United States: Brief Of Association For Competitive Technology

As Amicus Curiae In Support Of Defendant Microsoft Corporation’s Proposed Conclusions Of Law

Association for Competitive Technology ("ACT") is a nonprofit association representing over 9,000 companies in the information technology ("IT") industry. Its membership includes direct corporate and individual members, plus indirect corporate members through other industry associations that have joined ACT. (See Exhibit 1 for listing.) Representative of the IT industry, ACT's membership is made up mostly of small and medium sized businesses but includes household names such as CompUSA, Excite at Home, Intel, Microsoft and Symantec. ACT members come from all walks of the IT industry including software for Windows and other operating systems, hardware, reseller, consulting and on-line, unified by the cause of protecting competition and innovation in the IT industry. ACT's interest in this case stems from its knowledge that Microsoft, by providing the reliable, stable, widely used, and continually improving Windows operating system, has enabled thousands of competing companies to build today's $500 billion market for products and services for the Windows platform and has improved the products offered to consumers using other platforms as well.

ACT members know from experience (and the Court’s Findings show) that the widespread use of Windows and Microsoft’s continuing improvements to it, including the addition and improvement of browser functionality, have enormously benefited independent firms selling hardware, software, and Internet services, as well as consumers who use all of these products.

Computer manufacturers. Hundreds of companies now compete in making and selling PCs and related hardware, and this competition has improved quality and driven down prices spectacularly. These companies compete better because they do not each have to incur the expense of building and updating a proprietary operating system. Instead, they can rely on Windows to ensure that customers can use their hardware products efficiently.

Software developers. Thousands of companies now compete in making and selling software of every description, giving the consumer an exponentially increasing range of software at steadily decreasing prices. They can make the large up-front investments needed to create new and better software products because programs written to the ubiquitous Windows platform automatically compete for the widest possible number of consumers. Without the Windows platform and Microsoft’s investments in expanding Windows’ capabilities and in providing technical support and assistance to developers, far fewer software companies would have started up, and fewer and less sophisticated applications would have been created.

Consumers. Consumers, though, have benefited the most from these developments. Microsoft has made personal computers steadily easier for consumers to use, even as it rapidly increased what computers can do. In particular, millions of consumers have been introduced to the Internet because Microsoft added rapidly improving browser functionality (which also has non-browsing benefits) to Windows at no extra cost, in the process driving down the price of rival browser products as well. By so doing, Microsoft helped transform the PC from essentially a stand-alone piece of hardware, doing its own computing with limited capacity to communicate with others, into a part of a worldwide network of applications and information available at the consumer’s fingertips. In the process, Microsoft greatly stimulated sales of computers and of its own (and other companies’) software.

As active participants in the world of computing, ACT’s members know that any suggestion that Microsoft is, or will ever be, in a position where it can sit back, restrict output, and collect the "rent" from an operating system that fears no competition is utterly farfetched. Microsoft has not eliminated competition from Netscape’s Navigator and other rival products but has instead spurred improvements in their quality and reductions in their prices, and Microsoft must continually improve its own products and distribute them more efficiently to remain competitive. The world of computing changes incredibly fast. No one knows today where the growth of the IBM-sponsored Linux operating system, or of "hand-held" devices and Internet appliances that operate without Windows, or of powerful Internet access providers like AOL that can both dictate and provide the user-software that best fits their systems, will take the world of computing in the next five years. For Microsoft to relax development and seek primarily to "protect" today’s Windows would be incredibly short-sighted, and ACT knows of no sign that Microsoft is following such a strategy.

Finally, ACT’s members—knowing well what it takes to build computer hardware and software products and relate them usefully to other products in this complex, rapidly changing and interconnected industry—firmly believe it would be a tragic mistake for a court or government agency to dictate who should make or market which products, or what functionalities each product should have. Courts and agencies are ill-equipped to make product or marketing judgments. Entrepreneurs do not make perfect product and marketing judgments either—many development efforts fail—but the market sorts them out in a way that it cannot do if the decisions are dictated by a court or agency. And the consequences of a mistaken product decision by a court could be enormous. There can be no better illustration of that point than this case: If a few years ago a court had ordered Microsoft not to incorporate browser functionality into Windows, the whole world would today be a poorer place.

