESTIMONY, THE EXHIBITS, AND THE FACTS, THE

6

FIGURES, AND THE STATISTICS. WE WOULD ASK THE COURT, AS

7

THE EVIDENCE COMES IN BOTH FROM OUR SIDE AND FROM THE

8

OTHER SIDE, TO DO WHAT I KNOW THE COURT WILL, WHICH IS TO

9

LOOK AT THAT EVIDENCE IN CONTEXT; AND WHEN SOMEBODY

10

ATTACKS THE EVIDENCE, TO ASK YOURSELF, "IS THAT A TACT

11

CONSISTENT WITH THE CONTEMPORANEOUS RECORDS? IS IT

12

CONSISTENT WITH COMMON SENSE? IS WHAT I'M BEING TOLD

13

SOMETHING THAT CAN BE SQUARED FROM THE WRITTEN RECORD THAT

14

PEOPLE LEFT BEHIND AT THE TIME THAT THEY WERE ACTUALLY

15

DOING THESE THINGS?"

16

THANK YOU VERY MUCH.

17

THE COURT: ALL RIGHT. WHAT'S YOUR PLEASURE,

18

MR. WARDEN? DO YOU WANT TO START NOW, OR WOULD YOU PREFER

19

TO DEFER UNTIL TOMORROW MORNING?

20 21 22

MR. WARDEN: TOMORROW MORNING WOULD BE FINE, YOUR HONOR. THE COURT: ALL RIGHT. I HAVE RECEIVED A THIRD

23

MOTION--I DON'T RECALL WHO IS THE MOVANT--TO DEAL WITH

24

CONFIDENTIAL INFORMATION THAT MIGHT COME INTO EVIDENCE.

25

I THINK, PERHAPS, THE BEST WAY TO DO THAT IS TO

21 1

ALLOW BOTH SIDES TO RESPOND TO THESE MOTIONS AND THEN,

2

PERHAPS, SET ASIDE FOR ONE DAY FOR HEARING ALL OF THEM.

3

MR. WARDEN: THAT'S FINE, YOUR HONOR.

4

MR. BOIES: YOUR HONOR, I HAVE ONE HOUSEKEEPING

5

MATTER. WE HAVE BEEN ASKED BY THE PRESS WHETHER WE COULD

6

MAKE AVAILABLE TO THEM THE DOCUMENTS AND MATERIALS THAT WE

7

USED IN THE OPENING TODAY. THAT STUFF IS OBVIOUSLY NOT IN

8

EVIDENCE YET, BUT IT HAS BEEN USED IN COURT, AND I WASN'T

9

SURE HOW TO INTERPRET THE COURT'S ORDER.

10

MR. WARDEN: OUR POSITION IS, IF IT'S NOT IN

11

EVIDENCE, IT'S UNDER THE DISCOVERY PROTECTIVE ORDER; AND

12

WHEN IT COMES INTO EVIDENCE, IT'S UNDER THE FINAL PRETRIAL

13

ORDER.

14

THE COURT: FAIR ENOUGH. THAT'S A BRIGHT-LINE

15

RULE, AND I THINK WE WILL ADHERE TO IT.

16

MR. BOIES: THANK YOU, YOUR HONOR.

17

MR. HOLLEY: YOUR HONOR, MAY I RAISE ONE ISSUE

18

ABOUT THIS CONFIDENTIALITY POINT?

19

THE COURT: SURE.

20

MR. HOLLEY: WITH NETSCAPE, WE HAVE AGREED,

21

SUBJECT TO YOUR HONOR'S APPROVAL, THAT WE WILL REDACT

22

CERTAIN DOCUMENTS TO TAKE OUT INFORMATION THAT WE AGREE

23

WITH NETSCAPE IS PROPRIETARY AND SHOULD NOT BE DISCLOSED

24

IN OPEN COURT, AND WE PROPOSE TO USE THE REDACTED VERSIONS

25

OF THOSE DOCUMENTS, BUT I DIDN'T WANT TO DO THAT UNLESS

22 1

YOUR HONOR--

2 3

THE COURT: THAT'S PERFECTLY ALL RIGHT. THAT'S FINE.

4

MR. HOLLEY: THANK YOU, YOUR HONOR.

5

THE COURT: ALL RIGHT. WE WILL SEE YOU TOMORROW

6

MORNING AT 10:00.

7

(WHEREUPON, AT 2:35 P.M., THE HEARING WAS

8

ADJOURNED UNTIL 10:00 A.M., THE FOLLOWING DAY.)

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Go to Trial Documents listing Go to initial reference

John Warden's Opening Statement on Behalf of Microsoft (October 20, 1998) 1 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA 2 ______________________________ 3 UNITED STATES OF AMERICA, : PLAINTIFF, : 4 : VS. : C. A. NO. 98-1232 5 : MICROSOFT CORPORATION, ET AL. : 6 DEFENDANTS : ______________________________: 7 STATE OF NEW YORK, ET AL. : PLAINTIFFS : 8 : VS. : C. A. NO. 98-1233 9 : MICROSOFT CORPORATION, ET AL. : 10 DEFENDANTS : _______________________________ 11 WASHINGTON, D. C. OCTOBER 20, 1998 12 (A. M. SESSION) 13 TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE THOMAS P. JACKSON 14 15

16 17 18 19 COURT REPORTER: PHYLLIS MERANA 20 6816 U. S. COURTHOUSE 3RD & CONSTITUTION AVE., N.W. 21 WASHINGTON, D. C. 281-6648 22 23 24 25

2 1 FOR THE UNITED STATES: PHILLIP MALONE, ESQ. 2 DAVID BOIES, ESQ. U. S. DEPT. OF JUSTICE 3 ANTITRUST DIVISION SAN FRANCISCO, CA. 4 FOR THE DEFENDANT: JOHN WARDEN, ESQ. 5 RICHARD J. UROWSKY, ESQ. STEVEN L. HOLLEY, ESQ. 6 RICHARD PEPPERMAN, ESQ. SULLIVAN & CROMWELL 7 125 BROAD STREET NEW YORK, NEW YORK 8

FOR THE STATE OF NEW YORK: STEPHEN HOUCK, ESQ. 9 ALAN R. KUSINITZ, ESQ. N. Y. STATE DEPT. OF LAW 10 120 BROADWAY, SUITE 2601 NEW YORK, NEW YORK 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

3 1 I N D E X 2 OPENING STATEMENT BY MR. WARDEN PAGE 4 3 4 5 6 7 8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

4 1 P-R-O-C-E-E-D-I-N-G-S 2 THE DEPUTY CLERK: CIVIL ACTION 98-1232 AND 3 98-1233, UNITED STATES VERSUS MICROSOFT CORPORATION AND THE 4 STATE OF NEW YORK, ET AL., VERSUS MICROSOFT CORPORATION. 5 PHILLIP MALONE, STEVEN HOUCK AND DAVID BOIES FOR 6 THE PLAINTIFF. 7 JOHN WARDEN, STEVEN HOLLEY, RICHARD UROWSKY AND 8 WILLIAM NEUKOM FOR THE DEFENDANT. 9 THE COURT: MR. WARDEN, YOU HAVE THE STAGE. 10 MR. WARDEN: THANK YOU, YOUR HONOR. 11 OPENING STATEMENT ON BEHALF OF MICROSOFT

12 MR. WARDEN: AS YOUR HONOR KNOWS, JOHN WARDEN OF 13 SULLIVAN AND CROMWELL FOR MICROSOFT. I WOULD LIKE TO 14 INTRODUCE MY COLLEAGUES AT THE COUNSEL TABLE, NOT ALL OF 15 WHOM YOUR HONOR HAS PREVIOUSLY MET AND MANY OF WHOM WILL 16 PLAY A PART IN THIS TRIAL FOR US. 17 OF COURSE, YOUR HONOR KNOWS BILL NEUKOM, 18 MICROSOFT'S GENERAL COUNSEL, WHO WILL BE THE CORPORATE 19 REPRESENTATIVE AT THIS PROCEEDING. ALSO FROM MR. NEUKOM'S 20 OFFICE ARE TOM BURT AND DAVID HEINER, WHOM YOU HAVE MET. 21 FROM SULLIVAN AND CROMWELL, YOU KNOW STEVE HOLLEY, AS WELL 22 AS RICHARD UROWSKY, WHO IS UPSTAIRS THIS MORNING ON THE 15 23 U.S.C. SECTION 30 APPEAL. IN ADDITION, WE HAVE TED EDEMAN, 24 MICHAEL LACOVARA AND STEPHANIE WHEELER. 25 THE COURT: I'M PLEASED TO HAVE YOU ALL.

5 1 MR. WARDEN: THANK YOU. 2 AS YOUR HONOR KNOWS, WE FIRMLY BELIEVE THIS TRIAL 3 TO BE WHOLLY UNNECESSARY BECAUSE THE FACTS OF DECISIONAL 4 CONSEQUENCE ARE, IN OUR VIEW, UNDISPUTED. TODAY, HOWEVER, I 5 WILL PUT THAT POSITION ASIDE AND ADDRESS THE PROOF WE WILL 6 ADDUCE AT TRIAL. 7 WE WILL SHOW THAT MICROSOFT IS RIGHT ON THE FACTS 8 AS WELL AS THE LAW, AND RIGHT ON THE LARGER QUESTION OF HOW 9 TO PROMOTE INNOVATION, ECONOMIC GROWTH AND CONSUMER BENEFIT. 10 AS AN INITIAL MATTER, LET ME SAY THAT THE 11 GOVERNMENT'S CASE IS LONG ON RHETORIC AND SHORT ON 12 SUBSTANCE. THE EFFORT TO DEMONIZE BILL GATES IN THE OPENING 13 STATEMENTS IS EMBLEMATIC OF THIS APPROACH WHICH WRONGLY 14 CHARACTERIZES EVIDENCE OF TOUGH COMPETITION AS PROOF OF

15 ANTI-COMPETITIVE CONDUCT. 16 THE ANTITRUST LAWS ARE NOT A CODE OF CIVILITY IN 17 BUSINESS, AND A PERSONAL ATTACK ON A MAN WHOSE VISION AND 18 INNOVATION HAVE BEEN AT THE CORE OF THE VAST BENEFITS THAT 19 PEOPLE ARE REAPING FROM THE INFORMATION AGE IS NO SUBSTITUTE 20 FOR PROOF OF ANTI-COMPETITIVE CONDUCT AND ANTI-COMPETITIVE 21 EFFECTS. 22 THE EVIDENCE WILL SHOW THAT COMPANIES LIKE 23 MICROSOFT AND INTEL THAT DEVELOP COMPLEMENTARY PRODUCTS MUST 24 TALK TO EACH OTHER ON A ROUTINE BASIS TO PREVENT THE 25 CREATION OF TECHNICAL INCOMPATIBILITIES THAT ADVERSELY

6 1 AFFECT THE OPERATIONS OF THEIR PRODUCTS AND, THUS, 2 CONSUMERS. 3 AS YOUR HONOR IS WELL AWARE, MICROSOFT OPERATING 4 SYSTEMS AT THE MOMENT RUN PRIMARILY ON INTEL 5 MICROPROCESSORS, AND MOST COMPUTERS THAT CONTAIN INTEL 6 MICROPROCESSORS USE MICROSOFT OPERATING SYSTEMS. THE 7 COMPANIES HAVE A SYMBIOTIC RELATIONSHIP. THAT DOES NOT 8 MEAN, HOWEVER, THAT THEY ALWAYS AGREE ABOUT EVERYTHING. 9 SOMETIMES THEY DISAGREE ABOUT HOW BEST TO ADVANCE THEIR 10 MUTUAL INTERESTS, BUT THE FACT THAT SUCH DISAGREEMENTS OCCUR 11 IS HARDLY EVIDENCE OF AN ANTITRUST VIOLATION. NOR IS IT A 12 VIOLATION THAT DISAGREEMENTS ARE RESOLVED BY ADOPTING A 13 COMMON PLAN TO DEVELOP NEW TECHNOLOGIES JOINTLY. 14 LIKE THE OPENING STATEMENTS, THE WRITTEN DIRECT 15 TESTIMONY OF THE GOVERNMENT'S WITNESSES RELIES HEAVILY ON 16 SNIPPETS OF MICROSOFT E-MAIL MESSAGES THAT ARE TAKEN OUT OF 17 CONTEXT. NOW, I HAVE NO INTENTION THIS MORNING -- AND TIME

18 WOULDN'T PERMIT -- TO RESPOND TO EACH OF THE DOCUMENTS 19 MR. BOIES REFERRED TO IN HIS OPENING. BUT I MARKED UP A 20 COUPLE OF EXAMPLES WHILE HE WAS SPEAKING TO THE COURT 21 YESTERDAY WHICH I THINK SUFFICE TO SHOW HOW MISLEADING IT 22 CAN BE TO RELY ON THESE SNIPPETS. 23 I WILL PUT THESE ON THE ELMO, AND SINCE I MARKED 24 UP THE ONES THAT WE HAD WITH EXHIBIT TABS ON THEM, THEY ARE 25 NOT -- THEY DON'T HAVE TABS. BUT THIS IS IN YOUR BINDER,

7 1 GOVERNMENT'S EXHIBIT 43 AND -- I AM SORRY. THAT IS THE 2 WRONG DOCUMENT. THAT IS SUPPOSED TO BE THE SEPTEMBER 16TH 3 E-MAIL. 4 MR. BOIES DREW THE COURT'S ATTENTION TO THIS 5 SERIES OF E-MAILS CULMINATING IN THE TOP LINE: WE WILL DO 6 SOMETHING TO MAKE THIS HARD IN MEMPHIS, WINDOWS 95. I AM 7 SORRY. WINDOWS 98. THE FACT OF THE MATTER IS THAT WE 8 DIDN'T. THERE IS NO EVIDENCE THAT WE DID FROM A SINGLE 9 WITNESS AND MR. STORK, THE AUTHOR OF THE DOCUMENT, HAS 10 TESTIFIED THAT WE DID NOT. 11 NOW, I WILL DO GO TO WHAT HAS BEEN MARKED AS 12 GOVERNMENT'S EXHIBIT 277. AND THE PART I WILL REFER TO AND 13 HE REFERRED TO -- E-MAIL FROM BILL GATES TO ANDY GROVE, THE 14 C.E.O. OF INTEL. AND IT RELATES, AS YOUR HONOR HEARD 15 YESTERDAY, TO THE GROUP OF TECHNOLOGIES LOOSELY REFERRED TO 16 AS NATIVE SIGNAL PROCESSING. 17 MR. BOIES ASSERTED THAT THE E-MAIL EVIDENCED AN 18 ATTEMPT BY MICROSOFT TO PERSUADE INTEL NOT TO COMPETE IN 19 DEVELOPING SOFTWARE. BUT PORTIONS OF E-MAIL THAT MR. BOIES 20 DID NOT READ DESTROY THAT ASSERTION. AND I DRAW YOUR

21 ATTENTION TO THE SECOND PARAGRAPH OF THE GATES E-MAIL WHICH 22 IS ON DOWN IN THE DOCUMENT, BEGINNING: NSP MEANS A LOT OF 23 DIFFERENT THINGS. IT SAYS: WHAT IT MEANS IN TERMS OF 24 HARDWARE AND THE PROCESSOR BEING ABLE TO TAKE OVER MORE AND 25 MORE FUNCTIONS IS NONCONTROVERSIAL. WHAT IS A PROBLEM IS

8 1 THE INCOMPATIBILITY AND OVERLAP OF SYSTEM SOFTWARE DONE 2 UNDER THAT LABEL, THE LABEL NSP. ACTUALLY, SOME OF THE 3 SOFTWARE ELEMENTS ARE OKAY. WE STILL SEEM TO HAVE A COMMON 4 VIEW OF VARIOUS OF THOSE ELEMENTS. EACH OF THESE HAS TO BE 5 IMPROVED. SO WITH OUR CURRENT RELATIONSHIP, WE WILL 6 PROBABLY DIVERGE ON EACH OF THESE. THE ONES THAT ARE A 7 MAJOR PROBLEM FOR WINDOWS 95 AND WINDOWS NT TODAY ARE -- AND 8 HE SPECIFIES CERTAIN ONES. AND HE SAYS THESE ARE 9 INCOMPATIBLE WITH WHERE WE ARE TAKING WINDOWS AND HAVE MANY 10 PROBLEMS WITH WINDOWS 95. 11 HE GOES ON LATER IN THE DOCUMENT TO A PARAGRAPH 12 THAT BEGINS, "STRUCTURALLY," THREE PARAGRAPHS LATER OR FOUR 13 PARAGRAPHS LATER: IT'S VERY HARD TO HAVE OUR PEOPLE WORKING 14 AS BEST THEY CAN TO ADVANCE PC SOFTWARE STANDARDS WITH A 15 GROUP OF 200 PEOPLE -- THOSE ARE THE INTEL PEOPLE -- FULLY 16 FUNDED, TO BASICALLY TRY TO DO THE SAME THING IN PARALLEL 17 WITH NO GUIDANCE TO COORDINATE WITH US AT ALL. THEY DON'T 18 SHARE WITH US BECAUSE OF INTEL'S IP, INTELLECTUAL PROPERTY 19 ATTITUDE. WE TRIED SHIPPING SOME INTEL CODE RELATIVE TO DCI 20 AND ENDED UP IN THIS APPLE LAWSUIT THAT'S BEEN VERY 21 DAMAGING. 22 HE GOES ON TO TALK AGAIN IN THE NEXT PARAGRAPH 23 ABOUT HOW, EVEN IF THIS IS FIXED TO RUN WITH WINDOWS 95, IT

24 WON'T WORK ON WINDOWS NT. AND THE EVIDENCE WILL SHOW THAT 25 MICROSOFT'S CONCERN ABOUT THIS PRODUCT WAS -- THAT THIS

9 1 NSP -- WAS THAT PUTTING IT OUT AT THAT TIME WOULD CAUSE 2 PROBLEMS FOR BOTH MICROSOFT AND THE OEM'S BECAUSE IT DID NOT 3 WORK WITH AND HADN'T BEEN TESTED WITH WINDOWS 95. AND IF IT 4 WERE PREINSTALLED AND THEN SOMETHING WENT WRONG, THE OEM'S 5 AND MICROSOFT WOULD TAKE THE HEAT. 6 I URGE YOUR HONOR TO VIEW WITH CONSIDERABLE 7 SKEPTICISM THE CRAZY QUILT OF E-MAIL FRAGMENTS THAT SEEM TO 8 FORM THE CORE OF THE GOVERNMENT'S CASE AND TO DO THE SAME 9 WITH DEPOSITION EXCERPTS TAKEN OUT OF CONTEXT. 10 FOR EXAMPLE, YESTERDAY MR. BOIES PLAYED AN EXCERPT 11 FROM THE DEPOSITION OF MR. GATES IN WHICH MR. GATES SAID 12 THAT HE HAD FIRST LEARNED BY READING THE WALL STREET JOURNAL 13 THAT AN ALLEGATION HAD BEEN MADE THAT MICROSOFT HAD PROPOSED 14 OR DISCUSSED WITH NETSCAPE, IN THE SUMMER OF 1995, DIVISION 15 OF MARKETS. THERE IS NOTHING THAT WILL COME INTO EVIDENCE 16 THAT WILL IMPEACH THAT. THERE IS NO REPORT WITHIN MICROSOFT 17 OF PROPOSALS TO DIVIDE MARKETS. IF MR. BOIES INTENDED TO 18 IMPLY BY SHOWING THAT CLIP THAT MR. GATES DENIED KNOWING OF 19 DEALINGS BETWEEN MICROSOFT AND NETSCAPE, THE FACT THAT THERE 20 WERE DISCUSSIONS BETWEEN THE TWO PARTIES IN 1995, THAT WAS 21 WHOLLY UNFOUNDED. HE DIDN'T DENY THAT. 22 NOW I AM GOING TO TURN TO MICROSOFT'S ALLEGED 23 TYING OF WEB BROWSING SOFTWARE TO THE WINDOWS 98 OPERATING 24 SYSTEM, THE ALLEGATION THAT WAS AT THE CORE OF THE 25 GOVERNMENT'S CASE BACK IN MAY AND WAS THE PURPORTED SOURCE

10 1 OF THE FICTITIOUS URGENCY THAT LED TO THE HIGHLY EXPEDITED 2 SCHEDULE WE HAVE HAD. 3 FROM RECENT PRESENTATIONS BY THE GOVERNMENT, YOU 4 WOULD NEVER KNOW THE CENTRAL ROLE THAT THAT TYING ALLEGATION 5 ONCE PLAYED IN THE CASE. INSTEAD, WE NOW HEAR AND HEARD 6 YESTERDAY A GREAT DEAL, FOR EXAMPLE, ABOUT PREDATORY 7 PRICING, WHICH IS NOWHERE IN THE COMPLAINTS AND FOR GOOD 8 REASON. SUCH A CLAIM WOULD BE FRIVOLOUS, GIVEN THE 9 CONTRIBUTION THAT INTERNET EXPLORER TECHNOLOGIES MAKE TO 10 WINDOWS, A PRODUCT WHICH IS NOT KNOWN TO BE A MONEY-LOSER 11 FOR MICROSOFT. 12 IN ADDITION, AS YOUR HONOR KNOWS, PART OF A 13 PREDATORY PRICING CLAIM IS RECOUPMENT, AND WE HAVE HAD NO 14 ATTEMPT TO EXPLAIN HOW ANYONE COULD EVER RECOUP SUPPOSED 15 LOSSES ON A PRODUCT THAT IS FOREVER FREE. 16 NOW, AS TO THE TYING ALLEGATION, WHICH IS WHAT 17 STARTED THIS CASE OFF, TOGETHER WITH THE BACKGROUND NOISE 18 ABOUT ALL THESE CONTRACTS THAT ALLEGEDLY LOCK UP 19 DISTRIBUTION, THE EVIDENCE WILL CONFIRM WHAT MICROSOFT HAS 20 BEEN SAYING ALL ALONG, NAMELY THAT INTERNET EXPLORER 21 TECHNOLOGIES ARE AN INTEGRAL PART OF THE OPERATING SYSTEM 22 AND CANNOT BE REMOVED FROM WINDOWS 98 WITHOUT SERIOUSLY 23 DEGRADING IT. 24 THE GOVERNMENT'S WARD, NETSCAPE, AGREES WITH 25 MICROSOFT ON THIS FUNDAMENTAL POINT. UNLIKE MR. BOIES, I AM

11 1 HAPPY TO HAVE THE COURT FOCUS ON THE LETTER THAT PROVES THIS

2 POINT. ON MARCH 6, 1998, MORE THAN TWO MONTHS BEFORE THE 3 COMPLAINTS IN THIS CASE WERE FILED -- AND YOUR HONOR HAS 4 SEEN THIS DOCUMENT BEFORE -- NETSCAPE'S COUNSEL WROTE THE 5 ASSISTANT ATTORNEY GENERAL, JOEL KLEIN, IN A LETTER 6 ADDRESSED, DEAR JOEL, CONCERNING THE RELIEF NETSCAPE WOULD 7 LIKE TO SEE EMBODIED IN ANY CONSENT DECREE, SIGNED BY 8 MICROSOFT. THE LETTER STATES THAT NETSCAPE IS, QUOTE, 9 TOTALLY UNABLE TO PROVIDE EXAMPLES OF FILES THAT CAN OR 10 CANNOT BE DELETED FROM WINDOWS 98 SINCE, AS WE DISCUSSED 11 THIS WEEK, IT IS SIMPLY NOT POSSIBLE TO DELETE ANY PORTION 12 OF IE OR OF THE BROWSER FUNCTIONALITY FROM WINDOWS 98, AS 13 PRESENTLY CONFIGURED, WITHOUT SEVERELY INTERFERING WITH THE 14 OPERATING SYSTEM. 15 ANY ATTEMPT AT ANY STAGE OF THIS PROCEEDING TO 16 ANALOGIZE A FUNCTIONALITY SO DESCRIBED TO THE 17 ANESTHESIOLOGIST THAT WALKS ON HIS OWN LEGS IN AND OUT OF 18 THE OPERATING ROOM IN JEFFERSON PARISH IS RIDICULOUS. 19 MICROSOFT COULD NOT HAVE MADE THE POINT MORE CLEARLY ITSELF 20 THAN NETSCAPE'S COUNSEL MADE IT TO JOEL KLEIN. AND THIS IS 21 NOT A TECHNICALLY UNSOPHISTICATED LAWYER GETTING HIS FACTS 22 MIXED UP. HE IS SPEAKING ON BEHALF OF HIS CLIENT, AND EACH 23 OF THE SENIOR EXECUTIVES OF NETSCAPE DEPOSED BY MICROSOFT 24 HAS TESTIFIED THAT THEY REGARD INTERNET EXPLORER TO BE AN 25 INTEGRATED ELEMENT OF WINDOWS 98.

