banging on an elephant with a twig
Dan Kohn (dan@teledesic.com)
Fri, 23 Aug 1996 13:11:06 -0700
>Text of recent Netscape letter to the Justice Department
>
>
>Joel Klein, Esq.
>Deputy Assistant Attorney General
>International/Policy Matters
>Department of Justice
>10th & Constitution, N.W.
>Room 3208
>Washington, D.C. 20530
>
>RE: Microsoft Illegal Conduct and Ramifications for Consent Decree
>
>Dear Joel:
>
>This letter is intended to supplement and clarify our earlier
>communications
>with the Department concerning conduct by Microsoft that violates both
>the
>existing Consent Decree as well as the substantive antitrust laws.
>
>The Internet software industry currently exhibits great innovation,
>with the
>development of an astonishing number of new products and technologies
>that
>promise to transform the way that computers are used. These new
>products and
>technologies are being developed by a wide array of companies, from new
>start-ups to more established software firms. Many of the smaller
>Internet
>software vendors (including companies that make Internet software tools
>and
>servers), however, now face the threat of elimination from the market
>by
>reason of Microsoft's illegal conduct. While Netscape has greater
>resources
>to fight back against Microsoft's predation, both in the marketplace
>and
>through means such as this letter, many of these smaller Internet
>software
>vendors have made it clear that they have insufficient resources to
>fight
>back against Microsoft's illegal conduct in the market.
>
>Much of Microsoft's conduct appears to violate both the letter and
>spirit of
>the existing Consent Decree entered in United States v. Microsoft.
>Indeed,
>Microsoft's behavior is, if anything, more anticompetitive and
>pernicious
>than the conduct addressed specifically in the Decree. In engaging in
>this
>far-reaching anticompetitive behavior, Microsoft hurts consumers and
>restricts consumer choice.
>
>Microsoft's conduct
>
>Microsoft's recent conduct far exceeds any reasonable definition of
>procompetitive, welfare enhancing behavior. Microsoft has made written
>offers to OEMS; Internet Service Providers ("ISPs"), including many
>"local
>and long distance telephone companies"; Value-Added Resellers ("VARs"),
>including systems integrators; and to large corporations. These offers
>provide for either clandestine side payments, discounts on the
>Microsoft
>system (Windows), or payments in the form of "real estate" on the
>Windows 95
>screen. These inducements are made on the condition that the offeree
>make
>competitors' "browsers" (more correctly known as "Internet clients")
>far
>less accessible to users than Microsoft's own "browser." (Microsoft's
>browser, as you know, is called Internet Explorer.) A number of these
>offers
>have already been accepted and are in the process of being implemented.
>
>In addition to these under-the-table arrangements, Netscape's recent
>investigation has uncovered numerous additional steps that Microsoft
>has
>taken for the purpose of eliminating competition in the Internet
>software
>markets. Microsoft's tactics include manipulating the disclosure of
>APIs;
>predatory pricing; and the bundling of products such as FrontPage,
>Internet
>Explorer, and Microsoft's Internet server ("Internet Information
>Server," or
>"IIS") with Microsoft's monopoly operating systems. This
>anticompetitive
>behavior directly threatens numerous small Internet software companies
>that
>are competing in these markets. Microsoft's illegal acts include the
>following:
>
>* With respect to original equipment manufacturers ("OEMs"), i.e.
>personal
>computer makers, Microsoft began by bundling its "browser" free for
>redistribution. Now, Netscape has been informed that Microsoft has gone
>even
>further, offering OEMs discounts on the license price of the Windows
>operating system if the OEM not only continues to feature the Microsoft
>browser on its desktop, but also makes competitors' browsers far less
>accessible to users.
>
>The net effect is this. Every OEM automatically gets the Microsoft
>browser
>on the Windows desktop provided by Microsoft, whether desired by the
>OEM or
>not. If the OEM wants to give the consumer a fair and even choice of
>browsers by placing competitors' browser icons in a comparable place on
>the
>desktop, Netscape has been informed that the OEM must pay $3 more for
>Windows 95 than an OEM that takes the Windows bundle as is and agrees
>to
>make the competitors' browsers far less accessible and useful to
>customers.
>
>Some OEMs have gone so far as to indicate that the Microsoft Windows
>discount really buys exclusivity. For example, Hitachi has refused to
>bundle
>Netscape Navigator with its laptop computer because it says that it is
>prohibited from carrying the product under its license with Microsoft.
>Indeed, Hitachi now has gone even further, and informed another company
>that
>it cannot carry its software because that product includes Netscape
>Navigator and therefore is prohibited by the Microsoft license.