For purposes of this brief, ACT assumes the Court’s Findings of Fact to be correct, including the findings that (1) operating systems and browsers are distinct markets, (2) Microsoft holds a lawfully acquired monopoly in the market for Intel-compatible operating systems for personal computers ("PCs"), and (3) this monopoly is protected by an "applications barrier to entry." (see endnote 1) ACT will show that the Findings do not support a conclusion that Microsoft’s conduct violated the antitrust laws.

The antitrust laws assume that all firms, including lawful monopolists, will behave selfishly: the theory is that encouraging them to use industry, skill, and any inherent advantages to defeat their rivals will promote consumer welfare and economic progress. The antitrust laws therefore encourage a firm like Microsoft, with a lawful monopoly, to work hard to maintain that monopoly by improving the product, reducing its price, and offering economic incentives to distributors to distribute the product more efficiently. The antitrust laws also encourage a firm like Microsoft, with a lawful monopoly in one field, to enter into and compete aggressively in related fields, especially where the objective is to prevent a rival from gaining a durable monopoly in another field. Nothing in the antitrust laws bars a firm like Microsoft from seeking to gain market share in either its "monopoly" field or a related field at the expense of a rival—or from subjectively wanting to drive a rival out of business. And nothing in the antitrust laws bars Microsoft from designing or distributing or pricing its products so as to make it harder for rivals to compete against it.

What antitrust law bars is not aggressive, all-out competition, even when it eliminates competitors, but conduct that eliminates competition itself. On the facts as found by the Court, Microsoft did not engage in such conduct. On the contrary, Microsoft competed and continues to compete fiercely but fairly, and Microsoft did not succeed in either reinforcing its existing operating systems monopoly or foreclosing competing browsers. After setting forth the applicable law, this brief makes three principal points:

1. Microsoft did not, in fact, foreclose Netscape from the browser field or achieve any "dangerous probability" of doing so. Netscape’s Navigator has at all times been easily obtainable and widely used. As an asset of by far the largest Internet access provider, AOL, Navigator remains a threat to dominate the browser market. Microsoft must continue to compete aggressively with Navigator on quality, terms, innovative features, and distribution.
2. The most significant reason why Microsoft achieved its present substantial share of the browser market is that AOL selected Microsoft’s Internet Explorer in preference to Netscape’s Navigator. AOL, which represents a third of Internet Explorer’s usage base, made that choice because it believed Internet Explorer better met its needs—and reaffirmed its choice even after deciding to acquire Netscape. AOL is not bound by that choice after January 1, 2001, and only by continuing to improve Internet Explorer will Microsoft be able to retain its browser share.
3. The steps that Microsoft took, starting from far behind Netscape, to enable Internet Explorer to obtain its present market share were procompetitive, not anticompetitive: Microsoft improved quality, offered Internet Explorer at no additional charge, entered into efficient distribution arrangements, provided valuable technical support to independent software developers, and integrated Internet Explorer functionality more fully into Windows. Each of these steps was exactly the kind of vigorous competitive challenge the antitrust laws encourage, especially from new entrants to a market dominated by another firm. Each benefited consumers directly by providing easier access to a superior product at a lower price, and indirectly by inducing consumer-beneficial responses from rivals forced to compete more vigorously on quality and price. The steps were not predatory, for they greatly benefited Microsoft (and other hardware and software firms) through the increased sales that resulted from the explosive growth in the use of the Internet that browsers spurred.

The concern of the antitrust laws is not that a lawful monopolist will compete aggressively but that it will fail to do so. "A monopolist, no less than any other competitor, is permitted and indeed encouraged to compete aggressively on the merits. . . ." Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 544 (9th Cir. 1983) (emphasis added). As Judge Posner explained, "The main economic objection to monopoly is that the monopolist restricts output compared to what it would be under competition. The monopolist cannot be faulted for wanting to sell more output unless he is engaged in some predatory or exclusionary scheme the long-run effect of which may be to restrict output. . . ." Olympia Equip. Leasing Co. v. Western Union Tel. Co., 797 F.2d 370, 378 (7th Cir. 1986).(see endnote 2)

The antitrust laws are not concerned with the welfare of the monopoly firm’s rivals; the antitrust laws "were enacted for ‘the protection of competition, not competitors.’" (see endnote 3) As the Supreme Court explained in Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993):

The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.