12 1 WE EXPECT THERE TO BE NO COMPETENT EVIDENCE THAT 2 WINDOWS 98 IS ANYTHING BUT A SINGLE INTEGRATED PRODUCT THAT 3 PROVIDES BOTH END USERS AND SOFTWARE DEVELOPERS WITH A WIDE 4 RANGE OF BENEFICIAL FEATURES. ONE OF THOSE FEATURES IS THE

5 ABILITY TO LOCATE AND VIEW INFORMATION ON THE INTERNET. 6 HOWEVER, THE VERY SOFTWARE CODE IN WINDOWS 98 THAT PERFORMS 7 THAT FUNCTION ALSO PERFORMS OTHER FUNCTIONS THAT HAVE NO 8 NECESSARY CONNECTION TO WEB BROWSING. 9 THIS IS LIKE THE INDUSTRIAL ROBOT REFERRED TO BY 10 JUDGE RANDOLPH IN THE COURT OF APPEALS THAT BOTH WELDS AND 11 RIVETS. IE CODE IN WINDOWS 98 PERFORMS MULTIPLE TASKS SO 12 THAT IT CANNOT BE REMOVED; THAT IS NOT AN OPTION. 13 THE GOVERNMENT HAS NO ANSWER TO THE FACT THAT IE 14 TECHNOLOGIES ARE RELIED ON BY OTHER PARTS OF WINDOWS 98, AS 15 WELL AS BY INDEPENDENT SOFTWARE DEVELOPERS WHO WANT TO 16 INCORPORATE SUPPORT FOR INTERNET STANDARDS, SUCH AS HTML, 17 INTO THEIR PRODUCTS. 18 JIM ALLCHIN FROM MICROSOFT WILL BE ONE OF OUR 19 WITNESSES, AND HE WILL EXPLAIN THE MANY WAYS IN WHICH 20 WINDOWS 98 ITSELF DEPENDS ON INTERNET EXPLORER TECHNOLOGIES, 21 INCLUDING, MOST OBVIOUSLY, THE FACT THAT THE NEW USER 22 INTERFACE FOR THE OPERATING SYSTEM AS A WHOLE IS SUPPLIED BY 23 THOSE TECHNOLOGIES. IN ADDITION, WE WILL PRESENT TESTIMONY 24 FROM MIKE DEVLIN, FROM RATIONAL SOFTWARE, WHO WILL EXPLAIN 25 HOW HIS COMPANY'S PRODUCTS AND THOSE OF OTHER INDEPENDENT

13 1 SOFTWARE DEVELOPERS RELY ON THE INTERNET EXPLORER 2 TECHNOLOGIES IN WINDOWS 98 TO OBTAIN CRUCIAL FUNCTIONALITY 3 AND HOW THOSE SOFTWARE DEVELOPERS WOULD BE ADVERSELY 4 AFFECTED IF IE TECHNOLOGIES WERE REMOVED FROM THE OPERATING 5 SYSTEM. 6 WE WILL ALSO DEMONSTRATE THE MANY BENEFITS THAT 7 FLOW TO CONSUMERS FROM THE INTEGRATED DESIGN OF WINDOWS 98,

8 INCLUDING SUBSTANTIAL IMPROVEMENTS AND EASE OF USE. BECAUSE 9 THE GOVERNMENT IS FORCED TO ACKNOWLEDGE THAT INTERNET 10 EXPLORER TECHNOLOGIES CANNOT BE REMOVED ON A WHOLESALE BASIS 11 FROM WINDOWS 98, IT RESORTS TO SEMANTIC GAMES. THEIR 12 WITNESS, PROFESSOR FELTEN, WILL TESTIFY THAT HE SPENT SIX 13 WEEKS ATTEMPTING TO HIDE EVERY MEANS OF END USER ACCESS TO 14 WEB-BROWSING FUNCTIONALITY IN WINDOWS 98, BUT HE DIDN'T 15 SUCCEED. AND IN THE PROCESS OF TRYING, HE MANAGED TO SCREW 16 UP THE OPERATING SYSTEM. PROFESSOR FELTEN DOES NOT EVEN 17 CLAIM TO HAVE REMOVED INTERNET EXPLORER TECHNOLOGIES FROM 18 WINDOWS 98. SO HIS FAILED EFFORT TO HIDE THEM ONLY PROVES 19 MICROSOFT'S POINT. 20 GLENN WEADOCK, WHO WAS HERE BACK IN JANUARY, 21 ANOTHER OF THE GOVERNMENT'S EXPERTS, WILL TESTIFY THAT, 22 DESPITE HIS BEST EFFORTS, HE TOO WAS UNABLE EVEN TO HIDE ALL 23 OF THE MANY WAYS IN WHICH CONSUMERS CAN ACCESS WEB-BROWSING 24 FUNCTIONALITY IN WINDOWS 98. BUT THE ULTIMATE SEMANTICIST, 25 PROFESSOR FARBER, WILL ADVANCE THE PROPOSITION THAT THERE IS

14 1 A COGNIZABLE DIFFERENCE BETWEEN THE PRODUCT THAT MICROSOFT 2 MARKETS AS WINDOWS 98 AND WHAT HE REGARDS AS THE KERNEL OF A 3 TRUE OPERATING SYSTEM FUNCTIONALITY THAT'S HIDDEN SOMEWHERE 4 INSIDE THAT PRODUCT. 5 NOW, PROFESSOR FARBER SAYS IT'S FINE FOR MICROSOFT 6 TO INCLUDE IE TECHNOLOGIES IN THE PRODUCT CALLED WINDOWS 98, 7 BUT IT'S NOT ALL RIGHT FOR THEM TO INCLUDE THEM IN THE SMALL 8 SUBSET OF THE PRODUCT THAT HE CHOOSES TO CALL AN OPERATING 9 SYSTEM. 10 THIS PRODUCT, AS HE DEFINES IT, DOES NOT INCLUDE

11 BASIC COMPONENTS LIKE A USER INTERFACE AND A FILE SYSTEM. 12 THAT TESTIMONY FALLS OF ITS OWN WEIGHT. AND SUCH MUSINGS 13 FROM THE ACADEMY ABOUT THE THEORETICAL DEFINITION OF AN 14 OPERATING SYSTEM HAVE NO DECISIONAL SIGNIFICANCE. 15 AS JOHN ROSE FROM COMPAQ WILL EXPLAIN, ORDINARY 16 CONSUMERS WHO BUY COMPUTERS AT WAL-MART HAVE NO INTEREST IN 17 PIECING TOGETHER AN OPERATING SYSTEM FROM A GRAB BAG OF 18 SEPARATELY MARKETED COMPONENTS, UNLIKE CERTAIN ELECTRICAL 19 ENGINEERS, RESEARCH SCIENTISTS OR WHATEVER WHO GET THEIR 20 KICKS OUT OF DOING THAT. THEY WANT THEIR NEW MACHINE TO 21 COME OUT OF THE BOX -- CONSUMERS DO -- AND JUST WORK. AS 22 YOUR HONOR KNOWS, IT'S OUR POSITION WE'RE FULLY ENTITLED TO 23 PROVIDE THE CONSUMER WITH WHAT THEY WANT. 24 UNDER THE STANDARDS APPLICABLE HERE, THE 25 GOVERNMENT MUST SHOW THAT WHATEVER BENEFITS RESULT FROM THE

15 1 INTEGRATED DESIGN OF WINDOWS 98, COULD EQUALLY BE ACHIEVED 2 BY OEM'S OR END USERS. THEY HAVE NO SUCH EVIDENCE. INDEED, 3 VARIOUS OF THE GOVERNMENT'S WITNESSES WILL INSTEAD OPINE 4 THAT WEB BROWSING SOFTWARE SHOULD BE VIEWED IN THE ABSTRACT 5 AS AN APPLICATION RATHER THAN AS AN ELEMENT OF AN OPERATING 6 SYSTEM. THESE ARE OPINIONS OF PEOPLE IGNORANT OF THE 7 INTERNAL ARCHITECTURE OF WINDOWS 98 AND HAVE NO EVIDENTIARY 8 VALUE. NETSCAPE MAY HAVE DESIGNED ITS WEB BROWSING SOFTWARE 9 AS AN APPLICATION, BUT MICROSOFT DID NOT AND IT HAD NO 10 OBLIGATION TO ADOPT THE SAME APPROACH. 11 THE TESTIMONY OF MICROSOFT WITNESSES WILL SHOW 12 THAT THE INTEGRATION OF SUPPORT FOR INTERNET STANDARDS IN 13 WINDOWS 98 OCCURRED AT THE INITIAL DESIGN STAGE WITH THE

14 SAME SOFTWARE CODE, AS I HAVE SAID, PERFORMING MULTIPLE 15 FUNCTIONS, AND THAT THE OPERATING SYSTEM WAS DEVELOPED AND 16 TESTED ON THAT INTEGRATED BASIS. 17 OUR EVIDENCE, PRINCIPALLY PRESENTED THROUGH PAUL 18 MARITZ AND JIM ALLCHIN, WILL ESTABLISH THAT INTERNET 19 EXPLORER IS NOT A STAND-ALONE WEB BROWSER THAT HAS SIMPLY 20 BEEN BOLTED ON TOP OF WINDOWS 98. BECAUSE THE RELEVANT 21 INTEGRATION OCCURRED AT THE DESIGN STAGE, THE DEMONSTRABLE 22 CONSUMER BENEFITS THAT RESULT FROM THAT INTEGRATION CANNOT 23 BE REPLICATED BY OEM'S OR END USERS. IT'S THAT SIMPLE. 24 WE DO NOT UNDERSTAND THE GOVERNMENT TO BE 25 CONTENDING THAT THE INCLUSION OF IE TECHNOLOGIES IN WINDOWS

16 1 98 PROVIDES NO CONSUMER BENEFITS, BUT IF THAT CONTENTION IS 2 MADE, IT WILL BE UNDERMINED BY THE GOVERNMENT'S OWN 3 WITNESSES. 4 FOR EXAMPLE, JOHN SOYRING OF IBM BELIEVES THAT 5 HAVING A SINGLE USER INTERFACE FOR VIEWING BOTH INFORMATION 6 STORED LOCALLY ON HARD DISKS OR FLOPPY DISKS AND INFORMATION 7 STORED REMOTELY ON NETWORK SERVERS AND THE INTERNET IS 8 BENEFICIAL TO CONSUMERS. HE IS THE GOVERNMENT WITNESS. HE 9 IS PLAINLY RIGHT ABOUT THAT, AS ARE OTHERS OF THE 10 GOVERNMENT'S WITNESSES. 11 IN SUM, THE WEB-BROWSING FUNCTIONALITY IN 12 WINDOWS 98 IS NOT AN ADD-ON LIKE A FLASH ON A CAMERA OR A 13 CAR RADIO, BUT AN INTEGRAL FEATURE OF THE PRODUCT, LIKE THE 14 SHUTTER IN A CAMERA OR THE TRANSMISSION IN AN AUTOMOBILE. 15 MOREOVER, INTERNET EXPLORER TECHNOLOGIES IN WINDOWS 98 16 PROVIDE PROGRAMMING INTERFACES THAT INDEPENDENT APPLICATION

17 DEVELOPERS USE TO OBTAIN FUNCTIONALITY FROM THE OPERATING 18 SYSTEM TO MAKE THEIR PRODUCTS BETTER. 19 THE GOVERNMENT HAS TRIED TO INJECT MOTIVE INTO THE 20 DISCUSSION OF INTEGRATION. IN OUR VIEW, MOTIVE IS 21 IRRELEVANT ONCE THE FACT OF INTEGRATION, AS OPPOSED TO MERE 22 BUNDLING, IS SHOWN, ALONG WITH CONSUMER BENEFITS, PLAUSIBLE 23 IN NATURE, FLOWING FROM THAT INTEGRATION. NONETHELESS, WE 24 WILL REBUT ANY SHOWING THE GOVERNMENT SEEKS TO MAKE ON THIS 25 POINT, AND THE EVIDENCE WILL SHOW BOTH THAT THE INTEGRATION

17 1 OF WEB-BROWSING FUNCTIONALITY INTO WINDOWS MADE GOOD 2 SENSE -- INDEED, HAVING AN ENTIRELY SEPARATE MECHANISM FOR 3 BROWSING THE WEB, LOCATING AND VIEWING INFORMATION ON THE 4 INTERNET, WOULD HAVE BEEN MISGUIDED -- AND THAT MICROSOFT 5 INTENDED TO PROVIDE CONSUMERS WITH SEAMLESS ACCESS TO 6 INFORMATION WITHOUT REGARD TO WHERE THE INFORMATION WAS 7 STORED LONG BEFORE ANYONE HAD EVER HEARD OF NETSCAPE. THE 8 GOVERNMENT CANNOT DENY THAT MICROSOFT EXECUTIVES WERE 9 DISCUSSING PUBLICLY THE VISION OF INFORMATION AT YOUR 10 FINGERTIPS WHILE MARK ANDREESEN, NETSCAPE'S CO-FOUNDER, WAS 11 STILL A STUDENT AT THE UNIVERSITY OF ILLINOIS. 12 MOREOVER, THE EVIDENCE WILL SHOW THAT MICROSOFT'S 13 EFFORT TO DEVELOP THE FIRST VERSION OF INTERNET EXPLORER, 14 CODE NAME O'HARE, WAS UNDERTAKEN BY THE TEAM DEVELOPING 15 WINDOWS 95, CODE NAME CHICAGO, BEFORE NETSCAPE RELEASED THE 16 FIRST BETA TEST VERSION OF NAVIGATOR IN OCTOBER, 1994. THE 17 GOVERNMENT'S ASSERTION THAT CHICAGO AND O'HARE WERE NOT 18 CLOSELY RELATED IS REBUTTED BY THE CODE NAMES THEMSELVES AS 19 WELL AS NUMEROUS CONTEMPORANEOUS DOCUMENTS.

20 THE FACT THAT MICROSOFT MAY HAVE BEEN SPURRED INTO 21 ACCELERATING ITS EFFORTS TO BUILD SUPPORT FOR INTERNET 22 STANDARDS INTO WINDOWS BY THE RAPID COMMERCIAL SUCCESS 23 UNDOUBTEDLY ACHIEVED BY NETSCAPE IS PRECISELY HOW THE 24 COMPETITIVE PROCESS IS SUPPOSED TO WORK. THE E-MAILS THE 25 GOVERNMENT RELIES ON DON'T SHOW THAT MICROSOFT IS A

18 1 MONOPOLIST THAT CAN AFFORD TO IGNORE UPSTARTS LIKE NETSCAPE, 2 BUT THAT MICROSOFT IS FORCED TO RESPOND TO COMPETITIVE 3 CHALLENGES FROM MANY QUARTERS. 4 THE GOVERNMENT CANNOT COME TO THIS COURT AND 5 SERIOUSLY CONTEND THAT MICROSOFT SHOULD HAVE ITS HANDS TIED 6 BEHIND ITS BACK, UNABLE TO RESPOND TO CHANGES IN THE 7 MARKETPLACE. THAT BENEFITS NO ONE, PARTICULARLY CONSUMERS. 8 THE GOVERNMENT SIMPLY REFUSES TO COME TO GRIPS WITH THE FACT 9 THAT, ALTHOUGH THE FIRST TWO VERSIONS OF INTERNET EXPLORER 10 WERE INCLUDED IN WINDOWS 95 AS SUPPLIED TO OEM'S -- THAT'S 11 1.0 AND 2.0 -- AND ALTHOUGH INCLUSION IN THE OPERATING 12 SYSTEM, ACCORDING TO THE GOVERNMENT, SUPPOSEDLY CONFERS 13 INSUPERABLE ADVANTAGES, THE VAST MAJORITY OF CONSUMERS 14 CONTINUED TO USE NETSCAPE'S WEB BROWSING SOFTWARE UNTIL 15 MICROSOFT HAD DRAMATICALLY IMPROVED INTERNET EXPLORER, IN 16 PART BY FURTHER INTEGRATING IT INTO WINDOWS. THAT'S WHEN 17 CONSUMERS BEGAN USING MICROSOFT'S TECHNOLOGY FOR WEB 18 BROWSING IN LARGE NUMBERS. 19 EVIDENCE THAT MICROSOFT VIEWED CHANGES IN CONSUMER 20 DEMAND AS POTENTIAL THREATS TO ITS FUTURE BUSINESS SUCCESS 21 ADDS NOTHING TO OUR ANALYSIS. IN FACT, IF MICROSOFT WAS 22 REALLY THE MONOPOLIST THE GOVERNMENT'S POSITS, IT WOULD NOT

23 BE THREATENED BY ANYONE BECAUSE IT WOULD CONTROL PRODUCTIVE 24 CAPACITY AND THUS COULD EXCLUDE OTHER COMPANIES FROM THE 25 SOFTWARE BUSINESS WITHOUT DIFFICULTY.

19 1 THOSE ARE NOT THE FACTS. THOSE ARE NOT THE FACTS. 2 INSTEAD, MICROSOFT WILL SPEND MORE THAN $3 BILLION ON 3 RESEARCH AND DEVELOPMENT DURING ITS CURRENT FISCAL YEAR IN 4 ORDER TO KEEP PACE WITH ITS MANY AGGRESSIVE COMPETITORS. 5 THAT I SUBMIT, YOUR HONOR, IS HARDLY WHAT MR. HOUCK REFERRED 6 TO YESTERDAY AS THE QUIET LIFE OF A MONOPOLIST. 7 NOW I TURN TO THE SECOND ASPECT OF THE CASE AS 8 ORIGINALLY BROUGHT IN MAY, NAMELY THE CONTRACTS THAT 9 MICROSOFT ENTERED INTO WITH ISP'S, ICP'S, AND ON-LINE 10 SERVICES, THE LATTER BEING EXEMPLIFIED BY AOL. THE 11 GOVERNMENT CONTENDS, AS THE COURT KNOWS, THAT THESE 12 AGREEMENTS ARE UNLAWFUL EXCLUSIVE DEALING AGREEMENTS UNDER 13 BOTH SHERMAN 1 AND SHERMAN 2. 14 THESE CONTRACTS WERE ENTERED INTO WHEN MICROSOFT 15 HAD A SINGLE-DIGIT USAGE FIGURE FOR ITS WEB BROWSING 16 SOFTWARE. IN OTHER WORDS, MICROSOFT'S WEB BROWSING SOFTWARE 17 WAS USED BY LESS THAN 10 PERCENT OF THOSE BROWSING THE WEB. 18 THESE CONTRACTS WERE, THEREFORE, ACTUALLY NOT ONLY 19 COMPETITIVELY UNOBJECTIONABLE, BUT PRO-COMPETITIVE BECAUSE 20 THEY HELPED TO REDUCE NETSCAPE'S OVERWHELMING DOMINANCE AND 21 GAVE CONSUMERS A CHOICE. 22 THE NOTION THAT CONTRACTS THAT REDUCE 23 CONCENTRATION CAN BE ATTACKED AS ANTI-COMPETITIVE SHOWS HOW 24 FAR THE GOVERNMENT HAS DEPARTED FROM FUNDAMENTAL PRINCIPLES 25 OF ANTITRUST ANALYSIS. THOSE PRINCIPLES, AS THE COURT IS

20 1 WELL AWARE, FOCUS ON HARM TO COMPETITION AND NOT ON LOST 2 SALES OF PARTICULAR COMPANIES, LIKE NETSCAPE. 3 THERE IS REMARKABLY LITTLE IN THE GOVERNMENT'S 4 EVIDENCE OF ANY ADVERSE EFFECT ON CONSUMERS OF THE 5 CHALLENGED MICROSOFT CONTRACTS. I HEARD NOTHING ABOUT THAT 6 YESTERDAY BECAUSE -- AND THERE CAN'T BE ANYTHING SAID ABOUT 7 IT BECAUSE THESE CONTRACTS RESULTED IN THE RAPID AND 8 WIDESPREAD DISTRIBUTION OF NEW TECHNOLOGIES TO CONSUMERS AT 9 VERY ATTRACTIVE PRICES. THAT, AFTER ALL, IS WHAT THE 10 ANTITRUST LAWS ARE ALL ABOUT. 11 AS TO THE FORM OF THESE CONTRACTS, AS YOUR HONOR 12 KNOWS, THEY SPEAK FOR THEMSELVES. THEY ARE 13 CROSS-PROMOTIONAL AGREEMENTS, COMMON IN ALL CONSUMER 14 BUSINESSES, AND ALL ARE SHORT-TERM. NONE IS TRULY 15 EXCLUSIVE. AND WITH THE EXCEPTION OF THE AOL AGREEMENT, TO 16 WHICH I WILL RETURN SHORTLY, THEY ARE ALL WITH DISTRIBUTORS, 17 NOT CONSUMERS. FIRST, AS TO THE ICP AGREEMENTS, WE WILL 18 SHOW THROUGH THE TESTIMONY OF THE RESPONSIBLE MICROSOFT 19 EXECUTIVE, WILL POOLE, THAT THEY WERE, IN ACTUALITY, OF VERY 20 LITTLE COMMERCIAL CONSEQUENCE. 21 FIRST, WE HAD SUCH CONTRACTS WITH ONLY 31 OF THE 22 THOUSANDS OF CONTENT PROVIDERS THAT HAVE COMMERCIALLY 23 SIGNIFICANT WEB SITES. AND NONE OF THE 31 -- NONE OF THESE 24 PEOPLE IS A MAJOR DISTRIBUTOR OF WEB BROWSING SOFTWARE. AS 25 A RESULT, THE NOTION THAT THEY FORECLOSED ANYTHING IS

21

1 RIDICULOUS. 2 SECOND, THE CHANNEL BAR, TO WHICH THE ICP 3 AGREEMENTS RELATE, PROVE NOT TO BE VERY POPULAR WITH 4 CONSUMERS AND IS BEING PHASED OUT FOR THAT REASON. IN FACT, 5 BILL HARRIS OF INTUIT WILL TESTIFY THAT THE CHANNEL BAR WAS 6 A DISAPPOINTMENT TO INTUIT, MICROSOFT AND THE ENTIRE 7 INDUSTRY. 8 AS TO THE INTERNET SERVICE PROVIDER AGREEMENTS, WE 9 WILL SHOW THROUGH THE TESTIMONY OF THE RESPONSIBLE MICROSOFT 10 EXECUTIVE, CAMERON MYHRVOLD, THAT EACH AND EVERY ONE OF THE 11 ISP'S IN OUR REFERRAL SERVICE -- REFERRAL SERVER WAS FREE TO 12 PROVIDE NETSCAPE'S WEB BROWSING SOFTWARE TO CUSTOMERS WHO 13 ASKED FOR IT, AND THEY ALL HAVE, IN FACT, DONE SO. NOR WAS 14 A DEAL WITH MICROSOFT NECESSARY FOR THESE ISP'S TO GET ONTO 15 THE WINDOWS DESKTOP. DEALS WITH OEM'S COULD ACHIEVE THE 16 SAME RESULT. CUSTOMERS OF ISP'S GET THEIR WEB BROWSING 17 SOFTWARE THROUGH A VARIETY OF CHANNELS, WHICH EXPLAINS THE 18 FACT THAT MORE THAN HALF OF THE CUSTOMERS OF THE ISP'S AND 19 THE WINDOWS 95 REFERRAL SERVER USE NETSCAPE NAVIGATOR. 20 MOREOVER, THESE CONTRACTS COVERED ONLY 11 OF THE 21 MORE THAN 3,000 SERVICE PROVIDERS WHO PROVIDE INTERNET 22 ACCESS IN THE UNITED STATES AND, AS YOUR HONOR KNOWS, ALL 23 FIVE REGIONAL BELL OPERATING COMPANIES, WHO HAVE OBVIOUS 24 CONTACT WITH ALL OF AMERICA, HAVE PROMOTION AND DISTRIBUTION 25 CONTRACTS WITH NETSCAPE.

22 1 THE EVIDENCE GOES FURTHER, HOWEVER. IT WILL SHOW 2 THAT WE DIDN'T REMOVE ANY ISP FROM THE REFERRAL SERVER FOR 3 FAILING TO ACHIEVE THE TARGET LEVEL OF INTERNET EXPLORER

4 DISTRIBUTION SPECIFIED IN ITS CONTRACT, EVEN THOUGH A NUMBER 5 OF THEM ARE WELL BELOW THE TARGETS BECAUSE THEY DISTRIBUTED 6 LARGE NUMBERS OF NETSCAPE'S WEB BROWSING SOFTWARE INSTEAD. 7 FINALLY, WE DIDN'T HAVE THESE PEOPLE TIED UP IN 8 KNOTS, AS THE GOVERNMENT APPARENTLY WOULD HAVE THE COURT 9 BELIEVE. FIVE OF THE ELEVEN WHO HAD CONTRACTS WITH US ALSO 10 APPEAR IN NETSCAPE'S REFERRAL SERVER. OUR CONTRACTS WERE 11 CLEARLY NOT EXCLUSIVE AND CERTAINLY NOT EXCLUSIONARY. 12 NOW, YOUR HONOR KNOWS THAT A LOT OF THIS HAS BEEN 13 WAIVED AND IS EXPIRING AND THAT'S SIMPLY BECAUSE THEY BECAME 14 A LIGHTENING ROD FOR CRITICISM OF MICROSOFT, MUCH OF WHICH 15 WAS INSTIGATED BY NETSCAPE, AND WHILE THESE CONTRACT 16 PROVISIONS WERE HELPFUL, THEY WEREN'T CRITICAL TO ANYTHING. 17 THE COMPANY ELECTED IN APRIL 1988 TO WAIVE THEM. AND THE 18 ONES THAT HAVEN'T EXPIRED EVEN SINCE THEN SOON WILL, AND 19 THEY ARE NOT BEING RENEWED. THE NEW CONTRACTS FOR ISP'S AND 20 THE WINDOWS 98 REFERRAL SERVER DO NOT CONTAIN PROVISIONS OF 21 THE TYPE THE GOVERNMENT HAS CHALLENGED. THERE WILL BE NO 22 EVIDENCE THAT MICROSOFT HAS ANY INTENTION OF ENTERING INTO 23 ADDITIONAL CONTRACTS OF THE TYPE CHALLENGED, SO THIS ISSUE 24 IS TRULY MOOT AND, THE EVIDENCE WILL SHOW, WAS MUCH ADO 25 ABOUT NOTHING IN THE FIRST PLACE.

23 1 NOW I SAID I WOULD COME BACK TO AOL, WHICH IS A 2 SPECIAL SITUATION IN MANY RESPECTS. THAT IS A DISTRIBUTION 3 CONTRACT; THAT IS, AOL IS A CONSUMER HERE. THE CONTRACT 4 SPEAKS FOR ITSELF, AGAIN, AND IT BEARS EMPHASIZING THAT, 5 CONTRARY TO WHAT MIGHT HAVE BEEN IMPLIED BY THE PLAINTIFFS, 6 THIS CONTRACT IS ALSO, IN ACTUALITY, SHORT-TERM BECAUSE THE

7 PROVISIONS WITH RESPECT TO AOL'S UTILIZATION OF INTERNET 8 EXPLORER CAN BE TERMINATED AT AOL'S OPTION ON OR BEFORE 9 JANUARY 1 OF 1999, IN OTHER WORDS, TEN WEEKS FROM NOW. 10 THE EVIDENCE WITH RESPECT TO THIS AGREEMENT FROM 11 ALL SOURCES, AOL, NETSCAPE, AND MICROSOFT, WILL SHOW THAT 12 NETSCAPE AND MICROSOFT COMPETED HEAD TO HEAD TO SUPPLY WEB 13 BROWSING TECHNOLOGY TO AOL FOR INCLUSION IN WHAT JIM 14 BARKSDALE OF NETSCAPE, THE FIRST GOVERNMENT WITNESS, REFERS 15 TO AS AOL'S PROPRIETARY CLIENT. IN OTHER WORDS, NETSCAPE 16 AND MICROSOFT SOUGHT TO CONVINCE AOL TO USE THEIR RESPECTIVE 17 TECHNOLOGIES IN AOL'S PROPRIETARY BROWSING PRODUCT. 18 MICROSOFT WON THAT COMPETITION, AND THERE CANNOT BE ANYTHING 19 INSIDIOUS ABOUT THAT. 20 NOW, THE GOVERNMENT HAS AND WILL FOCUS ON ONLY ONE 21 ASPECT OF MICROSOFT'S VICTORY, THE SUPPOSEDLY HUGE 22 IMPORTANCE TO AOL OF PLACEMENT ON THE WINDOWS DESKTOP. BUT 23 THE EVIDENCE, YOUR HONOR, WILL SHOW THAT AOL WAS ALREADY 24 PRESENT ON THE WINDOWS DESKTOP BY VIRTUE OF AGREEMENTS WITH 25 LEADING COMPUTER MANUFACTURERS. ALREADY THERE.