>
>The potential magnitude of Microsoft's secret tax on the OEM channel --
>all
>for the purpose of restricting consumer choice -- is truly
>breathtaking. If
>estimates are correct that Windows 95 is selling at a rate of 40
>million
>copies or more a year. it will cost OEMs more than $10 million to offer
>their customers non-Microsoft Internet software on an equal footing
>with
>that of Microsoft. And Microsoft has made sure that customers will
>never
>learn about these under-the-table deals. Microsoft muzzles all of the
>OEMs
>with "non-disclosure" terms that place them in an entirely untenable
>position: they have been induced with secret payments, and ostensibly
>cannot
>tell anyone, including their customers, about them.
>
>* In addition to its efforts to to strong-arm OEMs Microsoft has also
>targeted Internet Service Providers with special inducements based on
>its
>position as a monopolist. Microsoft has offered a wide array of
>sweeteners
>even to to the smaller ISPS-- one ISP, for example, apparently was
>offered
>not just free software but free hardware as well as free advertising if
>it
>would agree not to make Netscape Navigator (or other Internet browsers)
>accessible to customers. Netscape believes that Microsoft also has
>offered
>to "buy out" the contracts that larger ISPs have with Netscape, and
>some of
>the international ISPs have apparently received side payments in the
>form of
>$400,000 "marketing funds" on condition that they will not sell any
>Netscape
>or other Internet software. (There are also what appear to be
>complicated
>"bounty" payments from ISPs to Microsoft; Netscape is still trying to
>ascertain the nature of these payments.) Microsoft's most important
>inducement to the large ISPs, however, is in the form of currency that
>no
>other company in the world can match; a place on the Windows 95 screen.
>This
>unique asset, which Microsoft controls because of its monopoly in
>operating
>systems, is one that AT&T and NetCom could not pass up -- just like the
>online services before them. In all of these cases, Microsoft is
>directly
>using its monopoly to hinder consumer choice. The transactions work
>like
>this: the ISP (or online service) gets "paid" with a spot on the
>Windows 95
>screen. Their customers, however, do not receive any "trickle-down"
>from
>this payment -- they do not, for example, get equal access to
>Microsoft's
>browser along with Netscape's and those of other Internet vendors. To
>the
>contrary: the "payment" that Microsoft extracts from these resellers is
>that
>they agree to make other Internet software less accessible to their
>customers.
>* Microsoft also is using its monopoly position in operating systems to
>restrict consumer choice in lnternet servers. For example, Windows NT
>Workstation is the platform of choice for consumers in many operating
>environments, and Netscape, O'Reilly and Associates, and Process
>Software
>(among others) have developed lnternet servers designed to provide
>consumers
>using this platform with the best possible functionality at the lowest
>possible price.
>
>Microsofl is trying to take away this consumer choice. Microsoft has
>taken
>the position (as we informed you by separate letter last week) that
>these
>companies must artificially limit the functionality of their Internet
>servers to 10 connections. lt asserts that claim even though it
>admitted in
>its July 19 press release that it is "in the best interests" of "the
>large
>number of customers who are planning to base their Internet and
>intranet
>solutions on Windows NT Workstation" not to face such a limit. But
>Microsoft
>now claims that it can make its competitors abide by such a limit, just
>because it says so.
>
>Moreover, Microsoft has expanded its strong-arm tactics on this issue
>to
>OEMS. For example, Microsoft has threatened OEMs that their users may
>be
>violating the Microsoft license agreement if the OEM bundles NT
>Workstation
>with Netscape's Internet server. And Netscape believes that independent
>software vendors writing products to run on Netscape's or other third
>parties' Internet servers have received the same implicit or explicit
>threat.
>
>* Microsoft's technical and legal manipulations on the 10-connection
>issue
>are not its only use of anticompetitive tactics in its effort to
>monopolize
>Internet servers. Equally notorious among Internet vendors was
>Microsoft's
>use of secret APIs in Windows NT Server to gain a preferential speed
>advantage for its lnternet server software ("IIS"). These APIS, which
>have a
>very significant impact on Internet server performance, were only
>disclosed
>by Microsoft in late 1995 in its "Service Pack 3," but were already
>incorporated into the beta of IIS released shortly thereafter. Plainly
>the
>IIS developers had been given these APIs months before the rest of the
>industry.