Accordingly, the courts "have been careful to avoid constructions of § 2 [of the Sherman Act] which might chill competition, rather than foster it." Id. at 448.

There is thus nothing wrong with a firm that enjoys a lawful monopoly seeking to maintain or increase its market share. "A desire to increase market share or even to drive a competitor out of business through vigorous competition on the merits is not sufficient [to violate Section 2.]" Abcor Corp. v. AM Int’l, Inc., 916 F.2d 924, 927 (4th Cir. 1990) (citing U.S. Steel Corp. v. Fortner Enter., 429 U.S. 610, 612 n.1 (1977)). (see endnote 4) A monopolist is not expected to pull its punches: on the contrary, the concern is that its monopoly position will enable it to stop punching hard. Olympia Equip., 797 F.2d at 375-78 ("Today it is clear that a firm with lawful monopoly power has no general duty to help its competitors . . . . [I]n the long run [consumers] will be hurt more if juries are allowed to burden a monopolist with a positive duty of assisting competitors.") (citations omitted).

There is also nothing wrong with a firm that enjoys a lawful monopoly in one field competing vigorously in another field, even if by competing successfully in the second field the firm will reinforce its lawful monopoly in the first field. It is, for example, good, not bad, for the maker of a patented "widget machine" to offer the best possible (unpatented) optional accessories for the purpose of increasing purchases of the machine, so long as it does not unlawfully foreclose competing brands of accessories. See Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1360 (Fed. Cir. 1999) ("It is an enlargement of antitrust theory and policy to prohibit downstream integration by a ‘monopolist’ into new markets."). (see endnote 5)

In sum, a dominant firm, competing hard to maintain its dominance, is doing exactly what the law wants it to do:

If a dominant supplier acts consistent with a competitive market—out of fear perhaps that potential competitors are ready and able to step in—the purpose of the antitrust laws is amply served. We make it clear today, if it was not before, that an efficient, vigorous, aggressive competitor is not the villain antitrust laws are aimed at eliminating.

United States v. Syufy Enters., 903 F.2d 659, 668-69 (9th Cir. 1990) (emphasis added). Accordingly—in part because of the danger of punishing the kind of aggressive competitive behavior that the antitrust laws encourage—the courts require plaintiffs alleging monopolization or attempted monopolization to prove two things:

First, the plaintiff must prove that the conduct it is challenging was "objectively anticompetitive." Olympia Equip., 797 F.2d at 379 (citing Ball Mem’l Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1338-39 (7th Cir. 1986)). "‘Anticompetitive’ also has a special meaning: it refers not to actions that merely injure individual competitors, but rather to actions that harm the competitive process . . . a process that aims to bring consumers the benefits of lower prices, better products, and more efficient production methods." Interface Group, Inc. v. Massachusetts Port. Auth., 816 F.2d 9, 10 (1st Cir. 1987) (Breyer, J.) (citation omitted).

Second, even if a firm engages in "objectively anticompetitive" behavior, Section 2 "makes the conduct of a single firm unlawful only when . . . [through this behavior, the firm] actually monopolizes or dangerously threatens to do so." Spectrum Sports, 506 U.S. at 459 (citing Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 767 (1984)). The plaintiff must prove that the defendant has either monopoly power or a dangerous probability of achieving it and "that the [anticompetitive] behavior has contributed significantly to the achievement or maintenance of the monopoly." III Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 650c, at 69 (1996) (emphasis added).

In Part II, ACT takes up these requirements in reverse order and shows that, on the Court’s Findings, plaintiffs have proved neither (1) that Microsoft has succeeded in foreclosing browser competition or reinforcing its operating system monopoly nor (2) that Microsoft has engaged in "objectively anticompetitive" conduct.