24 1 IN ADDITION, THE EVIDENCE WILL SHOW THAT THE 2 NUMBER OF SUBSCRIBERS AOL HAS OBTAINED OVER THE LAST TWO 3 YEARS BY VIRTUE OF ITS PLACEMENT IN THE ON-LINE SERVICES 4 FOLDER OF WINDOWS 95 AND WINDOWS 98 IS VERY MODEST IN 5 RELATION TO ITS TOTAL SUBSCRIBER BASE. BASED ON THE 6 TESTIMONY OF BRAD CHASE OF MICROSOFT AND EVIDENCE FROM AOL, 7 IT WILL BE CLEAR THAT AOL TOOK ITS BUSINESS TO MICROSOFT ON 8 THE MERITS, HOWEVER DEFINED, QUALITY OF TECHNOLOGY, 9 RECEPTIVENESS TO AOL'S NEEDS, ASSISTANCE WITH CUSTOMIZATION

10 AND ALLOWING AOL TO MAINTAIN ITS ONLY BRANDING. 11 THIS EVIDENCE WILL BE SUPPORTED IN FACT, AS I HAVE 12 SAID, BY EVIDENCE TO THE SAME EFFECT FROM NETSCAPE ITSELF. 13 WHEN AOL DECIDED TO BASE ITS CLIENT SOFTWARE ON MICROSOFT'S 14 TECHNOLOGY, INTERNET EXPLORER 3.0 HAD REACHED THE POINT 15 WHERE IT PROVIDED A SERIES OF MODULAR COMPONENTS THAT COULD 16 BE INTEGRATED INTO AOL'S PROPRIETARY CLIENT. NETSCAPE 17 NAVIGATOR, ON THE OTHER HAND, WAS A MONOLITHIC BLOCK OF WHAT 18 MANY REFERRED TO IN THE DOCUMENTS AS SPAGHETTI CODE THAT 19 WOULD HAVE BEEN DIFFICULT AND TIME-CONSUMING FOR AOL TO 20 CUSTOMIZE, PARTICULARLY SINCE NETSCAPE'S ENGINEERS EXPRESSED 21 LITTLE INTEREST IN ASSISTING AOL IN UNDERTAKING THAT 22 CUSTOMIZATION. 23 IN OCTOBER 1998, AS WE STAND HERE TODAY, MORE THAN 24 TWO YEARS LATER, NETSCAPE HAS YET TO RELEASE A COMPONENTIZED 25 VERSION OF ITS WEB BROWSING SOFTWARE THAT IS EASY FOR THIRD

25 1 PARTIES TO INCORPORATE INTO THEIR PRODUCTS. 2 THIRD, WITH REGARD TO MICROSOFT'S LICENSE 3 AGREEMENTS WITH COMPUTER MANUFACTURERS OR OEM'S, THE 4 GOVERNMENT HAS CLEARLY FALLEN DOWN THE RABBIT HOLE. THESE 5 CONTRACTS ALSO SPEAK FOR THEMSELVES. IT IS UNDISPUTED. 6 THERE WON'T BE ANY EVIDENCE TO THE CONTRARY THAT MICROSOFT 7 DOES NOT EVEN PURPORT TO LIMIT THE ABILITY OF COMPUTER 8 MANUFACTURES TO PREINSTALL WHATEVER SOFTWARE THEY LIKE ON 9 TOP OF WINDOWS 98. IF THEY THINK IT ADDS VALUE, THAT IS 10 THEIR BUSINESS. THAT INCLUDES NETSCAPE'S WEB BROWSING 11 SOFTWARE OR ANYTHING ELSE. AND THE EVIDENCE WILL SHOW THAT 12 COMPUTER MANUFACTURES CONTINUE TO INSTALL WEB BROWSING

13 SOFTWARE ON TOP OF WINDOWS 98. IN FACT, THE NEW SONY VAIO 14 HAS FOUR DIFFERENT KINDS OF WEB BROWSING SOFTWARE INSTALLED, 15 INCLUDING NETSCAPE'S. 16 NEXT, AS THE COURT LEARNED FROM DAVID COLE BACK IN 17 JANUARY OF THIS YEAR, MICROSOFT'S LICENSE AGREEMENTS WITH 18 THE COMPUTER MANUFACTURES DO NOT EVEN PURPORT TO PREVENT 19 THEM FROM MAKING NETSCAPE'S WEB BROWSING SOFTWARE THE 20 PREFERRED OR DEFAULT BROWSER THAT IS LAUNCHED AUTOMATICALLY 21 WHEN A USER SEEKS TO ACCESS INFORMATION ON THE INTERNET. 22 MR. BOIES TALKED ABOUT AN INTEREST EXPRESSED BY A 23 SMALL NUMBER OF COMPUTER MANUFACTURES IN REMOVING THE ICON 24 ON THE WINDOWS DESKTOP THAT PROVIDED ONE MEANS OF ACCESSING 25 WEB BROWSING IN WINDOWS 95. HE DID NOT SAY, BECAUSE HE

26 1 COULD NOT, THAT ANY COMPUTER MANUFACTURE EXPRESSED AN 2 INTEREST IN REMOVING INTERNET EXPLORER TECHNOLOGIES 3 THEMSELVES FROM THE OPERATING SYSTEM. AND IT IS A FAR CRY 4 FOR US TO PREVENT THE REMOVAL OF OUR ICON -- THAT IS FAR, 5 FAR DIFFERENT THAN TO ATTEMPT TO PRECLUDE THE INSTALLATION 6 OF OTHER THINGS THE OEM WANTS, INCLUDING ICONS FOR OTHER 7 SOFTWARE MANUFACTURERS. 8 MORE IMPORTANTLY, AND MOST IMPORTANTLY PERHAPS, 9 OUR LICENSE AGREEMENTS WITH THE OEM'S DO NOT IN ANY WAY 10 RESTRICT THE ULTIMATE CONSUMER'S CHOICE OF WEB BROWSING 11 SOFTWARE OR ANY OTHER SOFTWARE. THUS -- AND THIS POINT, I 12 THINK IS IMPORTANT IN LIGHT OF THE GOVERNMENT'S VIEW OF THE 13 MATTER ON THE SUMMARY JUDGMENT ARGUMENT -- OUR AGREEMENTS 14 WITH OEM'S DO NOT SEEK IN ANY SENSE TO ENLARGE UPON OR 15 EXTEND OUR LEGALLY GRANTED COPYRIGHT IN OUR OWN OPERATING

16 SYSTEM. NOR, PURSUANT TO THESE CONTRACTS OR OTHERWISE, IS 17 THERE ANY SENSE IN WHICH WINDOWS 98 IS DENIED TO ANYONE. 18 THE EVIDENCE WILL SHOW THE OPPOSITE, THAT MICROSOFT MAKES 19 HUGE QUANTITIES OF INFORMATION ABOUT ITS OPERATING SYSTEMS 20 AVAILABLE TO SOFTWARE DEVELOPERS BECAUSE IT IS IN 21 MICROSOFT'S BUSINESS INTEREST TO HAVE AS MANY PRODUCTS AS 22 POSSIBLE COMPATIBLE WITH ITS OPERATING SYSTEMS. NETSCAPE IS 23 A SIGNIFICANT BENEFICIARY OF THAT POLICY. 24 IN ADDITION TO THESE DISPOSITIVE FACTS, THE 25 RESPONSIBLE MICROSOFT EXECUTIVE, JOACHIM KEMPIN, WILL

27 1 TESTIFY AS TO MICROSOFT'S EFFORTS TO MAINTAIN MUTUALLY 2 BENEFICIAL RELATIONSHIPS WITH COMPUTER MANUFACTURERS. AND 3 PAUL MARITZ WILL TESTIFY ABOUT THE VALID BUSINESS REASONS 4 FOR MICROSOFT'S SEEKING TO PRESERVE THE INTEGRITY OF ITS 5 OPERATING SYSTEMS AS THEY MOVE THROUGH THE DISTRIBUTION 6 CHANNEL INTO THE HANDS OF CONSUMERS. 7 THE CLAIM THAT PREVENTING OEM'S FROM 8 DECONSTRUCTING WINDOWS 98 PROHIBITS THEM FROM BRANDING THEIR 9 MACHINES OR DIFFERENTIATING THEM FROM THEIR COMPETITORS' 10 MACHINES WILL BE DEBUNKED BY A VIDEO DEMONSTRATION OF 11 INITIAL BOOT SEQUENCES FOR SEVERAL DIFFERENT KINDS OF 12 PERSONAL COMPUTERS. AND INTERESTINGLY, THE MOST EFFECTIVE 13 BRANDING OF THESE NEW MACHINES IS MADE POSSIBLE BY THE VERY 14 INTERNET EXPLORER TECHNOLOGIES THAT THE GOVERNMENT WANTS 15 MICROSOFT TO REMOVE FROM WINDOWS 98. 16 WE WILL ALSO PRESENT THE TESTIMONY OF JOHN ROSE OF 17 COMPAQ, THE WORLD'S LARGEST MANUFACTURER OF PERSONAL 18 COMPUTERS BY A SUBSTANTIAL MARGIN, AS TO HIS COMPANY'S LONG

19 AND PRODUCTIVE RELATIONSHIP WITH MICROSOFT. IN CONTRAST, I 20 NOTE, THE GOVERNMENT WILL PRESENT NO WITNESS FROM A COMPUTER 21 MANUFACTURER WHO LICENSES WINDOWS 98 FROM MICROSOFT; THAT 22 IS, NO WITNESS WHO IS INVOLVED IN THAT LICENSING PROCESS, 23 HAVING CHOSEN FOR SOME INEXPLICABLE REASON, TO DEVOTE 5 OF 24 ITS 12 WITNESS SLOTS TO EXPERTS, MANY OF WHOM REPEAT THE 25 SAME TESTIMONY.

28 1 NOW I NOTE THAT, ENTIRELY ASIDE FROM THE 2 FOREGOING -- EVERYTHING I HAVE SAID UP TO THIS POINT -- ALL 3 OF THE CHARGES OR CLAIMS OR ALLEGATIONS THAT I HAVE THUS FAR 4 ADDRESSED, WHICH AMOUNT TO VIRTUALLY ALL OF WHAT WAS 5 ACTUALLY IN THE COMPLAINTS FILED IN MAY, WILL BE DESTROYED 6 AS WELL BY, ONE, OUR PROOF, THROUGH EVIDENCE FROM NETSCAPE 7 ITSELF AND FROM INDUSTRY DATA SOURCES, THAT NETSCAPE, FAR 8 FROM BEING FORECLOSED IN ANY SENSE OF THE WORD, HAS HAD 9 UNHINDERED ACCESS TO MORE THAN AMPLE CHANNELS OF 10 DISTRIBUTION OF ITS SOFTWARE, SO MUCH SO THAT NETSCAPE 11 ITSELF DESCRIBES ITS WEB BROWSING SOFTWARE AS UBIQUITOUS. 12 AND SECOND, THE GOVERNMENT'S COMPLETE FAILURE TO 13 PROVE THAT ANY OF THE CONTRACTS THEY ATTACK HAVE LOCKED UP A 14 SUFFICIENT PERCENTAGE OF CONSUMER DEMAND TO REQUIRE A MORE 15 EXTENSIVE ANALYSIS OF THEIR REASONABLENESS UNDER THE LAW. 16 THE EVIDENCE ON THIS POINT -- THE ABSENCE OF SUBSTANTIAL 17 FORECLOSURE -- IS EXTREMELY IMPORTANT AND COULD NOT BE 18 CLEARER. IT IS FATAL TO EACH AND EVERY ONE OF THE CLAIMS 19 ASSERTED IN THE COMPLAINTS, ALL OF WHICH DEPEND ON PROOF OF 20 SUBSTANTIAL FORECLOSURE OF COMPETITION. 21 FROM NETSCAPE'S OWN DOCUMENTS AND THE TESTIMONY OF

22 MR. BARKSDALE, MICROSOFT WILL PROVE THE FOLLOWING FACTS: 23 ONE, NETSCAPE EXPECTS TO DISTRIBUTE MORE THAN 100 MILLION 24 COPIES OF ITS WEB BROWSING SOFTWARE DURING ITS "NETSCAPE 25 EVERYWHERE" CAMPAIGN, WHICH COMES TO ROUGHLY

29 1 THREE-AND-A-HALF COPIES FOR EVERY HOME USER OF THE INTERNET 2 IN THE UNITED STATES. 3 TWO, NETSCAPE ANTICIPATES THAT THE 11,000 4 PARTICIPANTS IN ITS SO-CALLED UNLIMITED DISTRIBUTION 5 CAMPAIGN WILL DISTRIBUTE BETWEEN 150 MILLION AND 170 MILLION 6 COPIES OF NETSCAPE'S WEB BROWSING SOFTWARE THIS YEAR ALONE. 7 THAT'S HALF AS MANY COPIES AS THERE ARE USERS OF THE 8 INTERNET IN THE WORLD. 9 IN MAY 1998, THE MONTH THIS CASE BEGAN, MORE THAN 10 2 MILLION COPIES OF NETSCAPE'S WEB BROWSING SOFTWARE WERE 11 ELECTRONICALLY DOWNLOADED FROM THE INTERNET. IN NETSCAPE'S 12 OWN TERMINOLOGY, THAT FIGURE SKYROCKETED TO NEARLY 4 MILLION 13 COPIES IN JUNE, AND NETSCAPE HAS PUBLICLY ANNOUNCED THAT 14 MORE THAN 12 MILLION COPIES WERE ELECTRONICALLY DOWNLOADED 15 IN JULY AND AUGUST. 16 THE EVIDENCE WILL ALSO SHOW THAT NETSCAPE HASN'T 17 BEEN LOCKED OUT OF THE SPECIFIC DISTRIBUTION CHANNELS THAT 18 ARE THE FOCUS OF THE GOVERNMENT'S CLAIMS. NETSCAPE IS ABLE 19 TO AND DOES DISTRIBUTE ITS WEB BROWSING SOFTWARE THROUGH 20 COMPUTER MANUFACTURERS, INCLUDING MAJOR OEM'S SUCH AS 21 FUGITSU, GATEWAY 2000, IBM, PACKARD BELL/NEC, AND SONY. 22 NETSCAPE ALSO IS ABLE TO AND DOES DISTRIBUTE ITS WEB 23 BROWSING SOFTWARE THROUGH THOUSANDS OF DIFFERENT ISP'S, 24 INCLUDING SOME OF THE LARGEST IN THE COUNTRY.

25 MOREOVER, AS WE WILL DEMONSTRATE, HUNDREDS OF

30 1 THOUSANDS OF ICP'S HAVE "NETSCAPE NOW" BUTTONS ON THEIR WEB 2 SITES THAT ENABLE BROAD DISTRIBUTION OF NETSCAPE'S SOFTWARE 3 VIA ELECTRONIC DOWNLOADING FROM THE INTERNET. THEY ALSO 4 HAVE SUBSTANTIAL DISTRIBUTION IN A VERY, VERY SIGNIFICANT 5 CHANNEL THE GOVERNMENT DOES NOT EVEN MENTION, DIRECTLY TO 6 CORPORATE CUSTOMERS. AND THE EVIDENCE WILL SHOW THAT AS 7 MANY AS 90 PERCENT OF THE FORTUNE 1000 COMPANIES USE 8 NETSCAPE'S WEB BROWSING SOFTWARE. IN FACT, A STUDY OF WEB 9 BROWSING SOFTWARE BY ZONA RESEARCH RELEASED JUST LAST WEEK 10 STATES THAT NETSCAPE'S SHARE OF CORPORATE USAGE OF BROWSING 11 SOFTWARE HAS BEEN INCREASING IN RECENT MONTHS, A FACT THAT 12 COMPLETELY UNDERMINES THE GOVERNMENT'S CASE. 13 NOW LET ME TURN TO THE TWO FINAL COMPONENTS OF THE 14 CASE AS PLED, JAVA AND THE ALLEGED PROPOSED MARKET DIVISION 15 WITH NETSCAPE. JAVA IS REFERRED TO IN THE GOVERNMENT'S 16 COMPLAINT IN AN ALMOST INDIRECT WAY. IT'S REFERRED TO AS A 17 MOTIVATION FOR MICROSOFT TO ELIMINATE COMPETITION FROM 18 NETSCAPE OR, IF NOT ELIMINATING NETSCAPE, AT LEAST MICROSOFT 19 SEEKING DOMINANCE IN WEB BROWSING SOFTWARE. THE NOTION 20 BEING, IN PARAGRAPHS 8 AND 68 OF THE COMPLAINT, THAT 21 NON-MIRCOSOFT BROWSERS ARE PERHAPS THE MOST SIGNIFICANT 22 VEHICLE FOR DISTRIBUTION OF JAVA TECHNOLOGY OR JAVA VIRTUAL 23 MACHINES, AND WE WANTED TO STOP -- ALLEGEDLY STOP NETSCAPE 24 FROM PERFORMING THAT DISTRIBUTION FUNCTION BECAUSE JAVA, IN 25 TURN, IS CLAIMED TO POSE A THREAT TO THE WINDOWS OPERATING

31 1 SYSTEM BECAUSE OF THE SUPPOSED ABILITY THAT IT OFFERS TO RUN 2 PROGRAMS ON ANY OPERATING SYSTEM WITHOUT MODIFICATION. 3 NOW, THERE ARE A FEW STARK FACTS THAT WILL SHOW 4 THAT THIS IS PURE UNADULTERATED NONSENSE. FIRST, MICROSOFT 5 IS THE WORLD'S LARGEST DISTRIBUTOR OF JAVA VIRTUAL MACHINES. 6 THEY ARE INCLUDED IN EVERY COPY OF WINDOWS 98 AND 7 WINDOWS NT, AS WELL AS IN A NUMBER OF OTHER POPULAR 8 MICROSOFT PRODUCTS. WE ARE THE LARGEST DISTRIBUTOR OF WHAT 9 WE ARE ALLEGEDLY TRYING TO CHOKE OFF NETSCAPE SO IT WON'T 10 DISTRIBUTE. 11 SECOND, MICROSOFT'S JAVA VIRTUAL MACHINE IS THE 12 FASTEST, MOST COMPATIBLE JAVA VIRTUAL MACHINE IN EXISTENCE. 13 IT IS SO GOOD, IN FACT, THAT NETSCAPE ITSELF, THE GREAT JAVA 14 DISTRIBUTOR OF THE PLAINTIFFS, HAS PUBLICLY ACKNOWLEDGED THE 15 SUPERIORITY OF MICROSOFT'S IMPLEMENTATION, AS HAVE MANY 16 INDEPENDENT REVIEWERS. 17 NOW, IN THE FACE OF THOSE TWO ABSOLUTE FACTS, THE 18 GOVERNMENT HAS SORT OF MOVED OVER TO EMPHASIZING THE CHARGE 19 THAT MICROSOFT SET ABOUT TO POLLUTE JAVA, TO DESTROY ITS 20 CROSS-PLATFORM APPEAL. NOW, AS YOUR HONOR KNOWS, THE 21 QUESTION OF CONTRACT RIGHTS BETWEEN SUN, JAVA'S DEVELOPER, 22 AND MICROSOFT, ITS LICENSEE, IS THE SUBJECT OF ANOTHER CASE 23 PENDING BEFORE ANOTHER DISTRICT COURT IN CALIFORNIA. WE 24 DON'T BELIEVE THIS POLLUTION CLAIM IS EVEN PROPERLY PART OF 25 THIS CASE. BUT LEAVING THAT ASIDE, AS A MATTER OF ANTITRUST

32 1 LAW, THE POLLUTION CLAIM IS, ONCE AGAIN, NONSENSE. THE 2 EVIDENCE, INCLUDING THE TESTIMONY OF BOB MUGLIA OF

3 MICROSOFT, WILL SHOW THE JAVA VIRTUAL MACHINE IN WINDOWS 4 RUNS ANY PROGRAM WRITTEN IN SO-CALLED 100 PERCENT PURE JAVA; 5 THAT IS, JAVA AS SUN DEFINES IT FOR MARKETING PURPOSES. 6 THERE WON'T BE -- THERE IS NO WAY OF DISPUTING THAT. AND 7 THE EVIDENCE WILL SHOW IT RUNS THOSE PROGRAMS FASTER AND 8 BETTER THAN ANY OTHER JAVA VIRTUAL MACHINE, INCLUDING SUN'S 9 OWN. 10 NOW, WHAT IS THIS ALLEGED POLLUTION? SIMPLY THIS 11 AND NOTHING MORE. MICROSOFT HAS ALSO CREATED TOOLS THAT 12 ENABLE SOFTWARE DEVELOPERS TO WRITE PROGRAMS IN JAVA THAT 13 MAKE DIRECT CALLS TO WINDOWS IN ORDER TO OBTAIN NEEDED 14 FUNCTIONALITY FROM THE UNDERLYING OPERATING SYSTEM. WE RUN 15 PURE JAVA PERFECTLY, BETTER THAN ANYONE ELSE. WE HAVE 16 CREATED ADDITIONAL TOOLS SO THAT PEOPLE CAN WRITE PROGRAMS 17 IN JAVA AND ALSO CALL WINDOWS DIRECTLY. MICROSOFT HAS NOT 18 SOUGHT TO REQUIRE ANYONE TO TAKE ADVANTAGE OF THAT OPTION, 19 THE OPTION TO USE THESE TOOLS THAT WE HAVE CREATED THAT MAKE 20 DIRECT CALLS TO WINDOWS, AND SOFTWARE DEVELOPERS CREATING 21 JAVA APPLICATIONS ARE VERY WELL AWARE OF THE CONSEQUENCES OF 22 CHOOSING TO USE THOSE TOOLS. 23 PROVIDING THIS OPTION TO SOFTWARE DEVELOPERS DOES 24 NOTHING MORE THAN GIVE THEM AN ADDITIONAL COMMERCIAL CHOICE 25 THAT THEY CAN ELECT TO EXPLOIT OR NOT EXPLOIT. THAT IS THE

33 1 VERY ESSENCE OF COMPETITION, PERIOD, END OF STORY. IT'S 2 AMAZING THAT THE GOVERNMENT DOESN'T ACCEPT THIS SIMPLE FACT. 3 AS TO THE ALLEGED MARKET DIVISION THAT MICROSOFT 4 SUPPOSEDLY PROPOSED TO NETSCAPE ON JUNE 21, 1995 AND WHICH 5 FEATURED SO EXTENSIVELY YESTERDAY, THE FIRST AND UNDISPUTED

6 FACT IS THAT NOTHING OF THE KIND WAS AGREED TO OR EVER 7 OCCURRED. SECOND, THE EVIDENCE WILL SHOW THAT NETSCAPE'S 8 ACCOUNT OF THAT MEETING, UNCRITICALLY ACCEPTED BY THE 9 GOVERNMENT, IS FANTASTICAL. WHETHER THAT FANTASY AROSE FROM 10 THE NAIVETE OF ITS AUTHOR, MARK ANDREESEN, AND WAS THEN 11 PROMOTED BY HIS COLLEAGUES AS A MEANS OF ENLISTING THE 12 GOVERNMENT AS NETSCAPE'S PROTECTOR IN THE COMPETITIVE BATTLE 13 WITH MICROSOFT, OR WHETHER IT WAS CONCOCTED FROM THE VERY 14 BEGINNING FOR THAT PURPOSE, WE CANNOT ESTABLISH. BUT THE 15 EVIDENCE WILL SHOW IT WAS ONE OR THE OTHER. 16 THAT EVIDENCE, ALTHOUGH CONSTRAINED BY THE 17 LIMITATION ON THE NUMBERS OF WITNESSES AT TRIAL, WILL ALSO 18 SHOW THAT NETSCAPE'S CLAIMS OF REPEATED THREATS, ACCOMPANIED 19 BY HISTRIONICS, SHOUTING, AND TABLE-POUNDING, ARE BASELESS. 20 THAT VERSION OF EVENTS IS ENTIRELY INCONSISTENT WITH WHAT 21 PRECEDED AND FOLLOWED THE JUNE 21 MEETING. AND THESE EVENTS 22 PRECEDING AND FOLLOWING JUNE 21 MAKE IT QUITE CLEAR THAT 23 MICROSOFT WAS DOING NOTHING MORE THAN EXPLORING WHETHER SOME 24 SORT OF COLLABORATIVE EFFORT WITH NETSCAPE COULD BE BOTH OF 25 MUTUAL COMMERCIAL ADVANTAGE AND OF BENEFIT TO CONSUMERS

34 1 USING THE INTERNET WITH THE COMPANIES' RESPECTIVE PRODUCTS. 2 THERE WAS NO PROPOSAL BY MICROSOFT THAT NETSCAPE CEASE 3 DEVELOPMENT OF WEB BROWSING SOFTWARE FOR WINDOWS 95. THAT 4 SOFTWARE WAS FINISHED BY NETSCAPE AND PROVED TO BE ONE OF 5 THE MOST POPULAR SOFTWARE PRODUCTS IN HISTORY. 6 NOR, FAR FROM BEING THREATS OF DIRE CONSEQUENCES, 7 THERE WAS NO CESSATION OF ASSISTANCE TO NETSCAPE IN ITS WORK 8 ON THAT SOFTWARE. TO THE CONTRARY, MICROSOFT PROVIDED

9 EXTENSIVE ASSISTANCE ON THE VERSION OF NAVIGATOR DESIGNED 10 FOR WINDOWS 95 EVEN WHILE IT WAS RUSHING TO COMPLETE WORK ON 11 THE OPERATING SYSTEM ITSELF. 12 LIKEWISE, AS TO THE MARKET DIVISION PROPOSALS AND 13 THREATS ALLEGEDLY MADE BY MICROSOFT TO INTEL AND APPLE, 14 WHICH THE GOVERNMENT CLAIMS ARE RELEVANT UNDER RULE 404(B) 15 TO SHOW MICROSOFT'S INTENT AT THE JUNE 1995 NETSCAPE 16 MEETING AND CLAIMS ARE RELEVANT TO SHOW THE SUPPOSED 17 EXISTENCE OF MICROSOFT'S MONOPOLY POWER, THOSE PROPOSALS AND 18 THREATS CLAIMED BY THE GOVERNMENT WILL LIKEWISE BE SHOWN BY 19 THE EVIDENCE, INCLUDING THE TESTIMONY OF PAUL MARITZ, AND 20 ERIC ENGSTROM OF MICROSOFT, TO HAVE BEEN GARDEN-VARIETY 21 COMMERCIAL DISCUSSIONS BETWEEN COMPANIES DEVELOPING 22 COMPLEMENTARY PRODUCTS, DISCUSSIONS OF NO ANTITRUST 23 CONSEQUENCE. 24 I SAID AT THE OUTSET THAT MICROSOFT DEVELOPS 25 PRODUCTS COMPLEMENTARY WITH THOSE OFFERED BY BOTH INTEL AND

35 1 APPLE. AS A RESULT, CASTING THOSE COMPANIES AS MICROSOFT'S 2 COMPETITORS IN ALL CIRCUMSTANCES IS BOTH SIMPLISTIC AND 3 MISLEADING. DESPITE THE SUGGESTION MADE YESTERDAY, 4 COMPETITION ON THE MERITS IN THE SOFTWARE INDUSTRY OFTEN 5 INVOLVES EFFORTS TO ATTRACT THE ATTENTION OF COMPANIES THAT 6 DEVELOP PRODUCTS COMPLEMENTARY WITH YOUR OWN. IMPLICIT IN 7 SUCH EFFORTS IS URGING YOUR PROSPECTIVE PARTNER NOT TO ALLY 8 WITH YOUR PRINCIPAL COMPETITORS. YOU WANT HIM TO SUPPORT 9 YOUR TECHNOLOGY, NOT THEIRS. 10 THIS TALK OF MARKET DIVISION AND THREATS 11 PURPORTEDLY EVIDENCING MONOPOLY POWER LEADS ME TO MARKET

12 DEFINITION AND THE INABILITY OF MICROSOFT TO RAISE PRICES OR 13 EXCLUDE COMPETITION FROM ANY PROPERLY-DEFINED MARKET WHICH 14 IS THE DEFINITION OF MONOPOLY POWER UNDER THE LAW. 15 THE COURT: BEFORE YOU GET INTO MARKET DEFINITION, 16 WOULD THIS BE AN APPROPRIATE TIME FOR THE MORNING RECESS? 17 MR. WARDEN: YES, YOUR HONOR. IT SURELY WOULD. 18 THE COURT: TEN MINUTES. 19 (A RECESS WAS TAKEN.) 20 (AFTER RECESS.) 21 MR. WARDEN: AS I SAID, YOUR HONOR, I WILL NOW 22 TALK ABOUT MARKET DEFINITION AND ALLEGATIONS OF MONOPOLY 23 POWER. AS TO MARKETS, THE EVIDENCE FROM BOTH BUSINESS 24 PEOPLE AND EXPERTS WILL SHOW THAT THE DRAWING OF HARD AND 25 FAST LINES BETWEEN SEPARATELY IDENTIFIABLE PRODUCT MARKETS