>
>It was not until the end of June 1996 that Netscape was able to release
>a
>final version of its Internet server that incorporated the two new NT
>Server
>APIs. Other, smaller Internet server vendors. with fewer resources
>available, undoubtedly found it more difficult to catch up with
>Microsoft's
>unfair advantage. During this half-year interval, reviews (such as PC
>Week's
>March 1996 Internet server review) repeatedly emphasized Microsoft's
>speed
>superiority. But that superiority was not because its programmers were
>better than the rest of the industry's -- it is because they had an
>unfair
>advantage as a result of their operating system monopoly. Indeed, once
>Netscape was able to integrate these APIs in its June release, its
>Internet
>server did not simply match Microsoft's Internet server in speed, but
>significantly exceeded it. The APIs therefore were decisive in the
>half-year
>advantage that Microsoft held in Internet server speed.
>
>* Finally, Microsoft has resorted to a wide variety of predatory
>pricing and
>bundling behavior that violates the antitrust laws. For example, with
>corporate customers, Microsoft has agreed to a whole spectrum of free
>products and services, including free operating system upgrades, free
>consulting, free dialers, and so forth if the customer accepts the free
>Microsoft browser. Microsoft even offered international
>telecommunications
>customers $5 for every installed Netscape Navigator that they removed
>from
>their corporation and installed with Internet Explorer.
>
>Microsoft is also bundling its "free" Internet Explorer and IIS with
>its
>operating systems. which according to news reports have already led
>some
>vendors to decide to quit the market. And its bundling of tools such as
>FrontPage for "free" with its operating system products (as well as
>distribution of FrontPage as a stand-alone product for "free" at least
>until
>the end of the year) have threatened the lnternet tools market, which
>includes promising young companies with "hot" products like NetObjects.
>In
>short, it is plain that Microsoft intends to "zero out" the markets for
>Internet servers, and lnternet tools (like Internet browsers), and
>drive all
>other competitors out of these markets.
>
>The reason for Microsoft's conduct
>
>Obviously, Microsoft has so little confidence in the success of its
>products
>in a fair comparison with those of other software vendors that it has
>resorted to undisclosed, under-the-table payments and other forms of
>coercion to impose its products on consumers. Survey after survey has
>shown
>that in a straightforward comparison, end users, both in individual and
>corporate environments, would choose a non-Microsoft product. For
>example, a
>recent survey of lntranet computer users found that companies provide
>employees with Netscape Navigator 58% of the time, and Microsoft's
>Internet
>Explorer 17% of the time (with other vendors making up the rest). When
>asked
>which product they primarily use, however, Netscape's share shot up to
>89%,
>and Microsoft's dropped to 4%. In other words, Microsoft's product was
>offered four times as often as it would have been based on consumer
>preference, while Netscape Navigator was offered far less. Microsoft's
>conduct in buying off suppliers has inhibited if not precluded
>unfettered
>consumer choice.
>
>Nor wouId resellers themselves, if left to their own devices, prefer to
>bundle Microsoft's browsers. They are forced to do so by Microsoft's
>overwhelming market power. Typical comments to Netscape include:
>
>"All I can tell you is that the pressure and incentives from Microsoft
>are
>so outrageous they're scary."
>
> and
>"Microsoft gave me a deal I couldn't refuse. Free dialer, browser,
>developers kit, free distributable, etc. ... I know Netscape is better,
>but
>$0 vs. $18K is impossible to beat."
>
>The money to support these under-the-table payments comes directly from
>Microsoft's monopoly over the operating system. a point Bill Gates
>openly
>conceded to the Financial Times this June:
>
>"Our business model works even if all Internet software is free," says
>Mr.
>Gates, "We are still selling operating systems. What does Netscape's
>business model look like (if that happens)? Not very good."
>
>The point was made even more bluntly by a Microsoft representative who
>brazenly announced to hundreds of people in attendance at a program
>sponsored by Motorola:
>
>"Our intent is to flood the market with free Internet software and
>squeeze
>Netscape until they run out of cash."
>
>The entire industry will suffer if Microsoft is permitted to succeed.
>First.
>if the market remains open, it is far more likely that innovative
>developments will come from small competitors like NetObjects than from
>Microsoft. And to the extent that Microsoft does try to innovate, it
>will do
>so only under the spur of competition.
>
>Second, the: Internet revolution has the potential for providing
>competition
>to Microsoft's desktop operating system monopoly. That is the reason,
>Netscape believes, why Microsoft has resorted to such desperate
>measures in
>trying to eliminate its Internet software competitors. The point was
>explicitly made in a speech by Bill Gates that was posted on the
>Microsoft
>Web page. While his speech is focused on Netscape, it would more
>accurately
>be directed at the entire Internet software revolution:
>
>Netscape's strategy is to make Windows ... all but irrelevant by
>building
>the browser into a full-featured operating system with information
>browsing.