The essence of plaintiffs’ case is that Microsoft sought to reinforce its lawful operating system monopoly and to gain a browser monopoly through the methods it used to develop and market Internet Explorer. If these were Microsoft’s objectives, Microsoft utterly failed to achieve them: Netscape’s Navigator has not been foreclosed from the browser market (nor has there ever been a "dangerous probability" that it would be), and Microsoft’s operating system monopoly remains fully exposed to the risk that Netscape and other rival technologies will come to provide alternative platforms for applications. Furthermore, Microsoft did not achieve its share of the browser market by dealing unlawfully with either Internet access providers ("IAPs") or original equipment manufacturers ("OEMs"). On the contrary, the decisive reason for the success of Microsoft’s Internet Explorer functionality is that AOL—Microsoft’s competitor in Internet access and the owner of Netscape—found Internet Explorer’s technology superior to Navigator’s, as did other Internet access firms. Finally, the Microsoft conduct that is challenged in this case is not anticompetitive but is the kind of vigorous competitive conduct the antitrust laws encourage.

In late 1995 and early 1996, Netscape was "well on its way to becoming the standard software for browsing the web"; it had captured more than 80 percent of the installed base of software used for browsing the web and had become "nearly synonymous with the Web in the public’s consciousness." (Findings 143, 360, 377) Microsoft challenged Netscape’s dominance by making Internet Explorer a better browser, offering it as part of Windows at no additional charge, and aggressively distributing it. Microsoft thereby benefited consumers not only directly but also indirectly by forcing its rival, Netscape, to make Navigator a better and cheaper product than it would otherwise have been:

The debut of Internet Explorer and its rapid improvement gave Netscape an incentive to improve Navigator’s quality at a competitive rate. The inclusion of Internet Explorer with Windows at no separate charge increased general familiarity with the Internet and reduced the cost to the public of gaining access to it, at least in part because it compelled Netscape to stop charging for Navigator. These actions thus contributed to improving the quality of Web browsing software, lowering its cost, and increasing its availability, thereby benefiting consumers. (Id. 408)

Internet Explorer thus achieved a substantial share of the browser market. But if Microsoft’s objective was to foreclose distribution of Navigator, it failed spectacularly. On the Court’s Findings, competition between the two browsers remains vigorous. As of July 1998, Navigator’s share of browser usage was still in the "mid 50% range," while in late 1998 Internet Explorer’s domestic share of this "market" was 45-50%. (Findings 360) (citing AOL estimates). Indeed, although Navigator’s market share declined, Navigator’s installed base more than doubled over the relevant period: from 15 million users in 1996 to 33 million users in December 1998 in the United States alone. (Id. 378) (citing AOL estimates). The Court further found that, far from being foreclosed from the browser market, "[b]y all indications, Navigator’s installed base will continue to grow." (Id.) (emphasis added). (see endnote 6)

Moreover, Internet Explorer’s share of the browser market is very vulnerable to the decisions of AOL—the owner of Netscape. (see endnote 7) A consumer’s choice of a browser is heavily influenced by her IAP, and AOL is by far the largest IAP with 20 million subscribers (compared to 2.5 million, for example, for Microsoft’s MSN). (see endnote 8) As the Court found, "If AOL were to halt its distribution and promotion of Internet Explorer, the effect on Internet Explorer’s usage share would be significant, for AOL’s subscribers currently account for over one third of Internet Explorer’s installed base." (Findings 303) And AOL will soon be able to halt its distribution and promotion of Internet Explorer and provide only Navigator, the browser it owns: the current contract requiring AOL to distribute Internet Explorer (as its preferred browser option) expires in January 2001. (Id. 380)

In sum, in the browser market Microsoft plainly has not achieved—or "dangerously threatened" to achieve—the position antitrust law fears, where it can relax, stop innovating, cut production, and raise prices. Netscape has not been foreclosed from the browser market. The market remains fluid and competitive, and Microsoft can continue to succeed in it only by continuously improving Internet Explorer and finding new ways to make it available to consumers easily and conveniently. If Microsoft ceased competing vigorously, while Netscape continued to do so, Netscape could win back market share and once again be poised to become the "standard."