36 1 IN THE SOFTWARE BUSINESS IS NOT JUST DIFFICULT, BUT IS 2 IMPOSSIBLE. 3 AS THE COURT IS WELL AWARE, SOFTWARE IS COMPRISED 4 OF LINES OF CODE THAT TELL A COMPUTER WHAT TO DO. THERE IS 5 AN INFINITE VARIETY OF WAYS IN WHICH SUCH INSTRUCTIONS CAN 6 BE ARRANGED. 7 NOW, IT MAY BE EASY TO SAY AND PERHAPS GENERALLY 8 CORRECT IN SOME SENSE THAT SOME PIECES OF SOFTWARE 9 CONSTITUTE PLATFORMS, SUCH AS OPERATING SYSTEMS, AND SOME 10 PIECES OF SOFTWARE CONSTITUTE APPLICATIONS THAT RUN ON TOP 11 OF SUCH PLATFORMS. AND THERE EXAMPLES WOULD BE WORD 12 PROCESSORS OR SPREADSHEETS. NO SUCH CATEGORIZATION CAN BE 13 EXPECTED TO BE ENTIRELY TRUE, EVEN IN THE SHORT RUN. AND AS 14 AN EXAMPLE OF THAT, MICROSOFT OFFICE, WHICH IS WIDELY

15 REGARDED AS A COLLECTION OF BUSINESS PRODUCTIVITY 16 APPLICATIONS, IS ALSO A PLATFORM IN THE SENSE THAT 17 VALUE-ADDED RESELLERS AND SO-CALLED SYSTEM INTEGRATERS, 18 BUILD SPECIALIZED LINE-OF-EVIDENCE SOLUTIONS ON TOP OF SOME 19 OF THE APPLICATIONS IN OFFICE LIKE EXCEL AND WORD. 20 THE EVIDENCE WILL SHOW, HOWEVER, THAT ONE THING IS 21 CERTAINLY TRUE. THE GOVERNMENT CANNOT DRAW A LINE AROUND, 22 QUOTE, OPERATING SYSTEMS FOR INTEL-BASED PC'S, CLOSE QUOTE, 23 AND CALL THAT A MARKET FOR ANTITRUST LAW PURPOSES. PERSONAL 24 COMPUTERS ARE LINKED TOGETHER BY LAN SERVERS (LOCAL AREA 25 NETWORK SERVERS), WAN SERVERS (WIDE AREA NETWORK SERVERS),

37 1 INTRANET SERVERS WITHIN AN ENTERPRISE, AND INTERNET SERVERS, 2 ALL OF WHICH HAVE THEIR OWN OPERATING SYSTEMS, AND THUS, 3 TECHNOLOGY COMPETITIVE WITH P.C. OPERATING SYSTEMS. 4 THERE IS ALSO A REMARKABLE FLEXIBILITY IN HARDWARE 5 CHOICE AND SUBSTITUTION THAT MAKES THIS POINT EVEN CLEARER. 6 WHAT ONE COMPANY USES PERSONAL COMPUTERS TO DO, ANOTHER CAN 7 USE HAND-HELD PERSONAL DIGITAL ASSISTANCE TO DO, ANOTHER CAN 8 USE APPLE MACS TO DO, ANOTHER CAN USE WORK STATIONS RUNNING 9 UNIX TO DO, ANOTHER CAN USE NETWORK COMPUTERS ATTACHED TO A 10 SERVER TO DO AND, FINALLY, YOU CAN USE DUMB TERMINALS 11 CONNECTED TO A MAINFRAME COMPUTER TO DO THE SAME THINGS. 12 THESE ARE ALL VIABLE OPTIONS FROM THE PERSPECTIVE 13 OF CUSTOMERS SEEKING COMPUTING SOLUTIONS AND THAT IS, OF 14 COURSE, WHAT CUSTOMERS SEEK. THE SOLUTION SOUGHT MAY VARY 15 FROM CUSTOMER TO CUSTOMER. 16 NOW, WITH RESPECT TO THE ALLEGATION THAT MICROSOFT 17 POSSESSES MONOPOLY POWER IN THIS PURPORTED MARKET -- WHICH

18 WE CONTEND IS CLEARLY NOT A MARKET -- THE EVIDENCE WILL SHOW 19 THAT NO SUCH POWER IN ANY TRADITIONAL ECONOMIC SENSE DOES OR 20 CAN EXIST. 21 FIRST, THERE ARE NO STRUCTURAL BARRIERS TO ENTRY. 22 NO FACTORIES TO BUILD, NO MINERAL DEPOSITS TO LOCATE, AND NO 23 DISTRIBUTION INFRASTRUCTURE TO DEVELOP. 24 SECOND, THERE ARE LITERALLY NO CONSTRAINTS ON 25 OUTPUT ONCE A SOFTWARE PRODUCT, INCLUDING AN OPERATING

38 1 SYSTEM, HAS BEEN DEVELOPED. YOU DON'T HAVE TO GO BUILD 2 ANOTHER BILLION-DOLLAR FACTORY TO TURN OUT MORE TIRES. IT 3 DOESN'T WORK THAT WAY. AND MARGINAL COSTS OF PRODUCTION ARE 4 CLOSE TO ZERO. 5 ON THE BASIS OF THESE FUNDAMENTAL ECONOMIC 6 CONSIDERATIONS, THE SOFTWARE BUSINESS IS AND ALWAYS WILL BE 7 HIGHLY COMPETITIVE. THE ASSETS REQUIRED TO CREATE OPERATING 8 SYSTEMS, LIKE OTHER SOFTWARE, ARE TWO-FOLD: HUMAN BRAINS 9 AND THE CAPITAL TO SUPPORT THOSE HUMAN BRAINS WHILE THEY 10 WORK. SUPPLY OF BOTH OF THOSE ASSETS IS EXTENSIVE. THEY 11 ARE FREELY AND ABUNDANTLY AVAILABLE. AS LINUS TORVALDS, THE 12 CREATOR OF THE LINUX OPERATING SYSTEM HAS SHOWN, ONE PERSON 13 IN HELSINKI, FINLAND CAN QUICKLY WRITE THE CORE OF A 14 SOPHISTICATED OPERATING SYSTEM THAT IS NOW USED BY MILLIONS 15 OF PEOPLE. 16 AS I ALLUDED EARLIER, COMPETITION IN OPERATING 17 SYSTEMS IS BASED ON TECHNOLOGICAL INNOVATION. IN PRODUCT 18 COMMERCIALIZATION, AS IS TRUE OF ANY HIGH-TECH INDUSTRY, YOU 19 HAVE GOT TO DO THE CREATIVE WORK. YOU HAVE GOT TO TURN IT 20 INTO A USABLE PRODUCT AND FINALLY MARKET IT. AND YOU DO NOT

21 HAVE TO HAVE BILLIONS OF DOLLARS IN ASSETS TO GET INTO THE 22 GAME. 23 ANY COMPETITIVE POSITION CAN BE LOST OVERNIGHT IF 24 SOMEONE ELSE CREATES A TECHNICALLY SUPERIOR OR MORE 25 USER-FRIENDLY PRODUCT. THERE ARE THINGS THAT ENGINEERS MAY

39 1 VIEW AS ELEGANT THAT ORDINARY PEOPLE DON'T LIKE, AND VICE 2 VERSA. BUT IF YOU GET IT RIGHT -- IF YOU GET TO THE 3 CONSUMER THE PERFORMANCE THE CONSUMER WANTS IN A WAY THAT IS 4 EASIER FOR HIM TO USE, YOU HAVE THE BETTER MOUSETRAP. 5 THE SUPPOSED LOCK-IN EFFECTS THAT YOU HAVE SEEN 6 REFERENCE TO THAT THE GOVERNMENT POSITS ARE THUS 7 EPHEMERAL -- IF SUCH LOCK-IN EFFECTS EXISTED, IT WOULD HAVE 8 BEEN IMPOSSIBLE FOR MICROSOFT TO MAKE A DENT IN NETSCAPE'S 9 COMMANDING LEAD IN WEB-BROWSING SOFTWARE, A POINT THE 10 GOVERNMENT'S ECONOMIC EXPERTS IGNORE. 11 AS I SAID EARLIER, MICROSOFT OR ANY OTHER LEADING 12 FIRM IN THE SOFTWARE BUSINESS MUST CONSTANTLY INNOVATE TO 13 REMAIN VIABLE IN EACH SUCCEEDING ROUND OF COMPETITION, AND 14 THE PACE OF THAT COMPETITION IS EXTRAORDINARILY RAPID. THIS 15 IS NO COMFORTABLE AND QUIET MONOPOLY BACKWATER. 16 OEM'S HAVE ALTERNATIVES. THEY HAVE THEM TODAY, 17 AND THERE WILL BE PLENTY OF EVIDENCE AS TO WHAT THEY ARE. 18 THEY INSTALL WINDOWS BECAUSE THAT'S WHAT THEIR CUSTOMERS 19 WANT. AND THEY, THE OEM'S, ARE DEMAND-DRIVEN ENTERPRISES IN 20 A HIGHLY COMPETITIVE BUSINESS. 21 MICROSOFT HASN'T DENIED CONSUMER CHOICE. IT IS 22 CONSUMER CHOICE. ALTHOUGH I DO NOT AND CERTAINLY COULD NOT 23 PURPORT TO BE AMONG EVEN THE MORE TECHNICALLY ADEPT PEOPLE

24 IN THIS ROOM TODAY, I KNOW -- AND I AM SURE MY EXPERIENCE IS 25 THE SAME AS THE COURT'S -- OF NO OTHER AREA OF TECHNOLOGY

40 1 THAT HAS MOVED AS FAST IN THE LAST TWENTY YEARS AS 2 COMPUTING. 3 AT SULLIVAN & CROMWELL IN 1978 -- AND I THINK OUR 4 EXPERIENCE IS TYPICAL AND GENERAL IN THIS RESPECT -- WE HAD 5 VIDEX MACHINES FOR WORD PROCESSING. PEOPLE THOUGHT THEY 6 WERE GOING TO BE AROUND FOREVER, THEY WERE SO GREAT. THEY 7 WERE LARGE BOXES WITH A LOT OF BLINKING LIGHTS THAT ONLY A 8 FEW PEOPLE IN THE WORD PROCESSING DEPARTMENT UNDERSTOOD HOW 9 TO USE. 10 THOSE MACHINES WERE REPLACED BY IBM DISPLAY 11 WRITERS, ANOTHER GREAT ADVANCE THAT LOOKED LIKE IT WAS THERE 12 FOREVER. THESE WERE COMPUTERS DEDICATED TO THE SINGLE TASK 13 OF WORD PROCESSING. ALL THE SECRETARIES HAD THEM. IN A FEW 14 SHORT YEARS, THOSE TOO WERE OBSOLETE, AND THEY HAD TO BE 15 REPLACED BY PC'S THAT COULD RUN A NUMBER OF DIFFERENT 16 APPLICATIONS, INCLUDING WORD PROCESSING. THEY WERE USED 17 BOTH BY SECRETARIES AND YOUNGER LAWYERS. 18 RECENTLY WE SWITCHED OUR OFFICE TO WINDOWS 95 AND 19 GRAPHICAL WORD PROCESSING SOFTWARE THAT ALMOST EVERYONE IN 20 THE FIRM USES, ALTHOUGH THERE ARE A FEW OF US, INCLUDING 21 MYSELF, WHO STILL USE FOUNTAIN PENS AND LEGAL PADS. 22 MY POINT IS THIS. CONTRARY TO THE GOVERNMENT'S 23 SUBMISSION, THE EVIDENCE WILL SHOW THAT CONSUMERS ADOPT NEW 24 TECHNOLOGIES THEY REGARD AS SUPERIOR EVEN IF THAT REQUIRES 25 THEM TO SCRAP WHAT THEY ALREADY HAVE AND LEARN SOMETHING

41 1 NEW. 2 NOW ANOTHER THING THE COURT, I AM SURE, HAS AT 3 LEAST IN THE BACK OF YOUR HONOR'S MIND, BUT YOU HAVE TO 4 BRING TO THE FRONT AND BEAR IN MIND, IS THAT SOFTWARE NEVER 5 WEARS OUT. AS PAUL MARITZ WILL TESTIFY, THAT PUTS MICROSOFT 6 IN COMPETITION WITH ITSELF. 7 CONSUMERS WILL NOT GO OUT AND GET THE LATEST AND 8 GREATEST OPERATING SYSTEM FROM MICROSOFT, UNLESS THEY SEE IT 9 AS A SUBSTANTIAL IMPROVEMENT ON WHAT THEY ALREADY HAVE. 10 UNLIKE A MONOPOLIST, MICROSOFT MUST CONSTANTLY 11 INNOVATE JUST TO SELL NEW PRODUCTS AT ALL BEYOND THE 12 DIMENSIONS OF MARKET GROWTH ITSELF. AND EVEN THAT MARKET 13 GROWTH IS, IN TURN, PARTIALLY DEPENDENT ON INNOVATION TO 14 SPUR DEMAND. DEMAND HAS GREATLY INCREASED AS THE 15 FUNCTIONALITIES PROVIDED HAVE GREATLY INCREASED. 16 IT'S NOT JUST A QUESTION OF PRICE REDUCTION. IT'S 17 NOT JUST A QUESTION OF RISING STANDARDS OF LIVING IN OTHER 18 PARTS OF THE GLOBE. IT'S A QUESTION OF ACTUALLY PROVIDING 19 NEW PRODUCTS THAT MAKE MORE PEOPLE WANT TO HAVE THAT KIND OF 20 A PRODUCT. 21 THAT NEED TO GENERATE ADDITIONAL DEMAND IS ONE OF 22 THE REASONS WHY MICROSOFT ADDED SUPPORT FOR INTERNET 23 STANDARDS IN THE FORM OF INTERNET EXPLORER TECHNOLOGIES TO 24 WINDOWS 95. THEY WANTED TO MAKE PERSONAL COMPUTING 25 APPEALING TO A BROADER RANGE OF PROSPECTIVE PURCHASERS.

42 1 NOW I AM GOING TO LEAVE OPERATING SYSTEMS AND GO

2 TO THE OTHER ALLEGED MARKET, BROWSERS. THAT, TOO, CANNOT 3 PASS MUSTER UNDER ANY SENSIBLE TEST FOR MARKET DELINEATION. 4 YES, PEOPLE WANT WEB-BROWSING FUNCTIONALITY -- AT LEAST A 5 LOT OF PEOPLE DO -- BUT THAT IS BUT ONE OF A LARGE NUMBER OF 6 FEATURES THEY WANT IN A COMPUTER. 7 THE EVIDENCE WILL SHOW THAT THE INCLUSION OF THIS 8 FUNCTIONALITY, LIKE OTHERS IN OPERATING SYSTEMS, IS A 9 NATURAL EVOLUTION IN THE PROCESS OF PROVIDING ACCESS TO MORE 10 AND MORE SOURCES OF INFORMATION -- NO DIFFERENT IN PRINCIPLE 11 FROM WHEN SUPPORT FOR CD-ROMS OR TAPE BACK-UP DRIVES WAS 12 ADDED TO OPERATING SYSTEMS. 13 THIS IS CONFIRMED BY THE FACT THAT EVERY MAJOR 14 VENDOR OF OPERATING SYSTEM SOFTWARE INCLUDES WEB-BROWSING 15 SOFTWARE WITH ITS PRODUCT OFFERING. THUS, THE POINT I WANT 16 TO MAKE HERE IS THAT THE GOVERNMENT SAYS THERE ARE TWO 17 MARKETS: OPERATING SYSTEMS AND BROWSERS. THE FACT OF THE 18 MATTER IS, ASSUMING THEY WERE A BROWSER MARKET, THE EVIDENCE 19 WILL SHOW THAT DEMAND IN THAT MARKET THAT THE GOVERNMENT 20 CLAIMS IS A MARKET FOR BROWSING CAN BE SATISFIED BY SUPPLY 21 IN WHAT IT CALLS ANOTHER MARKET, OPERATING SYSTEMS, BECAUSE 22 THERE CAN BE STAND-ALONE BROWSERS AND THERE CAN BE OPERATING 23 SYSTEMS THAT SUPPLY BROWSING FUNCTIONALITY, ALONG WITH THE 24 MYRIAD OTHER FUNCTIONALITIES THAT THEY SUPPLY. 25 BEFORE LEAVING THIS SUBJECT, LET ME REPEAT THAT

43 1 THE EVIDENCE WILL SHOW THAT THE GOVERNMENT'S CHARGES 2 CONCERNING THE ALLEGED BROWSER MARKET REALLY TURN ANTITRUST 3 LAW ON ITS HEAD. BY THE GOVERNMENT'S OWN ACCOUNT, NETSCAPE, 4 THE OBJECT OF PROTECTION IN THIS CASE, HAD, BASED ON ITS

5 SHARE OF USAGE, WHAT THE GOVERNMENT APPARENTLY WOULD REGARD 6 AS A MONOPOLY IN WEB-BROWSING SOFTWARE, UNTIL THE GREAT 7 SATAN, MICROSOFT, CAME ALONG. 8 ACCORDING TO THE ACADEMIC THEORIES OF TIPPING AND 9 NETWORK EFFECTS THAT THE GOVERNMENT ESPOUSES, THAT POSITION 10 WOULD QUICKLY HAVE BECOME -- INDEED, ALREADY SHOULD HAVE 11 BEEN IMPREGNABLE. LUCKILY FOR THE CONSUMING PUBLIC, THOSE 12 THEORIES ARE JUST THAT, THEORIES. 13 ANTITRUST LAW PROTECTS COMPETITION, NOT PARTICULAR 14 COMPETITORS. AND IT IS DIFFICULT TO SEE HOW COMPETITION IN 15 BROWSERS WOULD BE MORE ROBUST IF MICROSOFT HAD NOT DEVELOPED 16 INTERNET EXPLORER TECHNOLOGIES, INTEGRATED THEM INTO WINDOWS 17 95 AND 98, ACTIVELY MARKETED THEM THROUGH PROMOTIONAL 18 AGREEMENTS, MADE THEM AVAILABLE TO THIRD-PARTY SOFTWARE 19 DEVELOPERS, SUPPLIED THEM TO AOL AS THE BASIS FOR ITS CLIENT 20 SOFTWARE, AND IMPROVED THEM AT A FURIOUS PACE. 21 THE GOVERNMENT, APPARENTLY, WOULD HAVE PREFERRED 22 MICROSOFT TO LEAVE NETSCAPE IN AN UNCHALLENGED POSITION AS A 23 POTENTIAL COLLECTOR OF MONOPOLY RENTS. INDEED, YOUR HONOR 24 WILL HEAR IN THE EVIDENCE THAT NETSCAPE ORIGINALLY SUPPLIED 25 ITS WEB-BROWSING SOFTWARE FOR FREE AND CONTINUED TO DO SO

44 1 UNTIL IT THOUGHT IT HAD AN ABILITY, BASED ON ITS DOMINANT 2 SHARE OF USAGE, TO GOUGE CONSUMERS BY CHARGING THEM $39.00 A 3 COPY. NOW AS A RESULT OF MICROSOFT'S COMPETITION, 4 NETSCAPE'S WEB BROWSER IS AGAIN FREE. THE UNDISPUTED VICTOR 5 IN THE SO-CALLED BROWSING WAR HAS BEEN THE CONSUMING PUBLIC. 6 IN CONCLUSION, LET ME SAY THAT WE FIRMLY BELIEVE 7 THE COURT WILL CONCLUDE, AFTER HEARING ALL THE EVIDENCE,

8 THAT THIS IS NOT REALLY AN ANTITRUST CASE BUT A RETURN OF 9 THE LUDDITES, THE 19TH CENTURY REACTIONARIES, WHO, FEARFUL 10 OF COMPETITION, WENT AROUND SMASHING MACHINES WITH 11 SLEDGEHAMMERS TO ARREST THE MARCH OF PROGRESS DRIVEN BY 12 SCIENCE AND TECHNOLOGY. 13 THE GOVERNMENT'S CASE IS A REPUDIATION OF THE 14 BASIC PRINCIPLE IN OUR SOCIETY THAT CREATIVE COMMERCIAL 15 ACTIVITY SHOULD BE ENCOURAGED AND REWARDED. THAT PRINCIPLE 16 HAS PRODUCED FOR THIS NATION ECONOMIC PROSPERITY AND 17 ASSOCIATED INDIVIDUAL LIBERTY UNPARALLELED IN HUMAN HISTORY. 18 NOW, WHETHER THIS CASE ARISES FROM ELECTORAL 19 POLITICS, FROM THE PRESSURE OF ACADEMICS SEEKING JUDICIAL 20 ACCEPTANCE OF NEW FORMS OF SOCIAL ENGINEERING, OR FROM 21 PRESSURE BY MICROSOFT'S MANY COMPETITORS, WHO WRONGLY THINK 22 CONSUMERS WOULD BENEFIT FROM LESS VIGOROUS COMPETITION, THE 23 GOVERNMENT'S CASE IS A FUNDAMENTALLY MISCONCEIVED ATTACK ON 24 THE CREATION OF INNOVATIVE NEW PRODUCTS BY OPERATION OF THE 25 FREE MARKET. THAT IS AN ATTACK ON THE VERY CREATION OF THE

45 1 INTERSTATE AND FOREIGN COMMERCE OF THE UNITED STATES SOUGHT 2 TO BE ADVANCED BY THE COMMERCE CLAUSE OF THE CONSTITUTION 3 AND PROTECTED BY THE SHERMAN ACT. 4 THANK YOU, YOUR HONOR. 5 THE COURT: THANK YOU. 6 WE'LL TAKE OUR NOONTIME RECESS AND RECONVENE AT 7 2:00 O'CLOCK. 8 (WHEREUPON, AT 11:57 P.M., THE ABOVE-ENTITLED 9 MATTER WAS RECESSED FOR LUNCH.) 10

11 12 CERTIFICATE OF REPORTER 13 THIS RECORD IS CERTIFIED BY THE UNDERSIGNED REPORTER TO 14 BE THE OFFICIAL TRANSCRIPT OF THE PROCEEDINGS INDICATED. 15 ______________________________ 16 PHYLLIS MERANA 17 18 19 20 21 22 23 24 25

Go to Trial Documents listing Go to initial reference

Judge Thomas Penfield Jackson's Findings of Fact (November 5, 1999)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ____________________________________ ) UNITED STATES OF AMERICA, ) ) Plaintiff, ) ) v. ) Civil Action No. 98-1232 (TPJ) ) MICROSOFT CORPORATION, ) ) Defendant. ) ) ____________________________________) ) STATE OF NEW YORK, ex rel. ) Attorney General ELIOT SPITZER,) et al., ) ) Plaintiffs and ) Counterclaim-Defendants, ) ) v. ) Civil Action No. 98-1233 (TPJ) ) MICROSOFT CORPORATION, ) ) Defendant and ) Counterclaim-Plaintiff. ) ____________________________________)

FINDINGS OF FACT

These consolidated civil antitrust actions alleging violations of the Sherman Act, §§ 1 and 2, and various state statutes by the defendant Microsoft Corporation, were tried to the Court, sitting without a jury, between October 19, 1998, and June 24, 1999. The Court has considered the record evidence submitted by the parties, made determinations as to its relevancy and materiality, assessed the credibility of the testimony of the witnesses, both written and oral, and ascertained for its purposes the probative significance of the documentary and visual evidence presented. Upon the record before the Court as of July 28, 1999, at the close of the admission of evidence, pursuant to FED. R. CIV. P. 52(a), the Court finds the following facts to have been proved by a preponderance of the evidence. The Court shall state the conclusions of law to be drawn therefrom in a separate Memorandum and Order to be filed in due course.

I.

BACKGROUND 1.

A “personal computer” (“PC”) is a digital information processing device designed

for use by one person at a time. A typical PC consists of central processing components (e.g., a microprocessor and main memory) and mass data storage (such as a hard disk). A typical PC system consists of a PC, certain peripheral input/output devices (including a monitor, a keyboard, a mouse, and a printer), and an operating system. PC systems, which include desktop and laptop models, can be distinguished from more powerful, more expensive computer systems known as “servers,” which are designed to provide data, services, and functionality through a digital network to multiple users. 2.

An “operating system” is a software program that controls the allocation and use

of computer resources (such as central processing unit time, main memory space, disk space, and

2

input/output channels). The operating system also supports the functions of software programs, called “applications,” that perform specific user-oriented tasks. The operating system supports the functions of applications by exposing interfaces, called “application programming interfaces,” or “APIs.” These are synapses at which the developer of an application can connect to invoke pre-fabricated blocks of code in the operating system. These blocks of code in turn perform crucial tasks, such as displaying text on the computer screen. Because it supports applications while interacting more closely with the PC system’s hardware, the operating system is said to serve as a “platform.” 3.

An Intel-compatible PC is one designed to function with Intel’s 80x86/Pentium

families of microprocessors or with compatible microprocessors manufactured by Intel or by other firms. 4.

An operating system designed to run on an Intel-compatible PC will not function

on a non-Intel-compatible PC, nor will an operating system designed for a non-Intel-compatible PC function on an Intel-compatible one. Similarly, an application that relies on APIs specific to one operating system will not, generally speaking, function on another operating system unless it is first adapted, or “ported,” to the APIs of the other operating system. 5.

Defendant Microsoft Corporation is organized under the laws of the State of

Washington, and its headquarters are situated in Redmond, Washington. Since its inception, Microsoft has focused primarily on developing software and licensing it to various purchasers. 6.

In 1981, Microsoft released the first version of its Microsoft Disk Operating

System, commonly known as “MS-DOS.” The system had a character-based user interface that required the user to type specific instructions at a command prompt in order to perform tasks

3

such as launching applications and copying files. When the International Business Machines Corporation (“IBM”) selected MS-DOS for pre-installation on its first generation of PCs, Microsoft’s product became the predominant operating system sold for Intel-compatible PCs. 7.

In 1985, Microsoft began shipping a software package called Windows. The

product included a graphical user interface, which enabled users to perform tasks by selecting icons and words on the screen using a mouse. Although originally just a user-interface, or “shell,” sitting on top of MS-DOS, Windows took on more operating-system functionality over time. 8.

In 1995, Microsoft introduced a software package called Windows 95, which

announced itself as the first operating system for Intel-compatible PCs that exhibited the same sort of integrated features as the Mac OS running PCs manufactured by Apple Computer, Inc. (“Apple”). Windows 95 enjoyed unprecedented popularity with consumers, and in June 1998, Microsoft released its successor, Windows 98. 9.

Microsoft is the leading supplier of operating systems for PCs. The company

transacts business in all fifty of the United States and in most countries around the world. 10.

Microsoft licenses copies of its software programs directly to consumers. The

largest part of its MS-DOS and Windows sales, however, consists of licensing the products to manufacturers of PCs (known as “original equipment manufacturers” or “OEMs”), such as the IBM PC Company and the Compaq Computer Corporation (“Compaq”). An OEM typically installs a copy of Windows onto one of its PCs before selling the package to a consumer under a single price.

4

11.

The Internet is a global electronic network, consisting of smaller, interconnected

networks, which allows millions of computers to exchange information over telephone wires, dedicated data cables, and wireless links. The Internet links PCs by means of servers, which run specialized operating systems and applications designed for servicing a network environment. 12.

The World Wide Web (“the Web”) is a massive collection of digital information

resources stored on servers throughout the Internet. These resources are typically provided in the form of hypertext documents, commonly referred to as “Web pages,” that may incorporate any combination of text, graphics, audio and video content, software programs, and other data. A user of a computer connected to the Internet can publish a page on the Web simply by copying it into a specially designated, publicly accessible directory on a Web server. Some Web resources are in the form of applications that provide functionality through a user’s PC system but actually execute on a server. 13.

