States' lawsuit against Microsoft

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States' lawsuit against Microsoft

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By early 1997, some estimates placed IE?s share of the Internet browser market at approximately 30%, a one-year increase of approximately 25%.

Shortly thereafter, Microsoft issued OEM Service Release ('OSR') 2.5 to its OEMs. The terms of OSR 2.5 not only required that IE be bundled with Windows 95, but required that the most recent version, IE4, be bundled, and provided a significant financial incentive in the form of a Windows royalty discount for prompt compliance.

At about this same time, the United States Department of Justice ('DOJ') sought a contempt order against Microsoft alleging that Microsoft?s tie of Internet Explorer to Windows 95 violated the 1995 consent decree entered into between DOJ and Microsoft. The Court declined to find Microsoft in contempt citing ambiguity in the language of the consent decree, but preliminarily enjoined the bundling of IE and Windows 95.

As of November, 1997, Microsoft estimated IE to have approximately 42% of the Internet browser market, an approximate 12% increase over April, 1997. Moreover, Microsoft predicted that IE would overtake Navigator in terms of market share by the second quarter of 1998.

Finally, Microsoft is scheduled to release Windows 98 to OEM?s in mid-May of 1998 and to the retail market at the end of June, 1998. Microsoft will continue to offer IE4 as a separate product from Windows 98 and to offer a successor version, IE5, as a separate product for Windows 98 and other platforms.

The bundling of Microsoft's Internet browser with Windows 95 and 98 forecloses and will foreclose a substantial amount of competition among Internet browsers.

Microsoft's bundling of IE with Windows 95 and its ultimate bundling of the Internet browser with the operating system in Windows 98 is no more than a thinly veiled attempt to 'tie' the purchase of its Internet browser to the purchase of its operating system. Through this tie Microsoft forces the captive consumers of its operating system to also take its Internet browser. By using its operating system monopoly to erect numerous hurdles to competition with its Internet browser, Microsoft has foreclosed and threatens to continue foreclosing a substantial volume of commerce in the Internet browser market and to deny consumers the benefits of fair and vigorous Internet browser competition.

Additionally, through bundling its Internet browser with Windows, Microsoft has sought to leverage its operating system monopoly to give it an unfair competitive advantage in the increasingly important Internet browser market.

Further, bundling the Internet browser with Windows constitutes an attempt to monopolize the Internet browser market. Because of its massive operating system market power, there is a dangerous probability that Microsoft will succeed in extending its operating system monopoly into this market.

Finally, by using its operating system monopoly to crush its competition in the adjacent Internet browser market, Microsoft seeks to maintain its operating system monopoly against the potential alternatives presented by the Internet browser and Java technologies, thus stifling innovation.

B. OTHER APPLICATIONS

In addition to bundling IE with Windows, Microsoft has also bundled a number of other applications with Windows 98. These applications include, but are not limited to, Outlook Express, an e-mail client application.

These applications are separate products from Windows, each with consumer demand distinct from demand for an operating system.

Competition exist for these applications. Microsoft's bundling of these applications with Windows will foreclose a significant amount of competition in the markets for these applications.

X. DEFENDANT MICROSOFT?S ADDITIONAL ANTICOMPETITIVE LICENSE RESTRICTIONS

When a consumer turns on a new PC with Windows 95 or Windows 98 preinstalled, the computer goes through an installation and configuration routine, including initialization of the PC operating system ('end user boot'). At the end of the initial end user boot a user sees a default or 'first' screen. The initial end user boot and 'first screen' present an opportunity for vendors of software and services to provide potential customers with information about and access to their products, and for OEMs to communicate with their customers and offer them configuration options.

When Windows 95 was first released in August 1995, a number of OEMs who preinstalled Windows 95 customized the content and configurations of their computers' end user boot and first screens for various commercial reasons, including minimizing support costs, maximizing ease of use, differentiation of PC brand, and exploiting third party revenue streams. For example, some OEMs provided users with welcome screens, tutorials, and other alternative user interfaces. Additionally, some OEMs altered the arrangement, number and content of icons and folders which accessed ISPs, Internet browsers and other software through the Windows 95 desktop. These OEMs struck deals with ISPs and ICPs that garnered revenue for the OEMs and customers for the ISPs and ICPs.