>Over time Netscape will add memory management, file systems, security,
>scheduling, graphics and everything else in Windows that applications
>require. The company hopes that its browser will become a de facto
>platform
>for software development, ultimately replacing Windows as the
>mainstream set
>of software standards.
>
>Steve Ballmer made the point even more emphatically in an interview,
>also
>posted on the Internet.
>
>"I want the thing that replaces Windows to be Windows. I don't want to
>wake
>up in a position one day where the guys at Netscape say, 'Isn't Windows
>just
>that little thing that we use to put up menus and draw lines.' "
>
>The promise to the Consent Decree
>
>As you know, Paragraph IV(E)(1) prohibits Microsoft from licensing
>Windows
>95 under terms that are "expressly or impliedly conditioned upon the
>licensing of any ... other product." Similarly, the following paragraph
>of
>the Decree, Paragraph IV(E)(2) states that the licensing of Windows 95
>cannot be expressly or impliedly conditioned upon the OEM "not
>licensing,
>purchasing or distributing any non-Microsoft product." If Microsoft's
>conduct is not an outright violation of the Decree, it is, if anything,
>far
>more disturbing than that expressly precluded by the Decree. Microsoft
>is
>conditioning the license of Windows 95 on inhibiting consumer access to
>products that, in Microsoft's view. could successfully develop "into a
>full-featured operating system."
>
>In its argument in support of the entry of the Decree, the Antitrust
>Division expressly promised that it would ensure that Microsoft would
>not be
>permitted to engage in such conduct. In its Memorandum in Support of
>the
>Motion to Enter Final Judgment, signed by the Assistant Attorney
>General
>herself, the Department of Justice made an important promise, upon
>which the
>industry has relied:
>
>It is important to note . . . that an alternative to Microsoft's
>operating
>system might arise at some point, an operating system that either
>displaces
>Microsoft's or attracts sufficient users to gain the benefits of
>increasing
>returns to the point where the market is divided between the world of
>Microsoft and the world of this new operating system. The proposed
>Consent
>Decree insures that this new operating system, when developed, will
>have
>access to the market.
>
>It is time for the Department of Justice to act on that promise. If
>action
>is not taken immediately, Microsoft will be able to maintain
>unilaterally
>its monopoly of desktop operating systems, to increase the installed
>base of
>its Internet software, and to inhibit the continued growth of
>competition
>through conduct of the very type addressed by the Decree, Action at
>some
>future date will simply not be effective. Action at a future date might
>stop
>Microsoft from engaging in future conduct, but only after the harm
>which the
>Decree is intended to prohibit has already occurred.
>
>The various written proposals and agreements made by Microsoft that are
>set
>forth in this letter have come to our attention orally. The offers are
>universally made under nondisclosure agreements, thereby prohibiting
>the
>offeree from providing us a copy of the offer/agreement, or even
>providing
>us with a complete set of terms. Simply put, Microsoft does not want
>the
>proposals to see the light of day. However, the Department of Justice
>could
>easily and rapidly gather detailed information. By issuing Civil
>Investigative Demands to local and long distance telephone companies
>and
>other ISPs, value added resellers, OEMS, and large corporate users, the
>Antitrust Division would be in a position to ascertain and act upon
>Microsoft's illegal offers.
>
>Time is of the essence. We know that the Antitrust Division has open
>file
>with respect to Microsoft. However, insofar as we know, the Division
>currently has no outstanding Civil Investigative Demands of any type.
>It has
>been almost a year since the Antitrust Division even sought documents
>from
>Microsoft. All of this leads us to wonder whether the Antitrust
>Division is
>truly in a position to investigate and restrain the illegal behavior on
>a
>timely basis.
>
>Perhaps the public interest would be better served given its possible
>staffing constraints, if the Department returned the matter to the
>Federal
>Trade Commission. The FTC has recently expressed interest in the
>subject
>matter and has allocated staff that has developed a very detailed
>report on
>antitrust concerns arising from networked industries. That report
>recognizes
>the need for "heightened scrutiny" in network markets such as the
>software
>industry. The FTC's conclusions are particularly germane in view of the
>threat that Microsoft's illegal behavior poses to the nascent Internet
>software industry, which its conduct places directly at risk.
>
>In any event, we are requesting immediate action. If you need any help
>in
>identifying potential CID recipients. we will be happy to work with
>your
>personnel. Please respond to me at your earliest opportunity.
>
>Sincerely,
>Gary L. Reback
>
>