Internet content providers (“ICPs”) are the individuals and organizations that have

established a presence, or “site,” on the Web by publishing a collection of Web pages. Most Web pages are in the form of “hypertext”; that is, they contain annotated references, or “hyperlinks,” to other Web pages. Hyperlinks can be used as cross-references within a single document, between documents on the same site, or between documents on different sites. 14.

Typically, one page on each Web site is the “home page,” or the first access point

to the site. The home page is usually a hypertext document that presents an overview of the site and hyperlinks to the other pages comprising the site. 15.

PCs typically connect to the Internet through the services of Internet access

providers (“IAPs”), which generally charge subscription fees to their customers in the United

5

States. There are two types of IAPs. Online services (“OLSs”) such as America Online (“AOL”), Prodigy, and the Microsoft Network (“MSN”) offer, in addition to Internet access, various services and an array of proprietary content. Internet service providers (“ISPs”) such as MindSpring and Netcom, on the other hand, offer few services apart from Internet access and relatively little of their own content. 16.

A “Web client” is software that, when running on a computer connected to the

Internet, sends information to and receives information from Web servers throughout the Internet. Web clients and servers transfer data using a standard known as the Hypertext Transfer Protocol (“HTTP”). A “Web browser” is a type of Web client that enables a user to select, retrieve, and perceive resources on the Web. In particular, Web browsers provide a way for a user to view hypertext documents and follow the hyperlinks that connect them, typically by moving the cursor over a link and depressing the mouse button. 17.

Although certain Web browsers provided graphical user interfaces as far back as

1993, the first widely-popular graphical browser distributed for profit, called Navigator, was brought to market by the Netscape Communications Corporation in December 1994. Microsoft introduced its browser, called Internet Explorer, in July 1995.

II.

THE RELEVANT MARKET 18.

Currently there are no products, nor are there likely to be any in the near future,

that a significant percentage of consumers world-wide could substitute for Intel-compatible PC operating systems without incurring substantial costs. Furthermore, no firm that does not currently market Intel-compatible PC operating systems could start doing so in a way that would,

6

within a reasonably short period of time, present a significant percentage of consumers with a viable alternative to existing Intel-compatible PC operating systems. It follows that, if one firm controlled the licensing of all Intel-compatible PC operating systems world-wide, it could set the price of a license substantially above that which would be charged in a competitive market and leave the price there for a significant period of time without losing so many customers as to make the action unprofitable. Therefore, in determining the level of Microsoft’s market power, the relevant market is the licensing of all Intel-compatible PC operating systems world-wide. 1.

Demand Substitutability 1.

19.

Server Operating Systems

Consumers could not turn from Intel-compatible PC operating systems to Intel-compatible server

operating systems without incurring substantial costs, since the latter type of system is sold at a significantly higher price than the former. A consumer intent on acquiring a server operating system would also have to buy a computer of substantially greater power and price than an Intel-compatible PC, because server operating systems generally cannot function properly on PC hardware. The price of an Intel-compatible PC operating system accounts for only a very small percentage of the price of an Intel-compatible PC system. Thus, even a substantial increase in the price of an Intel-compatible PC operating system above the competitive level would result in only a trivial increase in the price of an Intel-compatible PC system. Very few consumers would purchase expensive servers in response to a trivial increase in the price of an Intel-compatible PC system. Furthermore, a consumer would not obtain a satisfactory substitute for an Intel-compatible PC operating system even if he purchased a server, since server operating systems lack the features — and support for the breadth of applications — that induce users to purchase Intel-compatible PC operating systems. 2. 20.

Non-Intel-Compatible PC Operating Systems

Since only Intel-compatible PC operating systems will work with Intel-compatible PCs, a

consumer cannot opt for a non-Intel-compatible PC operating system without obtaining a non-Intel-compatible PC. Thus, for consumers who already own an Intel-compatible PC system, the cost of switching to a non-Intel compatible

7

PC operating system includes the price of not only a new operating system, but also a new PC and new peripheral devices. It also includes the effort of learning to use the new system, the cost of acquiring a new set of compatible applications, and the work of replacing files and documents that were associated with the old applications. Very few consumers would incur these costs in response to the trivial increase in the price of an Intel-compatible PC system that would result from even a substantial increase in the price of an Intel-compatible PC operating system. For example, users of Intel-compatible PC operating systems would not switch in large numbers to the Mac OS in response to even a substantial, sustained increase in the price of an Intel-compatible PC operating system. 21.

The response to a price increase would be somewhat greater among consumers buying their first

PC system, because they would not have already invested time and money in an Intel-compatible PC system and a set of compatible applications. Apple does not license the Mac OS separately from its PC hardware, however, and the package of hardware and software comprising an Apple PC system is priced substantially higher than the average price of an Intel-compatible PC system. Furthermore, consumer demand for Apple PC systems suffers on account of the relative dearth of applications written to run on the Mac OS. It is unlikely, then, that a firm controlling the licensing of all Intel-compatible PC operating systems would lose so many new PC users to Apple as the result of a substantial, enduring price increase as to make the action unprofitable. It is therefore proper to define a relevant market that excludes the Mac OS. In any event, as Section III of these findings demonstrates, including the Mac OS in the relevant market would not alter the Court’s conclusion as to the level of Microsoft’s market power.

3. 22.

Information Appliances

No operating system designed for a hand-held computer, a “smart” wireless telephone, a television

set-top box, or a game console is capable of performing as an adequate operating system for an Intel-compatible PC. Therefore, in order to adopt a substitute for the Intel-compatible PC operating system from the realm of “information appliances,” a consumer must acquire one or more of these devices in lieu of an Intel-compatible PC system. 23.

It is possible that, within the next few years, those consumers who otherwise would use an Intel-

compatible PC system solely for storing addresses and schedules, for sending and receiving E-mail, for browsing the Web, and for playing video games might be able to choose a complementary set of information appliances over an 8

Intel-compatible PC system without incurring substantial costs. To the extent this substitution occurs, though, it will be the result of innovation by the producers of information appliances, and it will occur even if Intel-compatible PC operating systems are priced at the same level that they would be in a competitive market. More importantly, while some consumers may decide to make do with one or more information appliances in place of an Intel-compatible PC system, the number of these consumers will, for the foreseeable future, remain small in comparison to the number of consumers deciding that they still need an Intel-compatible PC system. One reason for this is the fact that no single type of information appliance, nor even all types in the aggregate, provides all of the features that most consumers have come to rely on in their PC systems and in the applications that run on them. Thus, most of those who buy information appliances will do so in addition to, rather than instead of, buying an Intel-compatible PC system. Not surprisingly, then, sales of PC systems are not expected to suffer on account of the growing consumer interest in information appliances. It follows that, for the foreseeable future, a firm controlling the licensing of all Intelcompatible PC operating systems could set prices substantially above competitive levels without losing an unacceptable amount of business to information appliances. 4. 24.

Network Computers

A network computer system (sometimes called a “thin client”) typically contains central processing

components with basic capabilities, certain key peripheral devices (such as a monitor, a keyboard, and a mouse), an operating system, and a browser. The system contains no mass storage, however, and it processes little if any data locally. Instead, the system receives processed data and software as needed from a server across a network. A network computer system lacks the hardware resources to support an Intel-compatible PC operating system. It follows that software applications written to run on a specific Intel-compatible PC operating system will not run on a network computer. Network computers can run applications residing on a designated server, however. Moreover, a network computer system typically can run applications residing on other servers, so long as those applications are accessible through Web sites. The ability to run server-based applications is not exclusive to network computer systems, however. Generally speaking, any PC system equipped with a browser and an Internet connection is capable of accessing applications hosted through Web sites. 25.

Since the network computing model relies heavily on the processing power and memory of servers,

the requirements for the user’s hardware (and thus the price of that hardware) are low relative to those of an Intel9

compatible PC system. Still, a user who already owns a relatively expensive Intel-compatible PC system is not likely to abandon the investment and acquire less powerful hardware just because one of the least expensive components of his PC system — the operating system — is substantially more expensive than it would be under competitive conditions. Just as does the Mac OS, the network computing model presents a somewhat more attractive alternative to the first-time computer buyer. But as in the case where a prospective purchaser is considering acquiring the Apple alternative, a new buyer considering the network computing model must choose between types of computer systems. If the consumer opts for the less expensive hardware of the network computer, that hardware will not support an Intel-compatible PC operating system; and if the new buyer opts for the more expensive hardware of an Intelcompatible PC, an Intel-compatible PC operating system will almost certainly come pre-installed (and in any event represent very little additional cost relative to the price of the hardware). 26.

Only a few firms currently market network computer systems, and the systems have yet to attract

substantial consumer demand. In part, this is because PC systems, which can store and process data locally as well as communicate with a server, have decreased so much in price as to call into question the value proposition of buying a network computer system. This fact would not change if the price of an Intel-compatible PC operating system rose significantly, because the resulting change in the price of an Intel-compatible PC system would be very minor. Another reason for the limited demand for network computer systems is the fact that few consumers are in a position to turn from PC systems to network computer systems without making substantial sacrifices; for the network computing option exhibits significant shortcomings for current PC owners and first-time buyers alike. The problems of latency, congestion, asynchrony, and insecurity across a communications network, and contention for limited processing and memory resources at the remote server, can all result in a substantial derogation of computing performance. Moreover, the owner of a network computer is required to enter into long-term dependency upon the owner of a remote server in order to obtain functionality that would reside within his control if he owned a PC system. If network computing becomes a viable alternative to PC-based computing, it will be because innovation by the proponents of the network computing model overcomes these problems, and it will happen even if Intelcompatible PC operating systems are priced at competitive levels. In any case, that day has not arrived, nor does it appear imminent. 5.

Server-Based Computing Generally 10

27.

As the bandwidth available to the average user increases, “portal” Web sites, which aggregate Web

content and provide services such as search engines, E-mail, and travel reservation systems, could begin to host full lines of the server-based, personal-productivity applications that have begun to appear in small numbers on the Web. If so, increasing numbers of computer users equipped with Web browsers and IAP connections could begin to conduct a significant portion of their computing through these portals. To the extent they might do so, users probably would not regard the Mac OS’s limited stock of compatible applications as the major drawback to using an Apple PC system that it is today, and they might be increasingly drawn to network computer systems and information appliances. The variety and ease of use of server-based applications accessible through browsers would have to increase a great deal from today’s levels, however, before the total costs of dispensing with an Intel-compatible PC operating system would decline sufficiently to impose a significant constraint on the pricing of those systems. Again, that day is not imminent; for at least the next few years, the overwhelming majority of consumers accessing serverbased applications will do so using an Intel-compatible PC system and a browser. 6. 28.

Middleware

Operating systems are not the only software programs that expose APIs to application developers.

The Netscape Web browser and Sun Microsystems, Inc.’s Java class libraries are examples of non-operating system software that do likewise. Such software is often called “middleware” because it relies on the interfaces provided by the underlying operating system while simultaneously exposing its own APIs to developers. Currently no middleware product exposes enough APIs to allow independent software vendors (“ISVs”) profitably to write fullfeatured personal productivity applications that rely solely on those APIs. 29.

Even if middleware deployed enough APIs to support full-featured applications, it would not

function on a computer without an operating system to perform tasks such as managing hardware resources and controlling peripheral devices. But to the extent the array of applications relying solely on middleware comes to satisfy all of a user’s needs, the user will not care whether there exists a large number of other applications that are directly compatible with the underlying operating system. Thus, the growth of middleware-based applications could lower the costs to users of choosing a non-Intel-compatible PC operating system like the Mac OS. It remains to be seen, though, whether there will ever be a sustained stream of full-featured applications written solely to middleware APIs. In any event, it would take several years for middlware and the applications it supports to evolve from the 11

status quo to a point at which the cost to the average consumer of choosing a non-Intel compatible PC operating system over an Intel-compatible one falls so low as to constrain the pricing of the latter systems. 2.

The Possibility of Supply Responses

30.

Firms that do not currently produce Intel-compatible PC operating systems could do so. What is

more, once a firm had written the necessary software code, it could produce millions of copies of its operating system at relatively low cost. The ability to meet a large demand is useless, however, if the demand for the product is small, and signs do not indicate large demand for a new Intel-compatible PC operating system. To the contrary, they indicate that the demand for a new Intel-compatible PC operating system would be severely constrained by an intractable “chicken-and-egg” problem: The overwhelming majority of consumers will only use a PC operating system for which there already exists a large and varied set of high-quality, full-featured applications, and for which it seems relatively certain that new types of applications and new versions of existing applications will continue to be marketed at pace with those written for other operating systems. Unfortunately for firms whose products do not fit that bill, the porting of applications from one operating system to another is a costly process. Consequently, software developers generally write applications first, and often exclusively, for the operating system that is already used by a dominant share of all PC users. Users do not want to invest in an operating system until it is clear that the system will support generations of applications that will meet their needs, and developers do not want to invest in writing or quickly porting applications for an operating system until it is clear that there will be a sizeable and stable market for it. What is more, consumers who already use one Intel-compatible PC operating system are even less likely than first-time buyers to choose a newcomer to the field, for switching to a new system would require these users to scrap the investment they have made in applications, training, and certain hardware. 31.

The chicken-and-egg problem notwithstanding, a firm might reasonably expect to make a profit by

introducing an Intel-compatible PC operating system designed to support a type of application that satisfies the special interests of a particular subset of users. For example, Be, Inc. (‘Be”) markets an Intel-compatible PC operating system called BeOS that offers superior support for multimedia applications, and the operating system enjoys a certain amount of success with the segment of the consumer population that has a special interest in creating and playing multimedia content with a PC system. Still, while a niche operating system might turn a profit, the chicken-and-egg problem (hereinafter referred to as the “applications barrier to entry”) would make it prohibitively 12

expensive for a new Intel-compatible operating system to attract enough developers and consumers to become a viable alternative to a dominant incumbent in less than a few years. 32.

To the extent that developers begin writing attractive applications that rely solely on servers or

middleware instead of PC operating systems, the applications barrier to entry could erode. As the Court finds above, however, it remains to be seen whether server- or middleware-based development will flourish at all. Even if such development were already flourishing, it would be several years before the applications barrier eroded enough to clear the way for the relatively rapid emergence of a viable alternative to incumbent Intel-compatible PC operating systems. It is highly unlikely, then, that a firm not already marketing an Intel-compatible PC operating system could begin marketing one that would, in less than a few years, present a significant percentage of consumers with a viable alternative to incumbents.

III.

MICROSOFT’S POWER IN THE RELEVANT MARKET 33.

Microsoft enjoys so much power in the market for Intel-compatible PC operating systems that if it

wished to exercise this power solely in terms of price, it could charge a price for Windows substantially above that which could be charged in a competitive market. Moreover, it could do so for a significant period of time without losing an unacceptable amount of business to competitors. In other words, Microsoft enjoys monopoly power in the relevant market. 34.

Viewed together, three main facts indicate that Microsoft enjoys monopoly power. First,

Microsoft’s share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft’s dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft’s customers lack a commercially viable alternative to Windows. 1.

Market Share

35.

Microsoft possesses a dominant, persistent, and increasing share of the world-wide market for

Intel-compatible PC operating systems. Every year for the last decade, Microsoft’s share of the market for Intelcompatible PC operating systems has stood above ninety percent. For the last couple of years the figure has been at

13

least ninety-five percent, and analysts project that the share will climb even higher over the next few years. Even if Apple’s Mac OS were included in the relevant market, Microsoft’s share would still stand well above eighty percent.

2.

The Applications Barrier to Entry 1.

36.

Description of the Applications Barrier to Entry

Microsoft’s dominant market share is protected by the same barrier that helps define the market for

Intel-compatible PC operating systems. As explained above, the applications barrier would prevent an aspiring entrant into the relevant market from drawing a significant number of customers away from a dominant incumbent even if the incumbent priced its products substantially above competitive levels for a significant period of time. Because Microsoft’s market share is so dominant, the barrier has a similar effect within the market: It prevents Intelcompatible PC operating systems other than Windows from attracting significant consumer demand, and it would continue to do so even if Microsoft held its prices substantially above the competitive level. 37.

Consumer interest in a PC operating system derives primarily from the ability of that system to run

applications. 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 versions. 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 Windows, because it reassures them that their interests will be met as long as they use Microsoft’s product. 38.

Software development is characterized by substantial economies of scale. The fixed costs of

producing software, including applications, is very high. By contrast, marginal costs are very low. Moreover, the costs of developing software are “sunk” — once expended to develop software, resources so devoted cannot be used 14

for another purpose. The result of economies of scale and sunk costs is that application developers seek to sell as many copies of their applications as possible. An application that is written for one PC operating system will operate on another PC operating system only if it is ported to that system, and porting applications is both time-consuming and expensive. Therefore, application developers tend to write first to the operating system with the most users — Windows. Developers might then port their applications to other operating systems, but only to the extent that the marginal added sales justify the cost of porting. In order to recover that cost, ISVs that do go to the effort of porting frequently set the price of ported applications considerably higher than that of the original versions written for Windows. 39.

Consumer demand for Windows enjoys positive network effects. A positive network effect is a

phenomenon by which the attractiveness of a product increases with the number of people using it. The fact that there is a multitude of people using Windows makes the product more attractive to consumers. The large installed base attracts corporate customers who want to use an operating system that new employees are already likely to know how to use, and it attracts academic consumers who want to use software that will allow them to share files easily with colleagues at other institutions. The main reason that demand for Windows experiences positive network effects, however, is that the size of Windows’ installed base impels ISVs to write applications first and foremost to Windows, thereby ensuring a large body of applications from which consumers can choose. The large body of applications thus reinforces demand for Windows, augmenting Microsoft’s dominant position and thereby perpetuating ISV incentives to write applications principally for Windows. This self-reinforcing cycle is often referred to as a “positive feedback loop.” 40.

What for Microsoft is a positive feedback loop is for would-be competitors a vicious cycle. For

just as Microsoft’s large market share creates incentives for ISVs to develop applications first and foremost for Windows, the small or non-existent market share of an aspiring competitor makes it prohibitively expensive for the aspirant to develop its PC operating system into an acceptable substitute for Windows. To provide a viable substitute for Windows, another PC operating system would need a large and varied enough base of compatible applications to reassure consumers that their interests in variety, choice, and currency would be met to more-or-less the same extent as if they chose Windows. Even if the contender attracted several thousand compatible applications, it would still look like a gamble from the consumer’s perspective next to Windows, which supports over 70,000 15

applications. The amount it would cost an operating system vendor to create that many applications is prohibitively large. Therefore, in order to ensure the availability of a set of applications comparable to that available for Windows, a potential rival would need to induce a very large number of ISVs to write to its operating system. 41.

In deciding whether to develop an application for a new operating system, an ISV’s first

consideration is the number of users it expects the operating system to attract. Out of this focus arises a collectiveaction problem: Each ISV realizes that the new operating system could attract a significant number of users if enough ISVs developed applications for it; but few ISVs want to sink resources into developing for the system until it becomes established. Since everyone is waiting for everyone else to bear the risk of early adoption, the new operating system has difficulty attracting enough applications to generate a positive feedback loop. The vendor of a new operating system cannot effectively solve this problem by paying the necessary number of ISVs to write for its operating system, because the cost of doing so would dwarf the expected return. 42.

Counteracting the collective-action phenomenon is another known as the “first-mover incentive.”

For an ISV interested in attracting users, there may be an advantage to offering the first and, for a while, only application in its category that runs on a new PC operating system. The user base of the new system may be small, but every user of that system who wants such an application will be compelled to use the ISV’s offering. Moreover, if demand for the new operating system suddenly explodes, the first mover will reap large sales before any competitors arrive. An ISV thus might be drawn to a new PC operating system as a “protected harbor.” Once firstmovers stake claims to the major categories of applications, however, there is a strong chance that the new operating system could stall; it would not support the most familiar applications, nor the variety and number of applications, that attract large numbers of consumers, and there would no longer exist a first-mover incentive to attract additional ISVs to the important application categories. Although the upstart operating system might find itself with enough applications support to hold a fraction of the market, the collective-action phenomenon would still prevent the system from gaining the kind of positive feedback momentum that can turn a fringe entrant into a rival that would put competitive pressure on Windows. 43.

The cost to a would-be entrant of inducing ISVs to write applications for its operating system

exceeds the cost that Microsoft itself has faced in inducing ISVs to write applications for its operating system products, for Microsoft never confronted a highly penetrated market dominated by a single competitor. Of course, 16

the fact that it is extremely difficult for an efficient would-be rival to accumulate enough applications support to compete with Windows does not mean that sustaining its own applications support is effortless for Microsoft. In fact, if Microsoft stopped investing the hundreds of millions of dollars it spends each year inducing ISVs to write applications for Windows, it might become easier than it currently is for a competitor to develop its own positive feedback loop. But given that Windows today enjoys overwhelmingly more applications support than any other PC operating system, it would still take that competitor years to develop the necessary momentum. Plus, while Microsoft may spend more on platform “evangelization,” even in relative terms, than any other PC operating-system vendor, it is not difficult to understand why it is worthwhile for the principal beneficiary of the applications barrier to devote more resources to augmenting it than aspiring rivals are willing to expend in speculative efforts to erode it. 44.

Microsoft continually releases “new and improved” versions of its PC operating system. Each

time it does, Microsoft must convince ISVs to write applications that take advantage of new APIs, so that existing Windows users will have incentive to buy an upgrade. Since ISVs are usually still earning substantial revenue from applications written for the last version of Windows, Microsoft must convince them to write for the new version. Even if ISVs are slow to take advantage of the new APIs, though, no applications barrier stands in the way of consumers adopting the new system, for Microsoft ensures that successive versions of Windows retain the ability to run applications developed for earlier versions. In fact, since ISVs know that consumers do not feel locked into their old versions of Windows and that new versions have historically attracted substantial consumer demand, ISVs will generally write to new APIs as long as the interfaces enable attractive, innovative features. Microsoft supplements developers’ incentives by extending various ‘seals of approval’ — visible to consumers, investors, and industry analysts — to those ISVs that promptly develop new versions of their applications adapted to the newest version of Windows. In addition, Microsoft works closely with ISVs to help them adapt their applications to the newest version of the operating system — a process that is in any event far easier than porting an application from one vendor’s PC operating system to another’s. In sum, despite the substantial resources Microsoft expends inducing ISVs to develop applications for new versions of Windows, the company does not face any obstacles nearly as imposing as the barrier to entry that vendors and would-be vendors of other PC operating systems must overcome. 2.

Empirical Evidence of the Applications Barrier to Entry

17

45.

The experiences of IBM and Apple, Microsoft’s most significant operating system rivals in the

mid- and late 1990s, confirm the strength of the applications barrier to entry. 1. 46.

OS/2 Warp

IBM’s inability to gain widespread developer support for its OS/2 Warp operating system

illustrates how the massive Windows installed base makes it prohibitively costly for a rival operating system to attract enough developer support to challenge Windows. In late 1994, IBM introduced its Intel-compatible OS/2 Warp operating system and spent tens of millions of dollars in an effort to attract ISVs to develop applications for OS/2 and in an attempt to reverse-engineer, or “clone,” part of the Windows API set. Despite these efforts, IBM could obtain neither significant market share nor ISV support for OS/2 Warp. Thus, although at its peak OS/2 ran approximately 2,500 applications and had 10% of the market for Intel-compatible PC operating systems, IBM ultimately determined that the applications barrier prevented effective competition against Windows 95. For that reason, in 1996 IBM stopped trying to convince ISVs to write for OS/2 Warp. IBM now targets the product at a market niche, namely enterprise customers (mainly banks) that are interested in particular types of application that run on OS/2 Warp. The fact that IBM no longer tries to compete with Windows is evidenced by the fact that it prices OS/2 Warp at about two-and-one-half times the price of Windows 98. 2. 47.

The Mac OS

The inability of Apple to compete effectively with Windows provides another example of the

applications barrier to entry in operation. Although Apple’s Mac OS supports more than 12,000 applications, even an inventory of that magnitude is not sufficient to enable Apple to present a significant percentage of users with a viable substitute for Windows. The absence of a large installed base, in turn, reinforces the disparity between the applications made available for the Mac OS and those made available for Windows, further inhibiting Apple’s sales. The applications barrier thus prevents the Mac OS from hindering Microsoft’s ability to control price, regardless of whether the Mac OS is regarded as being in the relevant market or not.

3. 48.

Fringe Operating Systems

The applications barrier to entry does not prevent non-Microsoft, Intel-compatible PC operating

systems from attracting enough consumer demand and ISV support to survive. It does not even prevent vendors of 18

those products from making a profit. The barrier does, however, prevent the products from drawing a significant percentage of consumers away from Windows. 49.

As discussed above, Be markets an Intel-compatible PC operating system, called BeOS, that is

specially suited to support multimedia functions. The operating system survives on a relatively minuscule number of applications (approximately 1,000) and a user base which, at around 750,000, is trivial compared to the number of Windows users. One of the reasons the BeOS can even attract that many users despite its small base of applications is that it advertises itself as a complement to, rather than as a substitute for, Windows. Although the BeOS could run an Intel-compatible PC system without Windows, it is almost always loaded on a system along with Windows. What is more, when these dual-loaded PC systems are turned on, Windows automatically boots; the user must then take affirmative steps to invoke the BeOS. While this scheme allows the BeOS to occupy a niche in the market, it does not place the product on a trajectory to replace Windows on a significant number of PCs. The special multimedia support provided by the BeOS may, for a small number of users, outweigh the disadvantages of maintaining two large, complex operating systems on one PC. Of that group, however, it is likely that only a tiny number of users will find that support so attractive that they would be willing to forego Windows, and its huge base of compatible applications, altogether. 50.

The experience of the Linux operating system, a version of which runs on Intel-compatible PCs,

similarly fails to refute the existence of an applications barrier to entry. Linux is an “open source” operating system that was created, and is continuously updated, by a global network of software developers who contribute their labor for free. Although Linux has between ten and fifteen million users, the majority of them use the operating system to run servers, not PCs. Several ISVs have announced their development of (or plans to develop) Linux versions of their applications. To date, though, legions of ISVs have not followed the lead of these first movers. Similarly, consumers have by and large shown little inclination to abandon Windows, with its reliable developer support, in favor of an operating system whose future in the PC realm is unclear. By itself, Linux’s open-source development model shows no signs of liberating that operating system from the cycle of consumer preferences and developer incentives that, when fueled by Windows’ enormous reservoir of applications, prevents non-Microsoft operating systems from competing. 3.

Open-Source Applications Development 19

51.

Since application developers working under an open-source model are not looking to recoup their

investment and make a profit by selling copies of their finished products, they are free from the imperative that compels proprietary developers to concentrate their efforts on Windows. In theory, then, open-source developers are at least as likely to develop applications for a non-Microsoft operating system as they are to write Windowscompatible applications. In fact, they may be disposed ideologically to focus their efforts on open-source platforms like Linux. Fortunately for Microsoft, however, there are only so many developers in the world willing to devote their talents to writing, testing, and debugging software pro bono publico. A small corps may be willing to concentrate its efforts on popular applications, such as browsers and office productivity applications, that are of value to most users. It is unlikely, though, that a sufficient number of open-source developers will commit to developing and continually updating the large variety of applications that an operating system would need to attract in order to present a significant number of users with a viable alternative to Windows. In practice, then, the opensource model of applications development may increase the base of applications that run on non-Microsoft PC operating systems, but it cannot dissolve the barrier that prevents such operating systems from challenging Windows. 4. 52.