The OEMs innovations on the end user boot and first screen led to a differentiated consumer experience that offered various packages of content software and Internet access from one OEM to the next.

Microsoft reacted swiftly and decisively to curtail the proliferating OEM innovations of the end user boot and first screen. Exploiting the OEMs? need for Windows, beginning at least in August of 1996, Microsoft required OEMs, as part of their license for Windows, to agree to various limitations on their ability to customize the content and configuration of the first screen. These restrictions prohibited, with limited exceptions, OEMs' ability to alter the end user boot, prohibited OEMs from displaying anything other than the Windows default desktop after boot up, and severely limited modification of the desktop, including an outright prohibition on deleting icons and folders.

These licensing restrictions had the effect of curtailing OEMs' ability to offer their customers alternatives to IE. The restrictions also limited the OEMs' ability to compete with each other and with Microsoft in the provision of access to information about products and services through the end user boot and first screen. The restrictions also foreclosed OEMs from using the first screen and end user boot to offer customers products and services and the ability to customize the configuration options in response to consumer demand. This limited competition and prevented OEMs from significantly differentiating their products from other OEMs' offerings thus resulting in reduced customer choice. Finally, the restrictions foreclosed OEMs from offering alternative user interfaces, or 'shells,' which might compete with Microsoft's.

Various OEMs have requested that Microsoft allow them to provide new PC purchasers with an alternative user interface, welcome screen, or 'shell' that appears while the purchaser is first booting up a new PC, but Microsoft has refused. Microsoft's exercise of monopoly power has resulted in fewer choices for PC customers. Microsoft's boot-up and screen restrictions are not reasonably necessary to protect any legitimate interest Microsoft may have in branding, product identity, or quality control for its products. These goals could be fully achieved by substantially less restrictive and less anticompetitive means.

These anticompetitive configuration and content license restrictions continue to be part of Microsoft?s Windows licensing agreements, including both Windows 98 as well as Windows 95. At the same time as it began entering into these restrictive OEM licenses, Microsoft also began entering into agreements with Internet Service Providers ('ISPs' such as Earthlink and AT&T Worldnet) and Online Service Providers ('OLSs' such as America Online and Prodigy). Specifically, in return for placement by Microsoft in its Internet Connection Wizard The Internet Connection Wizard is an application provided by Microsoft with Windows 95 which, when accessed by a user, connects the user with Microsoft?s Internet Referral Server which, in turn, contains a list of regional and national ISPs and OLSs from which the user can choose, or Online Services older, ISPs and OLSs had to agree:

To distribute and promote to their subscribers exclusively or nearly exclusively Internet Explorer;
To eliminate links on their Web sites from which their subscribers could download a competing browser over the Internet;
To abstain from stating or suggesting 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 other Internet access service);
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
To limit the percentage of competing browsers they distributed even in response to specific requests from customers. Microsoft entered into these agreements because it recognized the critical importance of the ISP/OLS channel for distribution of its Internet browser.

Microsoft also entered into similarly restrictive agreements with Internet Content Providers ('ICPs' such as CNN). Under these agreements, an ICP who wished first tier, or 'platinum' placement on IE 4's 'active channel' bar were required to agree:

Not to compensate in any manner the manufacturer of an 'other browser' (defined as either of the top two non-Microsoft browsers) for placement on that manufacturer?s channel;
Not to promote a similar channel for an 'other browser' should one be provided without compensation; and
Not to allow an 'other browser' to promote that ICP's content. Thus, through its OEM agreements, Microsoft unfairly limited the user's access to Internet browsers that competed with its own and unfairly limited the user?s access to ISPs, OLSs and ICPs that did not agree to preferential promotion and distribution of IE. Through its ISP, OLS, and ICP agreements, Microsoft unfairly limited customer access to Internet browsers that competed with its own product, IE.