This means, in turn, that Microsoft has not reinforced the "applications barrier to entry" in the operating systems market through its competition in the browser market, at least not in any way the antitrust laws condemn. Any such reinforcing effect exists because Microsoft, through its lawful competitive efforts (discussed below), is doing a better job than Netscape at giving consumers a superior and more easily accessible browser. Even that effect, however, is transient, not durable: it will dissipate as soon as Microsoft eases up or Netscape (or another firm) comes up with a more attractive product. Since the Court’s Findings demonstrate that Microsoft does not dominate the browser market and could not do so except by continuously providing a superior browser product, this should be the end of the Government’s operating system market monopolization claim, which rests entirely on the alleged reinforcement of the "applications barrier."

Microsoft gained a competitive position in the browser market by competing aggressively on quality and price. This is proved by perhaps the most dramatic fact in this case: AOL, which was (and still is) in a position to deliver a substantial share of browser customers, decided to offer Internet Explorer functionality to its customers because Internet Explorer met its needs better than Navigator, and AOL chose to continue the arrangement unchanged even after it had contracted to acquire Netscape.

Plaintiffs charge that Microsoft went beyond competing on the merits and attempted to foreclose distribution of Navigator through the two most efficient channels: the IAP channel and the OEM channel. The Findings disprove plaintiffs’ charges:

• Microsoft won over AOL and other IAPs by offering a browser with superior qualities and by outbidding Netscape on economic terms. While it agreed to include AOL in the Windows "on-line services" folder, this promise was a purely economic inducement (giving AOL a valuable "space") that Netscape could have matched or bettered.
• Microsoft’s incorporation of Internet Explorer into Windows did assure that Internet Explorer would be distributed in equipment using the Windows operating system, but this step did not prevent Navigator from being distributed in this way as well. Nothing barred OEMs from pre-installing Navigator on such computers, or prevented Netscape or anyone else from offering them inducements to do so:

Microsoft’s license agreements have never prohibited OEMs from pre-installing programs, including Navigator, on their PCs and placing icons and entries for those programs on the Windows desktop and in the "Start" menu. The icons and entries that Microsoft itself places on the desktop and in the "Start" menu have always left room for OEMs to insert more icons and program entries of their own choosing. (Findings 217)

Indeed, two of the largest OEMs, IBM and Compaq, currently preinstall Navigator. (Id. 238, 240)

• Customers could also obtain Navigator in other ways, such as free downloading, and many did. It does not violate the antitrust laws for a supplier to enter into arrangements with distributors that prevent those distributors from marketing competing products so long as other distribution channels remain open, even if the other channels are less efficient. Omega Envtl., Inc. v. Gilbarco, Inc, 127 F.3d 1157, 1163 (9th Cir. 1997), cert. denied, 525 U.S. 812 (1998). (see endnote 9)

More than any other single event, Microsoft’s "coup" in defeating Netscape to become the browser for AOL’s flagship online service gave Internet Explorer a significant share of the market (Findings 272) and "contributed to extinguishing the threat that Navigator posed to the applications barrier to entry." (Id. 304) "Starting the day Microsoft announced the March 1996 agreement with AOL, and lasting at least until AOL announced its acquisition of Netscape in November 1998, developers had reason to look into the foreseeable future and see that non-Microsoft software would not attain stature as the standard platform for network-centric applications." (Id.)

Microsoft won the competition to become AOL’s preferred browser fair and square. As the Findings reflect, it was "AOL’s intention to select one firm’s Web browsing software and then to work closely with that firm to incorporate its browsing technology seamlessly into the AOL flagship client software." (Findings 293) Microsoft recognized immediately that this was "a potential breakthrough opportunity—a way for Microsoft quickly to obtain credibility in Web browsing technology as well as usage share" at a time when it had just entered the market and was struggling to catch up with Netscape. (Id. 274) AOL likewise recognized the value of the opportunity it was offering and sought, as any powerful buyer would, to secure as many concessions as possible. (See id. 293-304)