Cloning the 32-Bit Windows APIs

Theoretically, the developer of a non-Microsoft, Intel-compatible PC operating system could

circumvent the applications barrier to entry by cloning the APIs exposed by the 32-bit versions of Windows (Windows 9x and Windows NT). Applications written for Windows would then also run on the rival system, and consumers could use the rival system confident in that knowledge. Translating this theory into practice is virtually impossible, however. First of all, cloning the thousands of APIs already exposed by Windows would be an enormously expensive undertaking. More daunting is the fact that Microsoft continually adds APIs to Windows through updates and new versions. By the time a rival finished cloning the APIs currently in existence, Windows would have exposed a multitude of new ones. Since the rival would never catch up, it would never be able to assure consumers that its operating system would run all of the applications written for Windows. IBM discovered this to its dismay in the mid-1990s when it failed, despite a massive investment, to clone a sufficiently large part of the 32bit Windows APIs. In short, attempting to clone the 32-bit Windows APIs is such an expensive, uncertain undertaking that it fails to present a practical option for a would-be competitor to Windows. 3.

Viable Alternatives to Windows 20

53.

That Microsoft’s market share and the applications barrier to entry together endow the company

with monopoly power in the market for Intel-compatible PC operating systems is directly evidenced by the sustained absence of realistic commercial alternatives to Microsoft’s PC operating-system products. 54.

OEMs are the most important direct customers for operating systems for Intel-compatible PCs.

Because competition among OEMs is intense, they pay particularly close attention to consumer demand. OEMs are thus not only important customers in their own right, they are also surrogates for consumers in identifying reasonably-available commercial alternatives to Windows. Without significant exception, all OEMs pre-install Windows on the vast majority of PCs that they sell, and they uniformly are of a mind that there exists no commercially viable alternative to which they could switch in response to a substantial and sustained price increase or its equivalent by Microsoft. For example, in 1995, at a time when IBM still placed hope in OS/2's ability to rival Windows, the firm nevertheless calculated that its PC company would lose between seventy and ninety percent of its sales volume if failed to load Windows 95 on its PCs. Although a few OEMs have announced their intention to preinstall Linux on some of the computers they ship, none of them plan to install Linux in lieu of Windows on any appreciable number of PC (as opposed to server) systems. For its part, Be is not even attempting to persuade OEMs to install the BeOS on PCs to the exclusion of Windows. 55.

OEMs believe that the likelihood of a viable alternative to Windows emerging any time in the next

few years is too low to constrain Microsoft from raising prices or imposing other burdens on customers and users. The accuracy of this belief is highlighted by the fact that the other vendors of Intel-compatible PC operating systems do not view their own offerings as viable alternatives to Windows. Microsoft knows that OEMs have no choice but to load Windows, both because it has a good understanding of the market in which it operates and because OEMs have told Microsoft as much. Indicative of Microsoft’s assessment of the situation is the fact that, in a 1996 presentation to the firm’s executive committee, the Microsoft executive in charge of OEM licensing reported that piracy continued to be the main competition to the company’s operating system products. Secure in this knowledge, Microsoft did not consider the prices of other Intel-compatible PC operating systems when it set the price of Windows 98. 56.

As the Court found above, the growth of server- and middleware-based applications development

might eventually weaken the applications barrier to entry. This would not only make it easier for outside firms to 21

enter the market, it could also make it easier for non-Microsoft firms already in the market to present a viable alternative to Windows. But as the Court also found above, it is not clear whether ISVs will ever develop a large, diverse body of full-featured applications that rely solely on APIs exposed by servers and middleware. Furthermore, even assuming that such a movement has already begun in earnest, it will take several years for the applications barrier to erode enough to enable a non-Microsoft, Intel-compatible PC operating system to develop into a viable alternative to Windows.

4.

Price Restraint Posed by Microsoft’s Installed Base

57.

Software never expires, so consumers who already have a version of Windows with which they are

content and who are not shopping for a new PC system are somewhat reluctant to incur the cost of upgrading to a new version of Windows. Fortunately for Microsoft, the pace of innovation in PC hardware is rapid, and the price of that hardware has declined steadily in recent years. As a result, existing PC users buy new PC systems relatively frequently, and OEMs still attract at a healthy rate buyers who have never owned a computer. The license for one of Microsoft’s operating system products prohibits the user from transferring the operating system to another machine, so there is no legal secondary market in Microsoft operating systems. This means that any consumer who buys a new Intel-compatible PC and wants Windows must buy a new copy of the operating system. Microsoft takes pains to ensure that the versions of its operating system that OEMs pre-install on new PC systems are the most current. It does this, in part, by increasing the price to OEMs of older versions of Windows when the newer versions are released. Since Microsoft can sell so many copies of each new operating system through the sales of new PC systems, the average price it sets for those systems is little affected by the fact that older versions of Windows never wear out. 5.

Price Restraint Posed by Piracy

58.

Although there is no legal secondary market for Microsoft’s PC operating systems, there is a

thriving illegal one. Software pirates illegally copy software products such as Windows, selling each copy for a fraction of the vendor’s usual price. One of the ways Microsoft combats piracy is by advising OEMs that they will be charged a higher price for Windows unless they drastically limit the number of PCs that they sell without an operating system pre-installed. In 1998, all major OEMs agreed to this restriction. Naturally, it is hard to sell a 22

pirated copy of Windows to a consumer who has already received a legal copy included in the price of his new PC system. Thus, Microsoft is able to effectively contain, if not extinguish, the illegal secondary market for its operating-system products. So even though Microsoft is more concerned about piracy than it is about other firms’ operating system products, the company’s pricing is not substantially constrained by the need to reduce the incentives for consumers to acquire their copies of Windows illegally. 6.

Price Restraint Posed by Long-Term Threats

59.

The software industry in general is characterized by dynamic, vigorous competition. In many

cases, one of the early entrants into a new software category quickly captures a lion’s share of the sales, while other products in the category are either driven out altogether or relegated to niche positions. What eventually displaces the leader is often not competition from another product within the same software category, but rather a technological advance that renders the boundaries defining the category obsolete. These events, in which categories are redefined and leaders are superseded in the process, are spoken of as “inflection points.” 60.

The exponential growth of the Internet represents an inflection point born of complementary

technological advances in the computer and telecommunications industries. The rise of the Internet in turn has fueled the growth of server-based computing, middleware, and open-source software development. Working together, these nascent paradigms could oust the PC operating system from its position as the primary platform for applications development and the main interface between users and their computers. Microsoft recognizes that new paradigms could arise to depreciate the value of selling PC operating systems; however, the fact that these new paradigms already exist in embryonic or primitive form does not prevent Microsoft from enjoying monopoly power today. For while consumers might one day turn to network computers, or Linux, or a combination of middleware and some other operating system, as an alternative to Windows, the fact remains that they are not doing so today. Nor are consumers likely to do so in appreciable numbers any time in the next few years. Unless and until that day arrives, no significant percentage of consumers will be able to abandon Windows without incurring substantial costs. Microsoft can therefore set the price of Windows substantially higher than that which would be charged in a competitive market — or impose other burdens on consumers — without losing so much business as to make the action unprofitable. If Microsoft exerted its power solely to raise price, the day when users could turn away from Windows without incurring substantial costs would still be several years distant. Moreover, Microsoft could keep its 23

prices high for a significant period of time and still lower them in time to meet the threat of a new paradigm. Alternatively, Microsoft could delay the arrival of a new paradigm on the scene by expending surplus monopoly power in ways other than the maintenance of high prices. 7.

Significance of Microsoft’s Innovation

61.

The fact that Microsoft invests heavily in research and development does not evidence a lack of

monopoly power. Indeed, Microsoft has incentives to innovate aggressively despite its monopoly power. First, if there are innovations that will make Intel-compatible PC systems attractive to more consumers, and those consumers less sensitive to the price of Windows, the innovations will translate into increased profits for Microsoft. Second, although Microsoft could significantly restrict its investment in innovation and still not face a viable alternative to Windows for several years, it can push the emergence of competition even farther into the future by continuing to innovate aggressively. While Microsoft may not be able to stave off all potential paradigm shifts through innovation, it can thwart some and delay others by improving its own products to the greater satisfaction of consumers. 8.

Microsoft’s Pricing Behavior

62.

Microsoft’s actual pricing behavior is consistent with the proposition that the firm enjoys

monopoly power in the market for Intel-compatible PC operating systems. The company’s decision not to consider the prices of other vendors’ Intel-compatible PC operating systems when setting the price of Windows 98, for example, is probative of monopoly power. One would expect a firm in a competitive market to pay much closer attention to the prices charged by other firms in the market. Another indication of monopoly power is the fact that Microsoft raised the price that it charged OEMs for Windows 95, with trivial exceptions, to the same level as the price it charged for Windows 98 just prior to releasing the newer product. In a competitive market, one would expect the price of an older operating system to stay the same or decrease upon the release of a newer, more attractive version. Microsoft, however, was only concerned with inducing OEMs to ship Windows 98 in favor of the older version. It is unlikely that Microsoft would have imposed this price increase if it were genuinely concerned that OEMs might shift their business to another vendor of operating systems or hasten the development of viable alternatives to Windows. 63.

Finally, it is indicative of monopoly power that Microsoft felt that it had substantial discretion in

setting the price of its Windows 98 upgrade product (the operating system product it sells to existing users of 24

Windows 95). A Microsoft study from November 1997 reveals that the company could have charged $49 for an upgrade to Windows 98 — there is no reason to believe that the $49 price would have been unprofitable — but the study identifies $89 as the revenue-maximizing price. Microsoft thus opted for the higher price. 64.

An aspect of Microsoft’s pricing behavior that, while not tending to prove monopoly power, is

consistent with it is the fact that the firm charges different OEMs different prices for Windows, depending on the degree to which the individual OEMs comply with Microsoft’s wishes. Among the five largest OEMs, Gateway and IBM, which in various ways have resisted Microsoft’s efforts to enlist them in its efforts to preserve the applications barrier to entry, pay higher prices than Compaq, Dell, and Hewlett-Packard, which have pursued less contentious relationships with Microsoft. 65.

It is not possible with the available data to determine with any level of confidence whether the

price that a profit-maximizing firm with monopoly power would charge for Windows 98 comports with the price that Microsoft actually charges. Even if it could be determined that Microsoft charges less than the profit-maximizing monopoly price, though, that would not be probative of a lack of monopoly power, for Microsoft could be charging what seems like a low short-term price in order to maximize its profits in the future for reasons unrelated to underselling any incipient competitors. For instance, Microsoft could be stimulating the growth of the market for Intel-compatible PC operating systems by keeping the price of Windows low today. Given the size and stability of its market share, Microsoft stands to reap almost all of the future rewards if there are yet more consumers of Intelcompatible PC operating systems. By pricing low relative to the short-run profit-maximizing price, thereby focusing on attracting new users to the Windows platform, Microsoft would also intensify the positive network effects that add to the impenetrability of the applications barrier to entry. 66.

Furthermore, Microsoft expends a significant portion of its monopoly power, which could

otherwise be spent maximizing price, on imposing burdensome restrictions on its customers — and in inducing them to behave in ways — that augment and prolong that monopoly power. For example, Microsoft attaches to a Windows license conditions that restrict the ability of OEMs to promote software that Microsoft believes could weaken the applications barrier to entry. Microsoft also charges a lower price to OEMs who agree to ensure that all of their Windows machines are powerful enough to run Windows NT for Workstations. To the extent this provision induces OEMs to concentrate their efforts on the development of relatively powerful, expensive PCs, it makes OEMs 25

less likely to pursue simultaneously the opposite path of developing “thin client” systems, which could threaten demand for Microsoft’s Intel-compatible PC operating system products. In addition, Microsoft charges a lower price to OEMs who agree to ship all but a minute fraction of their machines with an operating system pre-installed. While this helps combat piracy, it also makes it less likely that consumers will detect increases in the price of Windows and renders operating systems not pre-installed by OEMs in large numbers even less attractive to consumers. After all, a consumer’s interest in a non-Windows operating system might not outweigh the burdens on system memory and performance associated with supporting two operating systems on a single PC. Other such restrictions and incentives are described below.

1.

Microsoft’s Actions Toward Other Firms

67.

Microsoft’s monopoly power is also evidenced by the fact that, over the course of several years,

Microsoft took actions that could only have been advantageous if they operated to reinforce monopoly power. These actions are described below.

IV.

THE MIDDLEWARE THREATS 68.

Middleware technologies, as previously noted, have the potential to weaken the applications

barrier to entry. Microsoft was apprehensive that the APIs exposed by middleware technologies would attract so much developer interest, and would become so numerous and varied, that there would arise a substantial and growing number of full-featured applications that relied largely, or even wholly, on middleware APIs. The applications relying largely on middleware APIs would potentially be relatively easy to port from one operating system to another. The applications relying exclusively on middleware APIs would run, as written, on any operating system hosting the requisite middleware. So the more popular middleware became and the more APIs it exposed, the more the positive feedback loop that sustains the applications barrier to entry would dissipate. Microsoft was concerned with middleware as a category of software; each type of middleware contributed to the threat posed by the entire category. At the same time, Microsoft focused its antipathy on two incarnations of middleware that, working

26

together, had the potential to weaken the applications barrier severely without the assistance of any other middleware. These were Netscape’s Web browser and Sun’s implementation of the Java technologies.

1.

The Netscape Web browser

69.

Netscape Navigator possesses three key middleware attributes that endow it with the potential to

diminish the applications barrier to entry. First, in contrast to non-Microsoft, Intel-compatible PC operating systems, which few users would want to use on the same PC systems that carry their copies of Windows, a browser can gain widespread use based on its value as a complement to Windows. Second, because Navigator exposes a set (albeit a limited one) of APIs, it can serve as a platform for other software used by consumers. A browser product is particularly well positioned to serve as a platform for network-centric applications that run in association with Web pages. Finally, Navigator has been ported to more than fifteen different operating systems. Thus, if a developer writes an application that relies solely on the APIs exposed by Navigator, that application will, without any porting, run on many different operating systems. 70.

Adding to Navigator’s potential to weaken the applications barrier to entry is the fact that the

Internet has become both a major inducement for consumers to buy PCs for the first time and a major occupier of the time and attention of current PCs users. For any firm looking to turn its browser product into an applications platform such to rival Windows, the intense consumer interest in all things Internet-related is a great boon. 71.

Microsoft knew in the fall of 1994 that Netscape was developing versions of a Web browser to run

on different operating systems. It did not yet know, however, that Netscape would employ Navigator to generate revenue directly, much less that the product would evolve in such a way as to threaten Microsoft. In fact, in late December 1994, Netscape’s chairman and chief executive officer (“CEO”), Jim Clark, told a Microsoft executive that the focus of Netscape’s business would be applications running on servers and that Netscape did not intend to succeed at Microsoft’s expense. 72.

As soon as Netscape released Navigator on December 15, 1994, the product began to enjoy

dramatic acceptance by the public; shortly after its release, consumers were already using Navigator far more than any other browser product. This alarmed Microsoft, which feared that Navigator’s enthusiastic reception could embolden Netscape to develop Navigator into an alternative platform for applications development. In late May 27

1995, Bill Gates, the chairman and CEO of Microsoft, sent a memorandum entitled “The Internet Tidal Wave” to Microsoft’s executives describing Netscape as a “new competitor ‘born’ on the Internet.” He warned his colleagues within Microsoft that Netscape was “pursuing a multi-platform strategy where they move the key API into the client to commoditize the underlying operating system.” By the late spring of 1995, the executives responsible for setting Microsoft’s corporate strategy were deeply concerned that Netscape was moving its business in a direction that could diminish the applications barrier to entry. B.

Sun’s Implementation of the Java Technologies

73.

The term “Java” refers to four interlocking elements. First, there is a Java programming language

with which developers can write applications. Second, there is a set of programs written in Java that expose APIs on which developers writing in Java can rely. These programs are called the “Java class libraries.” The third element is the Java compiler, which translates the code written by the developer into Java “bytecode.” Finally, there are programs called “Java virtual machines,” or “JVMs,” which translate Java bytecode into instructions comprehensible to the underlying operating system. If the Java class libraries and a JVM are present on a PC system, the system is said to carry a “Java runtime environment.” 74.

The inventors of Java at Sun Microsystems intended the technology to enable applications written

in the Java language to run on a variety of platforms with minimal porting. A program written in Java and relying only on APIs exposed by the Java class libraries will run on any PC system containing a JVM that has itself been ported to the resident operating system. Therefore, Java developers need to port their applications only to the extent that those applications rely directly on the APIs exposed by a particular operating system. The more an application written in Java relies on APIs exposed by the Java class libraries, the less work its developer will need to do to port the application to different operating systems. The easier it is for developers to port their applications to different operating systems, the more applications will be written for operating systems other than Windows. To date, the Java class libraries do not expose enough APIs to support the development of full-featured applications that will run well on multiple operating systems without the need for porting; however, they do allow relatively simple, networkcentric applications to be written cross-platform. It is Sun’s ultimate ambition to expand the class libraries to such an extent that many full-featured, end-user-oriented applications will be written cross-platform. The closer Sun gets to this goal of “write once, run anywhere,” the more the applications barrier to entry will erode. 28

75.

Sun announced in May 1995 that it had developed the Java programming language. Mid-level

executives at Microsoft began to express concern about Sun’s Java vision in the fall of that year, and by late spring of 1996, senior Microsoft executives were deeply worried about the potential of Sun’s Java technologies to diminish the applications barrier to entry. 76.

Sun’s strategy could only succeed if a Java runtime environment that complied with Sun’s

standards found its way onto PC systems running Windows. Sun could not count on Microsoft to ship with Windows an implementation of the Java runtime environment that threatened the applications barrier to entry. Fortunately for Sun, Netscape agreed in May 1995 to include a copy of Sun’s Java runtime environment with every copy of Navigator, and Navigator quickly became the principal vehicle by which Sun placed copies of its Java runtime environment on the PC systems of Windows users. 77.

The combined efforts of Netscape and Sun threatened to hasten the demise of the applications

barrier to entry, opening the way for non-Microsoft operating systems to emerge as acceptable substitutes for Windows. By stimulating the development of network-centric Java applications accessible to users through browser products, the collaboration of Netscape and Sun also heralded the day when vendors of information appliances and network computers could present users with viable alternatives to PCs themselves. Nevertheless, these middleware technologies have a long way to go before they might imperil the applications barrier to entry. Windows 98 exposes nearly ten thousand APIs, whereas the combined APIs of Navigator and the Java class libraries, together representing the greatest hope for proponents of middleware, total less than a thousand. Decision-makers at Microsoft are apprehensive of potential as well as present threats, though, and in 1995 the implications of the symbiosis between Navigator and Sun’s Java implementation were not lost on executives at Microsoft, who viewed Netscape’s cooperation with Sun as a further reason to dread the increasing use of Navigator.

3.

Other Middleware Threats

78.

Although they have been the most prominent, Netscape’s Navigator and Sun’s Java

implementation are not the only manifestations of middleware that Microsoft has perceived as having the potential to weaken the applications barrier to entry. Starting in 1994, Microsoft exhibited considerable concern over the 29

software product Notes, distributed first by Lotus and then by IBM. Microsoft worried about Notes for several reasons: It presented a graphical interface that was common across multiple operating systems; it also exposed a set of APIs to developers; and, like Navigator, it served as a distribution vehicle for Sun’s Java runtime environment. Then in 1995, Microsoft reacted with alarm to Intel’s Native Signal Processing software, which interacted with the microprocessor independently of the operating system and exposed APIs directly to developers of multimedia content. Finally, in 1997 Microsoft noted the dangers of Apple’s and RealNetworks’ multimedia playback technologies, which ran on several platforms (including the Mac OS and Windows) and similarly exposed APIs to content developers. Microsoft feared all of these technologies because they facilitated the development of useroriented software that would be indifferent to the identity of the underlying operating system.

22.

MICROSOFT’S RESPONSE TO THE BROWSER THREAT 1.

Microsoft’s Attempt to Dissuade Netscape from Developing Navigator as a Platform

79.

Microsoft’s first response to the threat posed by Navigator was an effort to persuade Netscape to

structure its business such that the company would not distribute platform-level browsing software for Windows. Netscape’s assent would have ensured that, for the foreseeable future, Microsoft would produce the only platformlevel browsing software distributed to run on Windows. This would have eliminated the prospect that non-Microsoft browsing software could weaken the applications barrier to entry. 80.

Executives at Microsoft received confirmation in early May 1995 that Netscape was developing a

version of Navigator to run on Windows 95, which was due to be released in a couple of months. Microsoft’s senior executives understood that if they could prevent this version of Navigator from presenting alternatives to the Internet-related APIs in Windows 95, the technologies branded as Navigator would cease to present an alternative platform to developers. Even if non-Windows versions of Navigator exposed Internet-related APIs, applications written to those APIs would not run on the platform Microsoft executives expected to enjoy the largest installed base, i.e., Windows 95. So, as long as the version of Navigator written for Windows 95 relied on Microsoft’s Internet-related APIs instead of exposing its own, developing for Navigator would not mean developing crossplatform. Developers of network-centric applications thus would not be drawn to Navigator’s APIs in substantial numbers. Therefore, with the encouragement and support of Gates, a group of Microsoft executives commenced a 30

campaign in the summer of 1995 to convince Netscape to halt its development of platform-level browsing technologies for Windows 95. 81.

In a meeting held at Microsoft’s headquarters on June 2, 1995, Microsoft executives suggested to

Jim Clark’s replacement as CEO at Netscape, James Barksdale, that the version of Navigator written for Windows 95 be designed to rely upon the Internet-related APIs in Windows 95 and distinguish itself with “value-added” software components. The Microsoft executives left unsaid the fact that value-added software, by definition, does not present a significant platform for applications development. For his part, Barksdale informed the Microsoft representatives that the browser represented an important part of Netscape’s business strategy and that Windows 3.1 and Windows 95 were expected to be the primary platforms for which Navigator would be distributed. 82.

At the conclusion of the June 2 meeting, Microsoft still did not know whether or not Netscape

intended to preserve Navigator’s own platform capabilities and expand the set of APIs that it exposed to developers. In the hope that Netscape could still be persuaded to forswear any platform ambitions and instead rely on the Internet technologies in Windows 95, Microsoft accepted Barksdale’s invitation to send a group of representatives to Netscape’s headquarters for a technology “brainstorming session” on June 21. Netscape’s senior executives saw the meeting as an opportunity to ask Microsoft for access to crucial technical information, including certain APIs, that Netscape needed in order to ensure that Navigator would work well on systems running Windows 95. 83.

Early in the June 21 meeting, Microsoft representatives told Barksdale and the other Netscape

executives present that they wanted to explore the possibility of building a broader and closer relationship between the two companies. To this end, the Microsoft representatives wanted to know whether Netscape intended to adopt and build on top of the Internet-related platform that Microsoft planned to include in Windows 95, or rather to expose its own Internet-related APIs, which would compete with Microsoft’s. If Netscape was not committed to providing an alternative platform for network-centric applications, Microsoft would assist Netscape in developing server- and (to a limited extent) PC-based software applications that relied on Microsoft’s Internet technologies. For one thing, the representatives explained, Microsoft would be content to leave the development of browser products for the Mac OS, UNIX, and Microsoft’s 16-bit operating system products to Netscape. Alternatively, Netscape could license to Microsoft the underlying code for a Microsoft-branded browser to run on those platforms. The Microsoft representatives made it clear, however, that Microsoft would be marketing its own browser for Windows 31

95, and that this product would rely on Microsoft’s platform-level Internet technologies. If Netscape marketed browsing software for Windows 95 based on different technologies, then Microsoft would view Netscape as a competitor, not a partner. 84.

When Barksdale brought the discussion back to the particular Windows 95 APIs that Netscape

actually wanted to rely on and needed from Microsoft, the representatives from Microsoft explained that if Netscape entered a “special relationship” with Microsoft, the company would treat Netscape as a “preferred ISV.” This meant that Netscape would enjoy preferential access to technical information, including APIs. They intimated that Microsoft’s internal developers had already created the APIs that Netscape was seeking, and that Microsoft had not yet decided either which ISVs would be privileged to receive them or when access would be granted. The Microsoft representatives made clear that the alacrity with which Netscape would receive the desired Windows 95 APIs and other technical information would depend on whether Netscape entered this “special relationship” with Microsoft. 85.

After listening to Microsoft’s proposal, Barksdale had two main questions: First, where would the

line between platform (Microsoft’s exclusive domain) and applications (where Netscape could continue to function) be situated? Second, who would get to decide where the line would lie? After all, the attractiveness of a special relationship with Microsoft depended a great deal on how much room would remain for Netscape to innovate and seek profit. The Microsoft representatives replied that Microsoft would incorporate most of the functionality of the current Netscape browser into the Windows 95 platform, perhaps leaving room for Netscape to distribute a userinterface shell. Where Netscape would have the most scope to innovate would be in the development of software “solutions,” which are applications (mainly server-based) focused on meeting the needs of specific types of commercial users. Since such applications are already minutely calibrated to the needs of their users, they do not present platforms for the development of more specific applications. Although the representatives from Microsoft assured Barksdale that the line between platform and solutions was fixed by a collaborative decision-making process between Microsoft and its ISV partners, those representatives had already indicated that the space Netscape would be allowed to occupy between the user and Microsoft’s platform domain was a very narrow one. Simply put, if Navigator exposed APIs that competed for developer attention with the Internet-related APIs Microsoft was planning to build into its platform, Microsoft would regard Netscape as a trespasser on its territory.

32

86.

The Microsoft representatives did not insist at the June 21 meeting that Netscape executives accept

their proposal on the spot. For his part, Barksdale said only that he would like more information regarding where Microsoft proposed to place the line between its platform and Netscape’s applications. In the ensuing, more technical discussions, the Netscape executives agreed to adopt one component of Microsoft’s platform-level Internet technology called Internet Shortcuts. The meeting ended cordially, with both sides promising to keep the lines of communication open. 87.

The executive who led Microsoft’s contingent on June 21, Daniel Rosen, emerged from the

meeting optimistic that Netscape would abandon its platform ambitions in exchange for special help from Microsoft in developing solutions. His sentiments were not shared by another Microsoft participant, Thomas Reardon, who had not failed to notice the Netscape executives grow tense when the Microsoft representatives referred to incorporating Navigator’s functionality into Windows. Reardon predicted that Netscape would compete with almost all of Microsoft’s platform-level Internet technologies. Once he heard both viewpoints, Gates concluded that Rosen was being a bit naive and that Reardon had assessed the situation more accurately. In the middle of July 1995, Rosen’s superiors instructed him to drop the effort to reach a strategic concord with Netscape. 88.

Had Netscape accepted Microsoft’s proposal, it would have forfeited any prospect of presenting a

comprehensive platform for the development of network-centric applications. Even if the versions of Navigator written for the Mac OS, UNIX, and 16-bit Windows had continued to expose APIs controlled by Netscape, the fact that Netscape would not have marketed any platform software for Windows 95, the operating system that was destined to become dominant, would have ensured that, for the foreseeable future, too few developers would rely on Navigator’s APIs to create a threat to the applications barrier to entry. In fact, although the discussions ended before Microsoft was compelled to demarcate precisely where the boundary between its platform and Netscape’s applications would lie, it is unclear whether Netscape’s acceptance of Microsoft’s proposal would have left the firm with even the ability to survive as an independent business. 89.