With Windows 98 Microsoft has solidified its control over the new PC user's access to Internet services by moving the Internet Connection Wizard into the 'Welcome to Windows' screen, a screen that appears on top of the Windows default desktop immediately after boot up and which, under the boot up and screen restrictions, cannot be removed or 'preempted' by the OEMs.

While, as noted below, Microsoft may no longer require ISPs to ship IE as their 'default' Internet browser, Microsoft still determines which ISPs may be accessed through the Internet Connection Wizard based on their choice of browser.

Microsoft has indicated that it intends to unilaterally relax some of the restrictions in its agreements with ISPs and ICPs for Windows 98. With respect to its ISP contracts, Microsoft has apparently waived some of the restrictions contained in those contracts, including the requirement that an ISP use IE as its default Internet browser in exchange for a place in the Internet Connection Wizard. With respect to the ICPs, Microsoft has apparently altered certain contract terms, now only requiring that IE be promoted in 'parity' with other Internet browsers.

Notably, these relaxations have occurred in the context of impending Congressional hearings, ongoing litigation with DOJ, and potential additional litigation with both the States and DOJ. There is no guarantee the original terms will not be reinstated if the threat of litigation is lifted. Additionally, these relaxations do not apply to Microsoft?s OLS contracts with such online behemoths as America Online, AT&T Worldnet, and Compuserve. Finally, they are prospective only and do not undo the damage already caused by the prior restrictions.

The restrictions imposed by Microsoft on the OEMs, ISPs, and ICPs have unreasonably foreclosed competition in a number of ways:

First, they reinforce Microsoft?s tie of IE to Windows by preventing OEMs from permitting an alternative Internet browser to substitute for IE during the boot-up process and by prohibiting OEMs from providing users with a first screen that does not include the IE icon, thereby impeding competitive browsers? ability to compete for distribution through placement on new PCs.
In addition, Microsoft's control of the initial boot up and first screen gives it the power to require that ISPs and OLSs use IE as their default Internet browser in exchange for placement on the Internet connection wizard and the first screen, thereby foreclosing this important channel of distribution to browser competition.
Also, the restrictions unreasonably restrict competition between Microsoft and the OEMs regarding the configuration and provision of products and services to the end user through the end user boot and first screen. Through these licensing agreements, Microsoft and the OEMs have, in effect, agreed not to compete, or to compete in only a limited way, in their marketing and use of the end user boot and first screen.
Finally, the restrictions operate to perpetuate Microsoft?s operating system monopoly by utilizing Microsoft?s power over initial boot up and the first screen to promote IE and reduce or eliminate access to alternative Internet browsers. The net result for the consumer is negative. The restrictions have stifled innovation and restricted consumers' choices regarding access to the Internet as well as to various PC software bundles and configurations. As a result of Microsoft's restrictions, consumers' PC choices have been narrowed.

XI. DEFENDANT MICROSOFT?S MONOPOLISTIC PRACTICES WITH REGARD TO OFFICE PRODUCTIVITY SUITE SOFTWARE

In addition to producing operating systems for personal computers, Microsoft has also developed application software, including its office productivity suite, Microsoft Office. Office productivity suits typically include most or all of the following functions, among others: word processing, spreadsheets, database managers, slide presentations, and personal information managers.

Office productivity suites and individual programs therein are software applications that are separate and distinct products from the PC operating system. The markets for office productivity suites and the individual applications contained in them are distinct product markets.

The relevant geographic market for analyzing the market for software applications is the world. Another relevant geographic market is the United States.

Microsoft Office has attained monopoly power in the field of office productivity suites. By calendar year 1995, Office accounted for over 85% of all sales of office productivity suites, and its share of sales has increased since that time.

Through its anticompetitive conduct, as described below, Microsoft has increased barriers to entry and establishment facing competitors in the PC office productivity suite market. Specifically, Microsoft has used in the imposition of 'per system' licenses to make it economically impractical for OEMs to offer competing office productivity suites for preinstallation on their PCs.

In licensing Office, Microsoft offers 'per copy' or 'per system' licenses to OEMs. Under a per copy license, an OEM pays Microsoft a royalty for each copy of Office it installs on a computer. Under a per system license, an OEM pays Microsoft a royalty for each computer it sells within a particular 'system.' Generally speaking, the per copy licensing royalty is significantly higher than the per system.