AOL initially had a strong predisposition to contract with Netscape rather than Microsoft, not only because Netscape had "better brand recognition and demonstrated success in the marketplace" (Findings 282), but also because Microsoft’s own on-line service, MSN, was a direct competitor to AOL. (Id. 139) Microsoft overcame these disadvantages by offering AOL a superior technology that better met AOL’s needs, by promising significant engineering and technical assistance and a precise timetable for product improvements, and by agreeing to place the AOL icon in the OLS folder on the Windows desktop despite the potential impact on MSN. (see endnote 10) (Id. 284) One "highly attractive feature" of Internet Explorer from AOL’s perspective was its componentized nature, which gave AOL "total control over the ‘browser frame’" and allowed it to customize the browser for use with AOL’s proprietary software. (Id. 281) Netscape was not able to match this feature because it had not yet developed a componentized version of Navigator. (see endnote 11) (Id. 282) It would be hard to conceive of a better example of winning a critically important contract through competition on the merits.

Microsoft’s success in being selected as the "preferred" browser of other Internet access providers was similarly due to its innovation and business acumen. For example, Microsoft’s Internet Explorer Access Kit, which Microsoft gave IAPs at no charge, made it very convenient for any IAP to create a distinctive identity for its services. It also enabled the IAP to preset the default home page so that customers would be taken to the IAP’s web site home page whenever they logged onto the Internet, which gave the IAPs advertising and promotional opportunities. (See Findings 248-252) Netscape, by contrast, refused to allow IAP licensees to change the home page from Netscape’s NetCenter and waited "a full nine months after the release of" Microsoft’s kit to introduce a similar tool kit, for which even then it sought to charge a $1,995 per copy license fee. (Id. 249-50)

AOL reaffirmed its commitment to Internet Explorer in December 1998, after it had agreed to acquire Netscape. At that time, AOL had the right to continue to use Internet Explorer as a browser but terminate its preferential commitment to Internet Explorer and offer its customers its own Netscape product on an equal or superior basis. AOL chose not to do that, even though it would have "dramatically" shifted browser market share in Netscape’s favor. (Findings 301) Instead, AOL renewed until January 2001 its preferential commitment to Internet Explorer. (Id.)

In sum, Microsoft achieved a significant position in the browser market, and defeated Netscape’s threat to provide an industry-wide alternative platform for applications that could break down the "applications barrier to entry" into the operating systems market, not through anticompetitive conduct, but by offering a browser product that Netscape’s own parent, AOL, judged superior.

Plaintiffs argue that Microsoft illegally foreclosed the distribution of Navigator through original equipment manufacturers (i.e., distribution as part of the software pre-installed in a personal computer) by bundling Internet Explorer into Windows and declining to offer Windows with this functionality omitted or suppressed. There are three answers to this: (a) Microsoft had the legal right to improve its Windows product by integrating browser functionality into it; adding that functionality to Windows provided important consumer benefits so that the integration was not a mere "bolting together" of two products, and cannot have been unlawful. (b) Having improved Windows through the integration of Internet Explorer, Microsoft was under no obligation to offer a distinct version of Windows without the Internet Explorer functionality, or with that functionality suppressed, even if a class of customers would have preferred a non-browsing version. (c) In any event, bundling did not foreclose the distribution of Navigator preinstalled as original equipment.

The antitrust laws not only permit but encourage a firm to improve its products so as to defeat its rivals. (see endnote 12) This remains true even for a product that enjoys a monopoly: as noted above, pp. 6-9, the danger the antitrust laws fear is that the firm will rest on its monopoly and not improve the product. Here, Microsoft improved Windows by adding new functionality, a step that is presumptively desirable and lawful.

Plaintiffs contend that Windows is simply a bolting together of two products—an operating system and a browser—that forces manufacturers to install them both, and that this is a per se illegal "tie" under Section 1 of the Sherman Act. But the D.C. Circuit has already rejected that contention, both in principle and with respect to this specific product. United States v. Microsoft Corp., 147 F.3d 935, 948-951 (D.C. Cir. 1998). The court of appeals explained that courts should not be "in the unwelcome position of designing computers," id. at 950 (quoting IX Phillip E. Areeda, Antitrust Law 1700j, at 15 (1991)), that courts should not "embark on product design assessment," 147 F.3d at 949, and that a court’s inquiry "must be narrow and deferential." Id. at 950. Noting that the issue is not whether "an integrated product is superior to its stand-alone rivals," the court of appeals ruled, on the record before it, that Microsoft "ha[d] clearly met the burden of ascribing facially plausible benefits to its integrated design as compared to an operating system combined with a stand-alone browser such as Netscape’s Navigator." Id. at 950 (emphasis added).(see endnote 13) The court of appeals identified several such benefits, including:

• the fact that "[i]ncorporating browsing functionality into the operating system allows applications to avail themselves of that functionality without starting up a separate browser application," id. at 950-51;
• enhancing the functionality of a wide variety of applications through components of Internet Explorer 3.0 and 4.0, such as the HTML reader, that "provide system services not directly related to Web browsing," id. at 951; and
• upgrading "aspects of the operating system unrelated to Web browsing" through Internet Explorer 4.0 technologies, id.

This Court agreed with the court of appeals that "Windows 98 offers some benefits unrelated to browsing that a consumer cannot obtain by combining Internet Explorer with Windows 95." (Findings 192) That was a sufficient basis for the court of appeals to conclude that Windows with Internet Explorer should be considered a single integrated product, and it should also be sufficient for this Court.

The presence of "facially plausible benefits" from the integration of browser functionality into Windows also puts an end to plaintiffs’ claims of "per se tying" in violation of Section 1 of the Sherman Act. Where there are such benefits that must be taken into account in assessing the challenged conduct, there cannot, by definition, be a per se violation. See Broadcast Music, Inc. v. CBS, 441 U.S. 1, 19-20 (1979) (per se label limited to "naked restrain[t] of trade with no purpose except stifling of competition").

Plaintiffs cite Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984), and Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451 (1992), for the proposition that "the character of the demand" for two functions (e.g., whether they have historically been offered separately and are distinguishable in the eyes of buyers) determines whether they are separate products. (See Pls. Conclusions at 55-56) (quoting Jefferson Parish, 466 U.S. at 21-22). But plaintiffs cite no case in which the "separate demand" test has been applied to uphold a tying claim involving a physically integrated product, let alone a technological product of a kind where combination is often the essence of innovation. As the court of appeals recognized, "[b]y its very nature ‘integration’ represents a change from a state of affairs in which products were separate, to one in which they are no longer." United States v. Microsoft Corp., 147 F.3d at 953; see also X Phillip E. Areeda et al., Antitrust Law 1746, at 224 (1996) (noting that most important innovations involve the bundling of previously "unbundled items"). Innovation by bundling is particularly common in the software industry, where "products are reconfigured constantly [and] today’s aggregation of distinguishable products becomes tomorrow’s integrated product." (see endnote 14) That is why the court of appeals held that the test in a technological tying case is merely whether the combination produces "facially plausible benefits" not provided by the uncombined components, 147 F.3d at 950, and that the issue is "not whether the integration is a net plus, but merely whether there is a plausible claim that it brings some advantage." Id. at 950 & n.13. (see endnote 15)

The speculation that (contrary to the view of the court of appeals) Microsoft could have sold only the components and left the combining to others (OEMs or consumers) is legally irrelevant. As long as the act of combining produced "facially plausible benefits" that the separate products do not have, Microsoft plainly had the legal right itself to offer a combined product conferring these benefits. It was under no obligation to offer only the components and leave it to someone else to combine them to achieve the additional benefits. Any ruling that Microsoft was obliged to offer only components would place this Court not only in the position of designing computer software (contrary to the court of appeals’ admonition) but in the even less appropriate position of designing the marketplace, determining which firms shall be allowed to provide which products and services.

Plaintiffs contend (see endnote 16) that Microsoft was somehow under an obligation to offer a second version of Windows, with the Internet Explorer functionality absent or suppressed. They note that some customers, such as parents concerned about children’s access to the Internet, would prefer an operating system without browser functionality. (See Findings 151-52) They also note that the Court has found that "[n]o consumer benefit can be ascribed . . . to Microsoft’s refusal to offer a [separate] version of Windows 95 or Windows 98 without Internet Explorer." (Pls. Conclusions at 29-30) But the customers who did not want either Internet Explorer or Navigator are of no antitrust significance: failing to satisfy them did not hurt Netscape or benefit Microsoft.