At the time Microsoft presented its proposal, Navigator was the only browser product with a

significant share of the market and thus the only one with the potential to weaken the applications barrier to entry. Thus, had it convinced Netscape to accept its offer of a “special relationship,” Microsoft quickly would have gained such control over the extensions and standards that network-centric applications (including Web sites) employ as to 33

make it all but impossible for any future browser rival to lure appreciable developer interest away from Microsoft’s platform. B.

Withholding Crucial Technical Information

90.

Microsoft knew that Netscape needed certain critical technical information and assistance in order

to complete its Windows 95 version of Navigator in time for the retail release of Windows 95. Indeed, Netscape executives had made a point of requesting this information, especially the so-called Remote Network Access (“RNA”) API, at the June 21 meeting. As was discussed above, the Microsoft representatives at the meeting had responded that the haste with which Netscape received the desired technical information would depend on whether Netscape entered the so-called “special relationship” with Microsoft. Specifically, Microsoft representative J. Allard had told Barksdale that the way in which the two companies concluded the meeting would determine whether Netscape received the RNA API immediately or in three months. 91.

Although Netscape declined the special relationship with Microsoft, its executives continued, over

the weeks following the June 21 meeting, to plead for the RNA API. Despite Netscape’s persistence, Microsoft did not release the API to Netscape until late October, i.e., as Allard had warned, more than three months later. The delay in turn forced Netscape to postpone the release of its Windows 95 browser until substantially after the release of Windows 95 (and Internet Explorer) in August 1995. As a result, Netscape was excluded from most of the holiday selling season. 92.

Microsoft similarly withheld a scripting tool that Netscape needed to make its browser compatible

with certain dial-up ISPs. Microsoft had licensed the tool freely to ISPs that wanted it, and in fact had cooperated with Netscape in drafting a license agreement that, by mid-July 1996, needed only to be signed by an authorized Microsoft executive to go into effect. There the process halted, however. In mid-August, a Microsoft representative informed Netscape that senior executives at Microsoft had decided to link the grant of the license to the resolution of all open issues between the companies. Netscape never received a license to the scripting tool, and as a result, was unable to do business with certain ISPs for a time. 3.

The Similar Experiences of Other Firms in Dealing with Microsoft

93.

Other firms in the computer industry have had encounters with Microsoft similar to the experiences

of Netscape described above. These interactions demonstrate that it is Microsoft’s corporate practice to pressure 34

other firms to halt software development that either shows the potential to weaken the applications barrier to entry or competes directly with Microsoft’s most cherished software products.

1. 94.

Intel

At the same time that Microsoft was trying to convince Netscape to stop developing cross-platform

APIs, it was trying to convince Intel to halt the development of software that presented developers with a set of operating-system-independent interfaces. 95.

Although Intel is engaged principally in the design and manufacture of microprocessors, it also

develops some software. Intel’s software development efforts, which take place at the Intel Architecture Labs (“IAL”), are directed primarily at finding useful ways to consume more microprocessor cycles, thereby stimulating demand for advanced Intel microprocessors. By early 1995, IAL was in the advanced stages of developing software that would enable Intel 80x86 microprocessors to carry out tasks usually performed by separate chips known as “digital signal processors.” By enabling this migration, the software, called Native Signal Processing (“NSP”) software, would endow Intel microprocessors with substantially enhanced video and graphics performance. 96.

Intel was eager for software developers and hardware manufacturers to write software and build

peripheral devices that would implement the enhanced capabilities that its microprocessors and its NSP software together offered. Intel did not believe, however, that the set of APIs and device driver interfaces (“DDIs”) in Windows had kept pace with the growing ability of Intel’s microprocessors to deliver audio/visual content. Consequently, IAL designed its NSP software to expose Intel’s own APIs and DDIs that, when invoked by developers and hardware manufacturers, would demonstrate the multimedia capabilities of an Intel microprocessor utilizing NSP. 97.

Microsoft reacted to Intel’s NSP software with alarm. First of all, the software threatened to offer

ISVs and device manufacturers an alternative to waiting for Windows to provide system-level support for products that would take advantage of advances in hardware technology. More troubling was the fact that Intel was developing versions of its NSP software for non-Microsoft operating systems. The different versions of the NSP 35

software exposed the same set of software interfaces to developers, so the more an application took advantage of interfaces exposed by NSP software, the easier it would be to port that application to non-Microsoft operating systems. In short, Intel’s NSP software bore the potential to weaken the barrier protecting Microsoft’s monopoly power. 98.

Over time, Microsoft developed additional qualms about Intel’s NSP software. For instance, Intel

initially designed the NSP software to be compatible with only Windows 3.1. At the time, Microsoft was preparing to release Windows 95, and the company did not want anything rekindling the interest of ISVs, equipment manufacturers, and consumers in the soon-to-be obsolescent version of Windows. More acute was Microsoft’s concern that users who received NSP software on their Windows 3.1 systems would have difficulty upgrading those systems to Windows 95. By June 1995, Intel had completed a pre-release, or “beta,” version of its NSP software for Windows 95, but Microsoft worried that a commercial version would not be ready by the time OEMs began loading Windows 95. 99.

Along with its concerns about contemporaneous compatibility, Microsoft also complained that

Intel had not subjected its software to sufficient quality-assurance testing. Microsoft was quick to point out that if Windows users detected problems with the software that came pre-installed on their PC systems, they would blame Microsoft or the OEMs, even if fault lay with Intel. Microsoft’s concerns with compatibility and quality were genuine. Both pre-dating and over-shadowing these transient and remediable concerns, however, was a more abiding fear at Microsoft that the NSP software would render ISVs, device manufacturers, and (ultimately) consumers less dependent on Windows. Without this fear, Microsoft would not have subjected Intel to the level of pressure that it brought to bear in the summer of 1995. 100.

Microsoft began complaining to Intel about its NSP software in inter-company communications

sent in the spring of 1995. In May, Microsoft raised the profile of its complaints by sending some of its senior executives to Intel to discuss the latter’s incursion into Microsoft’s platform territory. Returning from the May meeting, one Microsoft employee urged his superiors to refuse to allow Intel to offer platform-level software, even if it meant that Intel could not innovate as quickly as it would like. If Intel wished to enable a new function, the employee wrote, its only “winning path” would be to convince Microsoft to support the effort in its platform software. At any rate, “[s]ometimes Intel would have to accept the outcome that the time isn’t right for [Microsoft].” 36

In the first week of July, Gates himself met with Intel’s CEO, Andrew Grove, to discuss, among other things, NSP. In a subsequent memorandum to senior Microsoft executives, Gates reported that he had tried to convince Grove “to basically not ship NSP” and more generally to reduce the number of people working on software at Intel. 101.

The development of an alternative platform to challenge Windows was not the primary objective

of Intel’s NSP efforts. In fact, Intel was interested in providing APIs and DDIs only to the extent the effort was necessary to ensure the development of applications and devices that would spark demand for Intel’s most advanced microprocessors. Understanding Intel’s limited ambitions, Microsoft hastened to assure Intel that if it would stop promoting NSP’s interfaces, Microsoft would accelerate its own work to incorporate the functions of the NSP software into Windows, thereby stimulating the development of applications and devices that relied on the new capabilities of Intel’s microprocessors. At the same time, Microsoft pressured the major OEMs to not install NSP software on their PCs until the software ceased to expose APIs. NSP software could not find its way onto PCs without the cooperation of the OEMs, so Intel realized that it had no choice but to surrender the pace of software innovation to Microsoft. By the end of July 1995, Intel had agreed to stop promoting its NSP software. Microsoft subsequently incorporated some of NSP’s components into its operating-system products. Even as late as the end of 1998, though, Microsoft still had not implemented key capabilities that Intel had been poised to offer consumers in 1995. 102.

Microsoft was not content to merely quash Intel’s NSP software. At a second meeting at Intel’s

headquarters on August 2, 1995, Gates told Grove that he had a fundamental problem with Intel using revenues from its microprocessor business to fund the development and distribution of free platform-level software. In fact, Gates said, Intel could not count on Microsoft to support Intel’s next generation of microprocessors as long as Intel was developing platform-level software that competed with Windows. Intel’s senior executives knew full well that Intel would have difficultly selling PC microprocessors if Microsoft stopped cooperating in making them compatible with Windows and if Microsoft stated to OEMs that it did not support Intel’s chips. Faced with Gates’ threat, Intel agreed to stop developing platform-level interfaces that might draw support away from interfaces exposed by Windows. 103.

OEMs represent the primary customers for Intel’s microprocessors. Since OEMs are dependent on

Microsoft for Windows, Microsoft enjoys continuing leverage over Intel. To illustrate, Gates was able to report to

37

other senior Microsoft executives in October 1995 that “Intel feels we have all the OEMs on hold with our NSP chill.” He added: This is good news because it means OEMs are listening to us. Andy [Grove] believes Intel is living up to its part of the NSP bargain and that we should let OEMs know that some of the new software work Intel is doing is OK. If Intel is not sticking totally to its part of the deal let me know. 2. 104.

Apple

QuickTime is Apple’s software architecture for creating, editing, publishing, and playing back

multimedia content (e.g., audio, video, graphics, and 3-D graphics). Apple has created versions of QuickTime to run on both the Mac OS and Windows, enabling developers using the authoring software to create multimedia content that will run on QuickTime implementations for both operating systems. QuickTime competes with Microsoft’s own multimedia technologies, including Microsoft’s multimedia APIs (called “DirectX”) and its media player. Because QuickTime is cross-platform middleware, Microsoft perceives it as a potential threat to the applications barrier to entry. 105.

Beginning in the spring of 1997 and continuing into the summer of 1998, Microsoft tried to

persuade Apple to stop producing a Windows 95 version of its multimedia playback software, which presented developers of multimedia content with alternatives to Microsoft’s multimedia APIs. If Apple acceded to the proposal, Microsoft executives said, Microsoft would not enter the authoring business and would instead assist Apple in developing and selling tools for developers writing multimedia content. Just as Netscape would have been free, had it accepted Microsoft’s proposal, to market a browser shell that would run on top of Microsoft’s Internet technologies, Apple would have been permitted, without hindrance, to market a media player that would run on top of DirectX. But, like the browser shell that Microsoft contemplated as acceptable for Netscape to develop, Apple’s QuickTime shell would not have exposed platform-level APIs to developers. Microsoft executives acknowledged to Apple their doubts that a firm could make a successful business out of marketing such a shell. Apple might find it profitable, though, to continue developing multimedia software for the Mac OS, and that, the executives from Microsoft assured Apple, would not be objectionable. As was the case with the Internet technologies it was prepared to tolerate from Netscape, Microsoft felt secure in the conviction that developers would not be drawn in large

38

numbers to write for non-Microsoft APIs exposed by platforms whose installed bases were inconsequential in comparison with that of Windows. 106.

In their discussions with Apple, Microsoft’s representatives made it clear that, if Apple continued

to market multimedia playback software for Windows 95 that presented a platform for content development, then Microsoft would enter the authoring business to ensure that those writing multimedia content for Windows 95 concentrated on Microsoft’s APIs instead of Apple’s. The Microsoft representatives further stated that, if Microsoft was compelled to develop and market authoring tools in competition with Apple, the technologies provided in those tools might very well be inconsistent with those provided by Apple’s tools. Finally, the Microsoft executives warned, Microsoft would invest whatever resources were necessary to ensure that developers used its tools; its investment would not be constrained by the fact that authoring software generated only modest revenue. 107.

If Microsoft implemented technologies in its tools that were different from those implemented in

Apple’s tools, then multimedia content developed with Microsoft’s tools would not run properly on Apple’s media player, and content developed with Apple’s tools would not run properly on Microsoft’s media player. If, as it implied it was willing to do, Microsoft then bundled its media player with Windows and used a variety of tactics to limit the distribution of Apple’s media player for Windows, it could succeed in extinguishing developer support for Apple’s multimedia technologies. Indeed, as the Court discusses in Section VI of these findings, Microsoft had begun, in 1996, to use just such a strategy against Sun’s implementation of the Java technologies. 108.

The discussions over multimedia playback software culminated in a meeting between executives

from Microsoft and Apple executives, including Apple CEO, Steve Jobs, at Apple’s headquarters on June 15, 1998. Microsoft’s objective at the meeting was to secure Apple’s commitment to abandon the development of multimedia playback software for Windows. At the meeting, one of the Microsoft executives, Eric Engstrom, said that he hoped the two companies could agree on a single configuration of software to play multimedia content on Windows. He added, significantly, that any unified multimedia playback software for Windows would have to be based on DirectX. If Apple would agree to make DirectX the standard, Microsoft would be willing to do several things that Apple might find beneficial. First, Microsoft would adopt Apple’s “.MOV” as the universal file format for multimedia playback on Windows. Second, Microsoft would configure the Windows Media Player to display the QuickTime logo during the playback of “.MOV” files. Third, Microsoft would include support in DirectX for 39

QuickTime APIs used to author multimedia content, and Microsoft would give Apple appropriate credit for the APIs in Microsoft’s Software Developer Kit. 109.

Jobs reserved comment during the meeting with the Microsoft representatives, but he explicitly

rejected Microsoft’s proposal a few weeks later. Had Apple accepted Microsoft’s proposal, Microsoft would have succeeded in limiting substantially the cross-platform development of multimedia content. In addition, Apple’s future success in marketing authoring tools for Windows 95 would have become dependent on Microsoft’s ongoing cooperation, for those tools would have relied on the DirectX technologies under Microsoft’s control. 110.

Apple’s surrender of the multimedia playback business might have helped users in the short term

by resolving existing incompatibilities in the arena of multimedia software. In the long run, however, the departure of an experienced, innovative competitor would not have tended to benefit users of multimedia content. At any rate, the primary motivation behind Microsoft’s proposal to Apple was not the resolution of incompatibilities that frustrated consumers and stymied content development. Rather, Microsoft’s motivation was its desire to limit as much as possible the development of multimedia content that would run cross-platform. 3. 111.

RealNetworks

RealNetworks is the leader, in terms of usage share, in software that supports the “streaming” of

audio and video content from the Web. RealNetworks’ streaming software presents a set of APIs that competes for developer attention with APIs exposed by the streaming technologies in Microsoft’s DirectX. Like Apple, RealNetworks has developed versions of its software for multiple operating systems. In 1997, senior Microsoft executives viewed RealNetworks’ streaming software with the same apprehension with which they viewed Apple’s playback software — as competitive technology that could develop into part of a middleware layer that could, in turn, become broad and widespread enough to weaken the applications barrier to entry. 112.

At the end of May 1997, Gates told a group of Microsoft executives that multimedia streaming

represented strategic ground that Microsoft needed to capture. He identified RealNetworks as the adversary and authorized the payment of up to $65 million for a streaming software company in order to accelerate Microsoft’s effort to seize control of streaming standards. Two weeks later, Microsoft signed a letter of intent for the acquisition of a streaming media company called VXtreme.

40

113.

Perhaps sensing an impending crisis, executives at RealNetworks contacted Microsoft within days

of the VXtreme deal’s announcement and proposed that the two companies enter a strategic relationship. The CEO of RealNetworks told a senior vice president at Microsoft that if RealNetworks were presented with a profitable opportunity to move to value-added software, the company would be amenable to abandoning the base streaming business. On July 10, a Microsoft executive, Robert Muglia, told a RealNetworks executive that it would indeed be in the interests of both companies if RealNetworks limited itself to developing value-added software designed to run on top of Microsoft’s fundamental multimedia platform. Consequently, on July 18, Microsoft and RealNetworks entered into an agreement whereby Microsoft agreed to distribute a copy of RealNetworks’ media player with each copy of Internet Explorer; to make a substantial investment in RealNetworks; to license the source code for certain RealNetworks streaming technologies; and to develop, along with RealNetworks, a common file format for streaming audio and video content. Muglia, who signed the agreement on Microsoft’s behalf, believed that RealNetworks had in turn agreed to incorporate Microsoft’s streaming media technologies into its products. 114.

RealNetworks apparently understood import of the agreement differently, for just a few days after

it signed the deal with Microsoft, RealNetworks announced that it planned to continue developing fundamental streaming software. Indeed, RealNetworks continues to do so today. Thus, the mid-summer negotiations did not lead to the result Microsoft had intended. Still, Microsoft’s intentions toward RealNetworks in 1997, and its dealings with the company that summer, show that decision-makers at Microsoft were willing to invest a large amount of cash and other resources into securing the agreement of other companies to halt software development that exhibited discernible potential to weaken the applications barrier. 4. 115.

IBM

IBM is both a hardware and a software company. On the hardware side, IBM manufactures and

licenses, among other things, Intel-compatible PCs. On the software side, IBM develops and sells, among other things, Intel-compatible PC operating systems and office productivity applications. The IBM PC Company relies heavily on Microsoft’s cooperation to make a profit, for few consumers would buy IBM PC systems if those systems did not work well with Windows and, further, if they did not come with Windows included. IBM’s software division, on the other hand, competes directly with Microsoft in other respects. For instance, IBM has in the past marketed OS/2 as an alternative to Windows, and it currently markets the SmartSuite bundle of office productivity 41

applications as an alternative to Microsoft’s Office suite. The fact that IBM’s software division markets products that compete directly with Microsoft’s most profitable products has frustrated the efforts of the IBM PC Company to maintain a cooperative relationship with the firm that controls the product (Windows) without which the PC Company cannot survive. 116.

Whereas Microsoft tried to convince Netscape to move its business in a direction that would not

facilitate the emergence of products that would compete with Windows, Microsoft tried to convince IBM to move its business away from products that themselves competed directly with Windows and Office. Microsoft leveraged the fact that the PC Company needed to license Windows at a competitive price and on a timely basis, and the fact that the company needed Microsoft’s support in many more subtle ways. When IBM refused to abate the promotion of those of its own products that competed with Windows and Office, Microsoft punished the IBM PC Company with higher prices, a late license for Windows 95, and the withholding of technical and marketing support. 117.

In the summer of 1994, the IBM PC Company told Microsoft that, with respect to licensing

Microsoft’s operating-system products, it wanted to be quoted terms just as favorable as those extended to IBM’s competitor, Compaq. It was IBM’s belief that Compaq paid the lowest rate in the industry for Windows and enjoyed unparalleled marketing and technical support from Microsoft. In response to the IBM PC Company’s request, Microsoft proposed that the companies enter into a “Frontline Partnership” similar to the one that existed between Microsoft and Compaq. Pursuant to that proposal, Microsoft and the IBM PC Company would perform joint sales, marketing, and development work, and the PC Company would receive future Microsoft products at the lowest rates in the industry. 118.

At the same time that it offered the IBM PC Company the rather general terms in the Frontline

Partnership Agreement, Microsoft also offered the PC Company specific reductions in the royalty rate for Windows 95 if the company would focus its marketing and distribution efforts on Microsoft’s new operating system. Specifically, the PC Company would receive an $8 reduction in the per-copy royalty for Windows 95 if it mentioned no other operating systems in advertisements for IBM PCs, adopted Windows 95 as the standard operating system for its employees, and ensured that it was shipping Windows 95 pre-installed on at least fifty percent of its PCs two months after the release of Windows 95. Given the volume of IBM’s PC shipments, the discount would have amounted to savings of between $40 million and $48 million in one year. Of course, accepting the terms would have 42

required IBM, as a practical matter, to abandon its own operating system, OS/2. After all, IBM would have had difficulty convincing customers to adopt its own OS/2 if the company itself had used Microsoft’s Windows 95 and had featured that product to the exclusion of OS/2 in IBM PC advertisements. 119.

Representatives from IBM and Microsoft, including Bill Gates, met to discuss the relationship

between their companies at an industry conference in November 1994. At that meeting, IBM informed Microsoft that, rather than enter into the Frontline Partnership with Microsoft, IBM was going to pursue an initiative it called “IBM First.” Consistent with the title of the initiative, IBM would aggressively promote IBM’s software products, would not promote any Microsoft products, and would pre-install OS/2 Warp on all of its PCs, including those on which it would also pre-install Windows. IBM thus rejected the terms that would have resulted in an $8 reduction in the per-copy royalty price of Windows 95. 120.

True to its word, IBM began vigorous promotion of its software products. This effort included an

advertising campaign, starting in late 1994, that extolled OS/2 Warp and disparaged Windows. IBM’s drive to best Microsoft in the PC software venue intensified in June 1995, when IBM reached an agreement with the Lotus Development Corporation for the acquisition of that company. As a consequence of the acquisition, IBM took ownership of the Lotus groupware product, Lotus Notes, and the Lotus SmartSuite bundle of office productivity applications. Microsoft had already identified Notes as a middleware threat, because it presented users with a common interface, and ISVs with a common set of APIs, across multiple platforms. For its part, SmartSuite competed directly with Microsoft Office. In mid-July 1995, IBM announced that it was going to make SmartSuite its primary desktop software offering in the United States. 121.

Microsoft did not intend to capitulate. In July, Gates called an executive at the IBM PC Company

to berate him about IBM’s public statements denigrating Windows. Just a few days later, Microsoft began to retaliate in earnest against the IBM PC Company. 122.

The IBM PC Company had begun negotiations with Microsoft for a Windows 95 license in late

March 1995. For the first two months, the negotiations had progressed smoothly and at an expected pace. After IBM announced its intention to acquire Lotus, though, the Microsoft negotiators began canceling meetings with their IBM counterparts, failing to return telephone calls, and delaying the return of marked-up license drafts that they received from IBM. Then, on July 20, 1995, just three days after IBM announced its intention to pre-install 43

SmartSuite on its PCs, a Microsoft executive informed his counterpart at the IBM PC Company that Microsoft was terminating further negotiations with IBM for a license to Windows 95. Microsoft also refused to release to the PC Company the Windows 95 “golden master” code. The PC Company needed the code for its product planning and development, and IBM executives knew that Microsoft had released it to IBM’s OEM competitors on July 17. Microsoft’s purported reason for halting the negotiations was that it wanted first to resolve an ongoing audit of IBM’s past royalty payments to Microsoft for several different operating systems. 123.

Prior to the call on July 20, neither company’s management had ever linked the ongoing audit to

IBM’s negotiations for a license to Windows 95. IBM was dismayed by the abrupt halt in the license negotiations and the prospect that it might not get a license for Windows 95 until the audit process concluded. IBM’s executives executives surmised that all of its major competitors had already signed licenses for Windows 95. The PC Company would lose a great deal of business to those competitors during the crucial back-to-school season if it could not begin pre-installing Windows 95 on its PCs immediately. The conclusion of the audit appeared to be weeks, if not months, away. The PC Company thus faced the prospect of missing the holiday selling season as well. IBM executives pleaded with Microsoft to uncouple the license negotiations from the ongoing audit and offered Microsoft a $10 million bond that Microsoft could use to indemnify itself against any discrepancies that the audit might ultimately reveal. IBM also offered to add a term to any Windows 95 license agreement whereby IBM would pay penalties and interest if any future audit disclosed under-reporting of royalties by IBM. 124.

On August 9, 1995, a senior executive at the IBM PC Company went to Redmond to meet with

Joachim Kempin, the Microsoft executive in charge of the firm’s sales to OEMs. At the meeting, Kempin offered to accept a single, lump-sum payment from IBM that would close all outstanding audits. The amount of this payment would be reduced if IBM offered a concession that Kempin could take back to Gates. As one possibility, Kempin suggested that IBM agree to not bundle SmartSuite with its PCs for a period of six months to one year. He explained that the prospect of IBM bundling SmartSuite with its PCs threatened the profit margins that Microsoft derived from Office and constituted a core issue in the relationship between the two companies. The IBM executive rejected Kempin’s suggestion. In a follow-up letter, Kempin stated that Microsoft would require approximately $25 million from IBM in order to settle all outstanding audits. Kempin reiterated that,

44

If you believe that the amount I am asking for is too much, I would be willing to trade certain relationship improving measures for the settlement charges and/or convert some of the amounts into marketing funds if IBM too agrees to promote Microsoft’s software products together with their hardware offerings. The message was clear: IBM could resolve the impasse ostensibly blocking the issuance of a Windows 95 license — the royalties audit — by de-emphasizing those products of its own that competed with Microsoft and instead promoting Microsoft’s products. 125.

IBM never agreed to renounce SmartSuite or to increase its support for Microsoft software, and in

the end, Microsoft did not grant IBM a license to pre-install Windows 95 until fifteen minutes before the start of Microsoft’s official launch event on August 24, 1995. That same day, the firms brought the audit issue to a close with a settlement agreement under which IBM ultimately paid Microsoft $31 million. The release of Windows 95 had been postponed more than once, and many consumers apparently had been postponing buying PC systems until the new operating system arrived. The pent-up demand caused an initial surge in the sales of PCs loaded with Windows 95. IBM’s OEM competitors reaped the fruits of this surge, but because of the delay in obtaining a license, the IBM PC Company did not. The PC Company also missed the back-to-school market. These lost opportunities cost IBM substantial revenue. 126.

Even once the companies had resolved the audit dispute, Microsoft continued to treat the IBM PC

Company less favorably than it did the other major OEMs, and Microsoft executives continued to tell PC Company executives that the treatment would improve only if IBM refrained from competing with Microsoft’s software offerings. On January 5, 1996, Kempin sent a letter to a counterpart at the IBM PC Company. In it, Kempin expressed his belief that the PC Company would enjoy a closer, more cooperative relationship with Microsoft if only IBM’s software arm did not compete as aggressively with the products that comprised the core of Microsoft’s business: As long as IBM is working first on their competitive offerings and prefers to fiercely compete with us in critical areas, we should just be honest with each other and admit that such priorities will not lead to a most exciting relationship and might not even make IBM feel good when selling solutions based on Microsoft products. . . .You are a valued OEM customer of Microsoft, with whom we will cooperate as much as your self-imposed restraints allow us to do. Please understand that this is neither my choice or preferred way of doing business with an important company like IBM. In addition, we would like to see the IBM PC company being more actively involved in assisting Microsoft to bring key products to market . . . . To date the IBM PC company has not always been an active participant in these areas - understandable given your own internal product priorities. I hope you can help me to change this. 45

In closing, Kempin wrote, “You get measured in selling more hardware and I firmly believe if you had less conflict with IBM’s software directions you actually could sell more of it.” 127.

When Kempin spoke to the same executive at the end of the month, he repeated a message he had

delivered more than once before: The fact that the IBM PC Company pre-installed SmartSuite on its PC systems made Microsoft reluctant to help IBM sell more PC systems. After all, the more PC systems IBM sold with SmartSuite, the fewer copies of Office Microsoft could sell. For this reason, as Kempin explained to a group of IBM PC Company representatives in August 1996, Microsoft refused to provide IBM press releases with quotes endorsing any PC system that IBM shipped with SmartSuite. Microsoft later expanded that rule to cover any IBM PCs shipped with the World Book electronic encyclopedia instead of Microsoft’s Encarta. IBM might have been less concerned about Microsoft’s refusal to offer endorsements if such quotes did not appear frequently and prominently in press releases announcing new PC systems from other OEMs such as Compaq. Microsoft’s conspicuous silence with respect to IBM PCs sent the message to customers that IBM’s PCs did not support Windows as well as PCs manufactured by other OEMs did. 128.

Microsoft also denied the IBM PC Company access to the so-called “enabling programs” that

Microsoft ran for the benefit of OEMs such as Compaq, Hewlett-Packard, and DEC, even though IBM met the prescribed objective criteria for admission. Like the absence of public endorsements, IBM’s exclusion from Microsoft’s enabling programs led customers to question whether the Microsoft software they needed would work optimally with IBM’s PCs. IBM learned through surveys it conducted that the firm had lost between seven and ten large accounts, representing about $180 million in revenue for IBM, because the tension between Microsoft and IBM led customers to doubt that Windows would not work as well with IBM PCs as with PCs produced by firms with which Microsoft was on cordial terms. Microsoft justified its exclusion of the PC Company from the enabling programs with its suspicion that IBM might use the programs to gain entrée with customers and then attempt to sell those customers IBM software instead of Microsoft products. At the same time, a Microsoft executive told a counterpart at IBM that the PC Company would be admitted to the programs when IBM’s CEO repaired his relationship with Bill Gates.