OEMs cannot afford to pay the significantly higher royalties for per copy licenses, because their profit margins are very narrow. As a result, OEMs must use the per system method of licensing Office if they are to sell computers which include Office at competitive prices and they cannot afford not to license Office on many of their computer lines.

Even under the narrowest definition of the term 'system,' as used in the per system licensing arrangement, the term includes all the computers of a given model line sold by the company. Moreover, the definition of 'system' is not limited to the mere labeling of the model line. Instead, Microsoft considers a ?system? to consist of a broadly-defined, essentially generic, hardware configuration. Accordingly, the only way an OEM can avoid paying the per system royalty is to create a new model line and ensure that such model line differs significantly in terms of hardware configuration from the model line subject to the per system license.

OEMs have been able to negotiate only limited exceptions, i.e., grants of permission from Microsoft not to bundle Office on all the computers within a system. On information and belief, few or no OEMs have been able to negotiate exceptions with Microsoft for anything more than a very small percentage of a given model line.

It is impractical in an economic sense for an OEM to install a competing office productivity suite on a computer subject to a per system license. In order to do so the OEM would have to pay for both Office and the competing product, and likewise would be required to pass along to the customer the cost of offering both Office and the competing product.

Microsoft's per system licensing process wrongfully hampers competition among office productivity suites by effectively precluding OEMs from offering consumers the option of licensing a competing office suite application, or no suite at all, if the consumer wishes to purchase a system on which Office is offered. Consumers who purchase certain lines of new computers are thereby forced to receive, and pay for, MS Office.

In addition, Microsoft has recognized that the ubiquity and increasing functionality of e-mail poses a potential threat to Microsoft Word and MS Office. Part of Microsoft?s response to that potential threat has been to plan to bundle Outlook Express, Microsoft?s consumer e-mail application, with Windows 98 (through bundling with IE), thus using its monopoly franchise, Windows, as a vehicle to help ensure blanket distribution, use, and ultimate adoption of Microsoft?s e-mail software as the de facto e-mail standard.

Through the practices described in paragraphs 86 through 97, Microsoft has willfully and illegally sought to maintain and extend its monopoly in office productivity suite software.

XII. HARM

Through the actions described above, Microsoft has illegally attempted to prevent competition to its software products, with the following anticompetitive effects:

Actual competition between Microsoft and actual and potential competitors in the markets for Internet browser and related software, office productivity suites, and first screen and boot up access has been or is threatened to be curtailed and foreclosed;

OEMs have been denied, or are threatened with denial of, the benefits of a free, open and competitive market in the sale of licensing rights for Internet browsers and related software, office productivity suites, and first screen and boot up access;

Consumer purchasers of personal computers pre-loaded with software have been denied, or are threatened with denial of, the benefits of a free, open and competitive market for Internet browsers and related software, office productivity suites, and first screen and boot up access;

Barriers to entry into the markets for operating systems and office productivity suites have been raised and reinforced, tending to forestall the development of actual competition in those markets; and

The States' general welfare and economies have been injured through prevention of free and open competition in each of the States' economies.

Plaintiff States and their citizens will be subject to a continuing, substantial and immediate threat of irreparable injury to the general welfare and economy and to competition in their states unless

Defendant is enjoined from its illegal conduct.

Plaintiff States have no adequate remedy at law other than the filing of this lawsuit to address Microsoft?s illegal and anticompetitive conduct.

The threatened harm to Plaintiff States and their citizens from Microsoft's illegal and anticompetitive conduct outweighs any potential harm to Microsoft from the entry of an appropriately tailored preliminary and/or permanent injunction.

Entry of a preliminary and/or permanent injunction restraining Microsoft's illegal and anticompetitive conduct will serve the public?s interest in having free, open and competitive software and technology markets.

XIII. FIRST CLAIM FOR RELIEF - SHERMAN ACT, SECTION TWO MAINTENANCE OF OPERATING SYSTEM MONOPOLY