The absence of a "consumer benefit" from failing to provide an unbundled version of Windows is also legally irrelevant. Microsoft had no legal duty to provide a second version of Windows without Internet Explorer, just because some customers may have wanted it. No firm, even a monopolist, is obligated to provide alternative versions of products to satisfy every customer. (see endnote 17) And no firm (again, even a monopolist) is obligated to make an unimproved version of an improved new product so as to give other firms the opportunity to sell the improvements. (see endnote 18)

Finally, it does not matter whether Microsoft’s reason for producing only a version of Windows with Internet Explorer was to protect the "applications barrier to entry." (See Findings 155) Intent is irrelevant: "Good intentions will not change two products into one, and likewise, a single product does not become separate and distinct products because of a malevolent intent." ILC Peripherals Leasing Corp. v. IBM, 448 F. Supp. 228, 234 (N.D. Cal. 1978).

The evil associated with tying arrangements is that they foreclose competitors from the market for the tied product. (see endnote 20) Here, the integration of Internet Explorer into Windows had no such effect—it did not foreclose distribution of Navigator by original equipment manufacturers. (see endnote 21) (Findings 376) Microsoft does not charge for Internet Explorer functionality, (see endnote 22) and nothing prevents an original equipment manufacturer from pre-installing Navigator on an Intel-based computer with a Windows operating system. (Findings 217) Navigator runs perfectly satisfactorily on a Windows platform. (Id. 141) IBM, for example, has throughout the period under review pre-installed Navigator on its PCs, and Compaq began doing likewise in January 1999. (Id. 238, 240)

Bundling, therefore, did not foreclose the OEM channel of distribution. As the Court found, "[i]ncluding Internet Explorer . . . did not . . . prevent OEMs from meeting demand for Navigator, which remained higher than demand for Internet Explorer well into 1998." (Findings 376) There is no reason why, if Netscape had produced a superior product, or had competed skillfully and aggressively for installation of Navigator as part of the "original equipment," it could not have achieved even more substantial distribution through the OEM channel, as well as through the other channels that were unaffected by the integration of Internet Explorer in Windows. (see endnote 22) And, as noted above, failure to satisfy customers who wanted no browser did not foreclose Navigator from anything.

It is clear under the Court’s findings that AOL’s choice of Internet Explorer and Microsoft’s integration of browser functionality for Windows were by themselves sufficient to defeat Netscape’s dominance. Plaintiffs nevertheless accuse Microsoft of achieving market share in four other, allegedly unlawful, ways: (1) by investing more in developing and marketing Internet Explorer than the plaintiffs believe would have been profitable but for its effect in maintaining the "applications barrier to entry"; (2) by entering into agreements with AOL and other IAPs that operated to exclude Navigator from the "IAP channel"; (3) by its refusal to predisclose technical information about Windows 95 to Netscape; and (4) by impeding the development of Sun Microsystems’ Java product as an independent platform for applications. None of Microsoft’s activities in these categories improperly affected its competitive position.

Plaintiffs argue that Microsoft’s investment in improving Internet Explorer, its decision to distribute the stand-alone version at no cost to consumers, and its various promotional investments to obtain broad distribution were "predatory"—notwithstanding the obvious benefits to consumers (see endnote 23) -because, plaintiffs say, those actions would be profitable only if they contributed to the "applications barrier to entry."  (Pls. Conclusions at 42-43)  This theory would call into question the business strategy of virtually every Internet start-up—all of whom incur substantial losses in order to build traffic. (see endnote 24)  And it would, if accepted, penalize the most procompetitive activity imaginable, investing to enter a new market.

It is the possibility of success in the marketplace, attributable to superior performance, that provides the incentives on which the proper functioning of our competitive economy rests. If a firm that has engaged in the risks and expenses of research and development were required in all circumstances to share with its rivals the benefits of these endeavors, this incentive would very likely be vitiated. (see endnote 44)

a) Microsoft’s Dealings with Other Middleware Platform Developers.