46

129.

Microsoft’s executives were persistent despite IBM’s repeated refusals to sacrifice its own

software ambitions to improve its relations with Microsoft. In February 1997, one executive from Microsoft told a group of IBM PC Company executives that Gates might relent in his reluctance to cooperate with their company if IBM moderated its support for Notes and SmartSuite. In a meeting held the next month, Microsoft representatives conditioned fulfillment of two objects of IBM’s desires on the company’s willingness to pre-install Microsoft’s products in the place of competing applications, such as SmartSuite, and objectionable middleware, such as Notes. The first inducement that the Microsoft representatives blandished before the PC Company was early access to Windows source code, which Compaq and a handful of other OEMs enjoyed. IBM wanted this early access in order to ensure its hardware’s contemporaneous compatibility with Microsoft’s operating system products. Next, Microsoft offered IBM permission to certify itself as being compliant with certain hardware requirements that Microsoft imposed (and that customers had come to look for as a sign of an OEM’s ability to support Windows). Self-certification would have decreased the time it took IBM PCs to reach the market, and IBM knew that the privilege was already being extended to some of its main OEM competitors. With respect to both benefits, the representatives from Microsoft explained that Microsoft would extend them to the PC Company on the condition that it stop loading its PC systems with software that threatened Microsoft’s interests. 130.

The discriminatory treatment that the IBM PC Company received from Microsoft on account of

the “software directions” of its parent company also manifested itself in the royalty price that IBM paid for Windows. In the latter half of the 1990s, IBM (along with Gateway) paid significantly more for Windows than other major OEMs (like Compaq, Dell, and Hewlett-Packard) that were more compliant with Microsoft’s wishes. 131.

Finally, Microsoft made its frustration known to IBM by reducing, from three to one, the number

of Microsoft OEM account managers handling Microsoft’s operational relationship with the IBM PC Company. This reduced support impaired still further IBM’s ability to test, manufacture, and ship its PCs on schedule, further delaying IBM’s efforts to bring its PC products to market against the competition in a timely manner. 132.

In sum, from 1994 to 1997 Microsoft consistently pressured IBM to reduce its support for software

products that competed with Microsoft’s offerings, and it used its monopoly power in the market for Intel-compatible PC operating systems to punish IBM for its refusal to cooperate. Whereas, in the case of Netscape, Microsoft tried to induce a company to move its business away from offering software that could weaken the applications barrier to 47

entry, Microsoft’s primary concern with IBM was to reduce the firm’s support for software products that competed directly with Microsoft’s most profitable products, namely Windows and Office. That being said, it must be noted that one of the IBM products to which Microsoft objected, Notes, was like Navigator in that it exposed middleware APIs. In any event, Microsoft’s interactions with Netscape, IBM, Intel, Apple, and RealNetworks all reveal Microsoft’s business strategy of directing its monopoly power toward inducing other companies to abandon projects that threaten Microsoft and toward punishing those companies that resist. 4.

Developing Competitive Web Browsing Software

133.

Once it became clear to senior executives at Microsoft that Netscape would not abandon its efforts

to develop Navigator into a platform, Microsoft focused its efforts on ensuring that few developers would write their applications to rely on the APIs that Navigator exposed. Developers would only write to the APIs exposed by Navigator in numbers large enough to threaten the applications barrier if they believed that Navigator would emerge as the standard software employed to browse the Web. If Microsoft could demonstrate that Navigator would not become the standard, because Microsoft’s own browser would attract just as much if not more usage, then developers would continue to focus their efforts on a platform that enjoyed enduring ubiquity: the 32-bit Windows API set. Microsoft thus set out to maximize Internet Explorer’s share of browser usage at Navigator’s expense. 134.

Microsoft’s management believed that, no matter what the firm did, Internet Explorer would not

capture a large share of browser usage as long as it remained markedly inferior to Navigator in the estimation of consumers. The task of technical personnel at Microsoft, then, was to make Internet Explorer’s features at least as attractive to consumers as Navigator’s. Microsoft did not believe that improved quality alone would depose Navigator, for millions of users appeared to be satisfied with Netscape’s product, and Netscape was known as ‘the Internet company.’ As Gates wrote to Microsoft’s executive staff in his May 1995 “Internet Tidal Wave” memorandum, “First we need to offer a decent client,” but “this alone won’t get people to switch away from Netscape.” Still, once Microsoft ensured that the average consumer would be just as comfortable browsing with Internet Explorer as with Navigator, Microsoft could employ other devices to induce consumers to use its browser instead of Netscape’s. 135.

From 1995 onward, Microsoft spent more than $100 million each year developing Internet

Explorer. The firm’s management gradually increased the number of developers working on Internet Explorer from 48

five or six in early 1995 to more than one thousand in 1999. Although the first version of Internet Explorer was demonstrably inferior to Netscape’s then-current browser product when the former was released in July 1995, Microsoft’s investment eventually started to pay technological dividends. When Microsoft released Internet Explorer 3.0 in late 1996, reviewers praised its vastly improved quality, and some even rated it as favorably as they did Navigator. After the arrival of Internet Explorer 4.0 in late 1997, the number of reviewers who regarded it as the superior product was roughly equal to those who preferred Navigator. 5.

Giving Internet Explorer Away and Rewarding Firms that Helped Build Its Usage Share

136.

In addition to improving the quality of Internet Explorer, Microsoft sought to increase the

product’s share of browser usage by giving it away for free. In many cases, Microsoft also gave other firms things of value (at substantial cost to Microsoft) in exchange for their commitment to distribute and promote Internet Explorer, sometimes explicitly at Navigator’s expense. While Microsoft might have bundled Internet Explorer with Windows at no additional charge even absent its determination to preserve the applications barrier to entry, that determination was the main force driving its decision to price the product at zero. Furthermore, Microsoft would not have given Internet Explorer away to IAPs, ISVs, and Apple, nor would it have taken on the high cost of enlisting firms in its campaign to maximize Internet Explorer’s usage share and limit Navigator’s, had it not been focused on protecting the applications barrier. 137.

In early 1995, personnel developing Internet Explorer at Microsoft contemplated charging OEMs

and others for the product when it was released. Internet Explorer would have been included in a bundle of software that would have been sold as an add-on, or “frosting,” to Windows 95. Indeed, Microsoft knew by the middle of 1995, if not earlier, that Netscape charged customers to license Navigator, and that Netscape derived a significant portion of its revenue from selling browser licenses. Despite the opportunity to make a substantial amount of revenue from the sale of Internet Explorer, and with the knowledge that the dominant browser product on the market, Navigator, was being licensed at a price, senior executives at Microsoft decided that Microsoft needed to give its browser away in furtherance of the larger strategic goal of accelerating Internet Explorer’s acquisition of browser usage share. Consequently, Microsoft decided not to charge an increment in price when it included Internet Explorer in Windows for the first time, and it has continued this policy ever since. In addition, Microsoft has never charged for an Internet Explorer license when it is distributed separately from Windows. 49

138.

Over the months and years that followed the release of Internet Explorer 1.0 in July 1995, senior

executives at Microsoft remained engrossed with maximizing Internet Explorer’s share of browser usage. Whenever competing priorities threatened to intervene, decision-makers at Microsoft reminded those reporting to them that browser usage share remained, as Microsoft senior vice president Paul Maritz put it, “job #1.” For example, in the summer of 1997, some mid-level employees began to urge that Microsoft charge a price for at least some of the components of Internet Explorer 4.0. This would have shifted some anticipatory demand to Windows 98 (which was due to be released somewhat later than Internet Explorer 4.0), since Windows 98 would include all of the browser at no extra charge. Senior executives at Microsoft rejected the proposal, because while the move might have increased demand for Windows 98 and generated substantial revenue, it would have done so at the unacceptable cost of retarding the dissemination of Internet Explorer 4.0. Maritz reminded those who had advocated the proposal that “getting browser share up to 50% (or more) is still the major goal.” 139.

The transcendent importance of browser usage share to Microsoft is evident in what the firm

expended, as well as in what it relinquished, in order to maximize usage share for Internet Explorer and to diminish it for Navigator. Not only was Microsoft willing to forego an opportunity to attract substantial revenue while enhancing (albeit temporarily) consumer demand for Windows 98, but the company also paid huge sums of money, and sacrificed many millions more in lost revenue every year, in order to induce firms to take actions that would help increase Internet Explorer’s share of browser usage at Navigator’s expense. First, even though Microsoft could have charged IAPs, ISVs, and Apple for licenses to distribute Internet Explorer separately from Windows, Microsoft priced those licenses, along with related technology and technical support, at zero in order to induce those companies to distribute and promote Internet Explorer over Navigator. Second, although Microsoft could have charged IAPs and ICPs substantial sums of money in exchange for promoting their services and content within Windows, Microsoft instead bartered Windows’ valuable desktop “real estate” for a commitment from those firms to promote and distribute Internet Explorer, to inhibit promotion and distribution of Navigator, and to employ technologies that would inspire developers to write Web sites that relied on Microsoft’s Internet technologies rather than those provided by Navigator. Microsoft was willing to offer such prominent placement even to AOL, which was the principal competitor to Microsoft’s MSN service. If an IAP was already under contract to pay Netscape a certain amount for browser licenses, Microsoft offered to compensate the IAP the amount it owed Netscape. Third, 50

Microsoft also reduced the referral fees that IAPs paid when users signed up for their services using the Internet Referral Server in Windows in exchange for the IAPs’ efforts to convert their installed bases of subscribers from Navigator to Internet Explorer. For example, Microsoft entered a contract with AOL whereby Microsoft actually paid AOL a bounty for every subscriber that it converted to access software that included Internet Explorer instead of Navigator. Finally, with respect to OEMs, Microsoft extended co-marketing funds and reductions in the Windows royalty price to those agreeing to promote Internet Explorer and, in some cases, to abstain from promoting Navigator. 140.

Even absent the strategic imperative to maximize its browser usage share at Netscape’s expense,

Microsoft might still have set the price of an Internet Explorer consumer license at zero. It might also have spent something approaching the $100 million it has devoted each year to developing Internet Explorer and some part of the $30 million it has spent annually marketing it. After all, consumers in 1995 were already demanding software that enabled them to use the Web with ease, and IBM had announced in September 1994 its plan to include browsing capability in OS/2 Warp at no extra charge. Microsoft had reason to believe that other operating-system vendors would do the same. 141.

Still, had Microsoft not viewed browser usage share as the key to preserving the applications

barrier to entry, the company would not have taken its efforts beyond developing a competitive browser product, including it with Windows at no additional cost to consumers, and promoting it with advertising. Microsoft would not have absorbed the considerable additional costs associated with enlisting other firms in its campaign to increase Internet Explorer’s usage share at Navigator’s expense. This investment was only profitable to the extent that it protected the applications barrier to entry. Neither the desire to bolster demand for Windows, nor the prospect of ancillary revenues, explains the lengths to which Microsoft has gone. For one thing, loading Navigator makes Windows just as Internet-ready as including Internet Explorer does. Therefore, Microsoft’s costly efforts to limit the use of Navigator on Windows could not have stemmed from a desire to bolster consumer demand for Windows. Furthermore, there is no conceivable way that Microsoft’s costly efforts to induce Apple to pre-install Internet Explorer on Apple’s own PC systems could have increased consumer demand for Windows. 142.

In pursuing its goal of maximizing Internet Explorer’s usage share, Microsoft actually has limited

rather severely the number of profit centers from which it could otherwise derive income via Internet Explorer. For 51

example, Microsoft allows the developers of browser shells built on Internet Explorer to collect ancillary revenues such as advertising fees; for another, Microsoft permits its browser licensees to change the browser’s start page, thus limiting the fees that advertisers are willing to pay for placement on that page by Microsoft. Even if Microsoft maximized its ancillary revenue, the amount of revenue realized would not come close to recouping the cost of its campaign to maximize Internet Explorer’s usage share at Navigator’s expense. The countless communications that Microsoft’s executives dispatched to each other about the company’s need to capture browser usage share indicate that the purpose of the effort had little to do with attracting ancillary revenues and everything to do with protecting the applications barrier from the threat posed by Netscape’s Navigator and Sun’s implementation of Java. For example, Microsoft vice president Brad Chase told the company’s assembled sales and marketing executives in April 1996 that they should “worry about your browser share[] as much as BillG” even though Internet Explorer was “a no revenue product,” because “we will lose [sic] the Internet platform battle if we do not have a significant user installed base.” He told them that “if you let your customers deploy Netscape Navigator, you will loose [sic] leadership on the desktop.” 6.

Excluding Navigator from Important Distribution Channels

143.

Decision-makers at Microsoft worried that simply developing its own attractive browser product,

pricing it at zero, and promoting it vigorously would not divert enough browser usage from Navigator to neutralize it as a platform. They believed that a comparable browser product offered at no charge would still not be compelling enough to consumers to detract substantially from Navigator’s existing share of browser usage. This belief was due, at least in part, to the fact that Navigator already enjoyed a very large installed base and had become nearly synonymous with the Web in the public’s consciousness. If Microsoft was going to raise Internet Explorer’s share of browser usage and lower Navigator’s share, executives at Microsoft believed they needed to constrict Netscape’s access to the distribution channels that led most efficiently to browser usage. 1. 144.

The Importance of the OEM and IAP Channels

Very soon after it recognized the need to gain browser usage share at Navigator’s expense,

Microsoft identified pre-installation by OEMs and bundling with the proprietary client software of IAPs as the two distribution channels that lead most efficiently to browser usage. Two main reasons explain why these channels are so efficient. First, users must acquire a computer and connect to the Internet before they can browse the Web. Thus, 52

the OEM and IAP channels lead directly to virtually every user of browsing software. Second, both OEMs and IAPs are able to place browsing software at the immediate disposal of a user without any effort on the part of the user. If an OEM pre-installs a browser onto its PCs and places an icon for that browser on the default screen, or “desktop,” of the operating system, purchasers of those PCs will be confronted with the icon as soon as the operating system finishes loading into random access memory (“RAM”). If an IAP bundles a browser with its own proprietary software, its subscribers will, by default, use the browser whenever they connect to the Web. In its internal decisionmaking, Microsoft has placed considerable reliance on studies showing that consumers tend strongly to use whatever browsing software is placed most readily at their disposal, and that once they have acquired, found, and used one browser product, most are reluctant — and indeed have little reason — to expend the effort to switch to another. Microsoft has also relied on studies showing that a very large majority of those who browse the Web obtain their browsing software with either their PCs or their IAP subscriptions. 145.

Indeed, no other distribution channel for browsing software even approaches the efficiency of

OEM pre-installation and IAP bundling. The primary reason is that the other channels require users to expend effort before they can start browsing. The traditional retail channel, for example, requires the consumer to make contact with a retailer, and retailers generally do not distribute products without charging a price for them. Naturally, once Microsoft and Netscape began offering browsing software for free, consumers for the most part lost all incentive to pay for it. 146.

The relatively few users who already have a browser but would prefer another can avoid the retail

channel by using the Internet to download new browsing software electronically, but they must wait for the software to transmit to their PCs. This process takes a moderate degree of sophistication and substantial amount of time, and as the average bandwidth of PC connections has grown, so has the average size of browser products. The longer it takes for the software to download, the more likely it is that the user’s connection to the Internet will be interrupted. As a vanguard of the “Internet Age,” Navigator generated a tremendous amount of excitement in its early days among technical sophisticates, who were willing to devote time and effort to downloading the software. Today, however, the average Web user is more of a neophyte, and is far more likely to be intimidated by the process of downloading. It is not surprising, then, that downloaded browsers now make up only a small and decreasing percentage of the new browsers (as opposed to upgrades) that consumers obtain and use. 53

147.

The consumer who receives a CD-ROM containing a free browser in the mail or as a magazine

insert is at least spared the time and effort it would take to obtain browsing software from a retail vendor or to download it from the Web. But, just as the consumer who obtains a browser at retail or off the Web, the consumer who receives the software unsolicited at home must first install it on a PC system in order to use it, and merely installing a browser product takes time and can be confusing for novice users. Plus, a large percentage of the unsolicited disks distributed through “carpet bombing” reach individuals who do not have PCs, who already have pre-installed browsing software, or who have no interest in browsing the Web. In practice, less than two percent of CD-ROM disks disseminated in mass-distribution campaigns are used in the way the distributor intended. As a result, this form of distribution is rarely profitable, and then only when undertaken by on-line subscription services for whom a sale translates into a stream of revenues lasting into the future. The fact that an OLS may find it worthwhile to “carpet bomb” consumers with free disks obviously only helps the vendor of browsing software whose product the OLS has chosen to bundle with its proprietary software. So, while there are other means of distributing browsers, the fact remains that to a firm interested in browser usage, there simply are no channels that compare in efficiency to OEM pre-installation and IAP bundling. 148.

Knowing that OEMs and IAPs represented the most efficient distribution channels of browsing

software, Microsoft sought to ensure that, to as great an extent as possible, OEMs and IAPs bundled and promoted Internet Explorer to the exclusion of Navigator. 2.

Excluding Navigator from the OEM Channel 1.

Binding Internet Explorer to Windows 1.

149.

The Status of Web Browsers as Separate Products

Consumers determine their software requirements by identifying the functionalities they desire.

While consumers routinely evaluate software products on the basis of the functionalities the products deliver, they generally lack sufficient information to make judgements based on the designs and implementations of those products. Accordingly, consumers generally choose which software products to license, install, and use on the basis of the products’ functionalities, not their designs and implementations. 150.

While the meaning of the term “Web browser” is not precise in all respects, there is a consensus in

the software industry as to the functionalities that a Web browser offers a user. Specifically, a Web browser 54

provides the ability for the end user to select, retrieve, and perceive resources on the Web. There is also a consensus in the software industry that these functionalities are distinct from the set of functionalities provided by an operating system. 151.

Many consumers desire to separate their choice of a Web browser from their choice of an

operating system. Some consumers, particularly corporate consumers, demand browsers and operating systems separately because they prefer to standardize on the same browser across different operating systems. For such consumers, standardizing on the browser of their choice results in increased productivity and lower training and support costs, and permits the establishment of consistent security and privacy policies governing Web access. 152.

Moreover, many consumers who need an operating system, including a substantial percentage of

corporate consumers, do not want a browser at all. For example, if a consumer has no desire to browse the Web, he may not want a browser taking up memory on his hard disk and slowing his system’s performance. Also, for businesses desiring to inhibit employees’ access to the Internet while minimizing system support costs, the most efficient solution is often using PC systems without browsers. 153.

Because of the separate demand for browsers and operating systems, firms have found it efficient

to supply the products separately. A number of operating system vendors offer consumers the choice of licensing their operating systems without a browser. Others bundle a browser with their operating system products but allow OEMs, value-added resellers, and consumers either to not install it or, if the browser has been pre-installed, to uninstall it. While Microsoft no longer affords this flexibility (it is the only operating system vendor that does not), it has always marketed and distributed Internet Explorer separately from Windows in several channels. These include retail sales, service kits for ISVs, free downloads over the Internet, and bundling with other products produced both by Microsoft and by third-party ISVs. In order to compete with Navigator for browser share, as well as to satisfy corporate consumers who want their diverse PC platforms to present a common browser interface to employees, Microsoft has also created stand-alone versions of Internet Explorer that run on operating systems other than 32-bit Windows, including the Mac OS and Windows 3.x. 154.

In conclusion, the preferences of consumers and the responsive behavior of software firms

demonstrate that Web browsers and operating systems are separate products. 2.

Microsoft’s Actions 55

155.

In contrast to other operating system vendors, Microsoft both refused to license its operating

system without a browser and imposed restrictions — at first contractual and later technical — on OEMs’ and end users’ ability to remove its browser from its operating system. As its internal contemporaneous documents and licensing practices reveal, Microsoft decided to bind Internet Explorer to Windows in order to prevent Navigator from weakening the applications barrier to entry, rather than for any pro-competitive purpose. 156.

Before it decided to blunt the threat that Navigator posed to the applications barrier to entry,

Microsoft did not plan to make it difficult or impossible for OEMs or consumers to obtain Windows without obtaining Internet Explorer. In fact, the company’s internal correspondence and external communications indicate that, as late as the fall of 1994, Microsoft was planning to include low-level Internet “plumbing,” such as a TCP/IP stack, but not a browser, with Windows 95. 157.

Microsoft subsequently decided to develop a browser to run on Windows 95. As late as June

1995, however, Microsoft had not decided to bundle that browser with the operating system. The plan at that point, rather, was to ship the browser in a separate “frosting” package, for which Microsoft intended to charge. By April or May of that year, however, Microsoft’s top executives had identified Netscape’s browser as a potential threat to the applications barrier to entry. Throughout the spring, more and more key executives came to the conclusion that Microsoft’s best prospect of quashing that threat lay in maximizing the usage share of Microsoft’s browser at Navigator’s expense. The executives believed that the most effective way of carrying out this strategy was to ensure that every copy of Windows 95 carried with it a copy of Microsoft’s browser, then code-named “O’Hare.” For example, two days after the June 21, 1995 meeting between Microsoft and Netscape executives, Microsoft’s John Ludwig sent an E-mail to Paul Maritz and the other senior executives involved in Microsoft’s browser effort. “[O]bviously netscape does see us as a client competitor,” Ludwig wrote. “[W]e have to work extra hard to get ohare on the oem disks.” 158.

Microsoft did manage to bundle Internet Explorer 1.0 with the first version of Windows 95

licensed to OEMs in July 1995. It also included a term in its OEM licenses that prohibited the OEMs from modifying or deleting any part of Windows 95, including Internet Explorer, prior to shipment. The OEMs accepted this restriction despite their interest in meeting consumer demand for PC operating systems without Internet Explorer. After all, Microsoft made the restriction a non-negotiable term in its Windows 95 license, and the OEMs 56

felt they had no commercially viable alternative to pre-installing Windows 95 on their PCs. Apart from a few months in the fall of 1997, when Microsoft provided OEMs with Internet Explorer 4.0 on a separate disk from Windows 95 and permitted them to ship the latter without the former, Microsoft has never allowed OEMs to ship Windows 95 to consumers without Internet Explorer. This policy has guaranteed the presence of Internet Explorer on every new Windows PC system. 159.

Microsoft knew that the inability to remove Internet Explorer made OEMs less disposed to pre-

install Navigator onto Windows 95. OEMs bear essentially all of the consumer support costs for the Windows PC systems they sell. These include the cost of handling consumer complaints and questions generated by Microsoft’s software. Pre-installing more than one product in a given category, such as word processors or browsers, onto its PC systems can significantly increase an OEM’s support costs, for the redundancy can lead to confusion among novice users. In addition, pre-installing a second product in a given software category can increase an OEM’s product testing costs. Finally, many OEMs see pre-installing a second application in a given software category as a questionable use of the scarce and valuable space on a PC’s hard drive. 160.

Microsoft’s executives believed that the incentives that its contractual restrictions placed on OEMs

would not be sufficient in themselves to reverse the direction of Navigator’s usage share. Consequently, in late 1995 or early 1996, Microsoft set out to bind Internet Explorer more tightly to Windows 95 as a technical matter. The intent was to make it more difficult for anyone, including systems administrators and users, to remove Internet Explorer from Windows 95 and to simultaneously complicate the experience of using Navigator with Windows 95. As Brad Chase wrote to his superiors near the end of 1995, “We will bind the shell to the Internet Explorer, so that running any other browser is a jolting experience.” 161.

Microsoft bound Internet Explorer to Windows 95 by placing code specific to Web browsing in

the same files as code that provided operating system functions. Starting with the release of Internet Explorer 3.0 and “OEM Service Release 2.0" (“OSR 2") of Windows 95 in August 1996, Microsoft offered only a version of Windows 95 in which browsing-specific code shared files with code upon which non-browsing features of the operating system relied. 162.

The software code necessary to supply the functionality of a modern application or operating

system can be extremely long and complex. To make that complexity manageable, developers usually write long 57

programs as a series of individual “routines,” each ranging from a few dozen to a few hundred lines of code, that can be used to perform specific functions. Large programs are created by “knitting” together many such routines in layers, where the lower layers are used to provide fundamental functionality relied upon by higher, more focused layers. Some preliminary aspects of this “knitting” are performed by the software developer. The user who launches a program, however, is ultimately responsible for causing routines to be loaded into memory and executed together to produce the program’s overall functionality. 163.

Routines can be packaged together into files in almost any way the designer chooses. Routines

need not reside in the same file to function together in a seamless fashion. Also, a developer can move routines into new or different files from one version of a program to another without changing the functionalities of those routines or the ability to combine them to provide integrated functionality. 164.

Starting with Windows 95 OSR 2, Microsoft placed many of the routines that are used by Internet

Explorer, including browsing-specific routines, into the same files that support the 32-bit Windows APIs. Microsoft’s primary motivation for this action was to ensure that the deletion of any file containing browsing-specific routines would also delete vital operating system routines and thus cripple Windows 95. Although some of the code that provided Web browsing could still be removed, without disabling the operating system, by entering individual files and selectively deleting routines used only for Web browsing, licensees of Microsoft software were, and are, contractually prohibited from reverse engineering, decompiling, or disassembling any software files. Even if this were not so, it is prohibitively difficult for anyone who does not have access to the original, human-readable source code to change the placement of routines into files, or otherwise to alter the internal configuration of software files, while still preserving the software’s overall functionality. 165.

Although users were not able to remove all of the routines that provided Web browsing from OSR

2 and successive versions of Windows 95, Microsoft still provided them with the ability to uninstall Internet Explorer by using the “Add/Remove” panel, which was accessible from the Windows 95 desktop. The Add/Remove function did not delete all of the files that contain browsing specific code, nor did it remove browsing-specific code that is used by other programs. The Add/Remove function did, however, remove the functionalities that were provided to the user by Internet Explorer, including the means of launching the Web browser. Accordingly, from the

58

user’s perspective, uninstalling Internet Explorer in this way was equivalent to removing the Internet Explorer program from Windows 95. 166.

In late 1996, senior executives within Microsoft, led by James Allchin, began to argue that

Microsoft was not binding Internet Explorer tightly enough to Windows and as such was missing an opportunity to maximize the usage of Internet Explorer at Navigator’s expense. Allchin first made his case to Paul Maritz in late December 1996. He wrote: I don’t understand how IE is going to win. The current path is simply to copy everything that Netscape does packaging and product wise. Let’s [suppose] IE is as good as Navigator/Communicator. Who wins? The one with 80% market share. Maybe being free helps us, but once people are used to a product it is hard to change them. Consider Office. We are more expensive today and we’re still winning. My conclusion is that we must leverage Windows more. Treating IE as just an add-on to Windows which is cross-platform [means] losing our biggest advantage — Windows marketshare. We should dedicate a cross group team to come up with ways to leverage Windows technically more. . . . We should think about an integrated solution — that is our strength. Allchin followed up with another message to Maritz on January 2, 1997: You see browser share as job 1. . . . I do not feel we are going to win on our current path. We are not leveraging Windows from a marketing perspective and we are trying to copy Netscape and make IE into a platform. We do not use our strength — which is that we have an installed base of Windows and we have a strong OEM shipment channel for Windows. Pitting browser against browser is hard since Netscape has 80% marketshare and we have