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Text File | 1994-08-11 | 29KB | 530 lines

FOR IMMEDIATE RELEASE                                          AT
SATURDAY, JULY 16, 1994                            [phone]
                                               TDD [phone]

     MICROSOFT AGREES TO END UNFAIR MONOPOLISTIC PRACTICES

     WASHINGTON, D.C. --  Microsoft, the world's largest and
dominant computer software company, agreed to end its illegal
monopolistic practices after the Department of Justice charged
that the company used unfair contracts that choked off
competition and preserved its monopoly position.
     The company agreed to settle the charges with a consent
decree that will prohibit Microsoft from engaging in these
monopolistic practices in the future.
     Microsoft, which makes the MS-DOS and Windows operating
systems used in more than 120 million personal computers, was
accused of building a barricade of exclusionary and unreasonably
restrictive licensing agreements to deny others an opportunity to
develop and market competing products.
     Attorney General Janet Reno said, "Microsoft's unfair
contracting practices have denied other U.S. companies a fair
chance to compete, deprived consumers of an effective choice
among competing PC operating systems, and slowed innovation.
Today's settlement levels the playing field and opens the door
for competition."
     "Microsoft is an American success story but there is no
excuse for any company to try to cement its success through
unlawful means, as Microsoft has done with its contracting
practices," said Anne K. Bingaman, Assistant Attorney General in
charge of the Antitrust Division.
     The settlement is the result of close coordination between
the Department of Justice and the competition enforcement
authorities of the European Commission, which has been
investigating Microsoft since mid-1993, and which also initiated
an undertaking containing essentially the same terms.  This
complaint and settlement marks the first coordinated effort of
the two enforcement bodies in initiating and settling an
antitrust enforcement action.
     Bingaman, praised the Commission, noting that, "This
unprecedented, historic cooperative action sends a powerful
message to firms around the world that the antitrust authorities
of the United States and the European Commission are prepared to
move decisively and promptly to pool resources to attack conduct
by multinational firms that violate the antitrust laws of the two
jurisdictions."
     The civil complaint and consent decree were filed last
night, July 15, in U.S. District Court in Washington, D.C.  The
consent decree, if approved by the court, would settle the suit.
Until approved, Microsoft has agreed in a stipulation filed with
the court to abide by the terms of the decree.
     The Department alleged that Microsoft used the following
unfair practices:
     Exclusionary Per Processor Licenses--Microsoft makes its
MS-DOS and Windows technology available on a "per processor"
basis, which requires PC manufacturers to pay a fee to Microsoft
for each computer shipped, whether or not the computer contains
Microsoft operating system software.  The complaint alleges that
this arrangement gives Microsoft an unfair advantage by causing a
manufacturer selling a non-Microsoft operating system to pay at
least two royalties--one to Microsoft and one to its competitor--
thereby making a non-Microsoft unit more expensive.
     "Microsoft has used its monopoly power, in effect, to levy a
"tax" on PC manufacturers who would otherwise like to offer an
alternative system," said Bingaman.  "As a result, the ability of
rival operating systems to compete has been impeded, innovation
has been slowed and consumer choices have been limited."  She
noted that Microsoft has maintained the price of its operating
systems while the price of other components has fallen
dramatically.  Since 1988, Microsoft's share of the market has
never dropped below 70 percent.
     Unreasonably Long Licenses--The Department further alleged
that Microsoft's contracts are unreasonably long.  By binding
manufacturers to the purchase of Microsoft products for an
excessive period of time, beyond the lifetime of most operating
system products, the agreements foreclose new entrants from
gaining a sufficient toe-hold in the market.
     Restrictive Non-Disclosure Agreements--The Department also
charged that Microsoft introduced overly restrictive non-
disclosure agreements to unreasonably restrict the ability of
independent software companies to work with developers of non-
Microsoft operating systems.  Microsoft sought the agreements
from companies participating in trial testing of the new version
of Windows, to be released later this year.  The terms of these
agreements preclude applications developers from working with
Microsoft's competitors for an unreasonable amount of time.
     The settlement ends these practices and will help to rectify
the effects of Microsoft's past unlawful conduct.  In particular,
the settlement prohibits Microsoft from:
     --Entering into per processor licenses.
     --Obligating licensees (manufacturers of personal computers)
to purchase any minimum number of Microsoft's operating systems;
     --Entering into any licenses with terms longer than one year
(although licensees may renew for another year on the same
terms).
     --Requiring licensees to pay Microsoft on a "lump sum"
basis.
     --Requiring licensees to purchase any other Microsoft
product as a condition for licensing a particular Microsoft
operating system.
     --Requiring developers of applications software to sign
unlawfully restrictive non-disclosure agreements.
     The settlement is effective immediately and will be in
effect for six and a half years.
     Bingaman said "this settlement resolves the competitive
problems created by Microsoft's unlawful conduct quickly and
effectively."
     Microsoft's main corporate office is in Redmond, Washington.

                               ###
94-387



               IN THE UNITED STATES DISTRICT COURT
                  FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,     )
                              )
               Plaintiff,     )
                              )
     v.                       )  Civil Action No. __________
                              )
                              )  Judge Charles R. Richey
MICROSOFT CORPORATION,        )
                              )
                 Defendant.   )
                              )

                            COMPLAINT
      (For Violations of Sections 1 & 2 of the Sherman Act)

     The United States of America, acting under the direction of
the Attorney General of the United States, brings this civil
action to prevent and restrain the defendant Microsoft
Corporation ("Microsoft") from using exclusionary and
anticompetitive contracts to market its personal computer
operating system software.  By these contracts, Microsoft has
unlawfully maintained its monopoly of personal computer ("PC")
operating systems and has unreasonably restrained trade.
     Virtually all major PC manufacturers find it necessary to
offer Microsoft operating systems on most of their PCs.
Microsoft's monopoly power allows it to induce these manu-
facturers to enter into anticompetitive, long-term licenses under
which they must pay royalties to Microsoft not only when they
sell PCs containing Microsoft's operating systems, but also when
they sell PCs containing non-Microsoft operating systems.
     These anticompetitive contracts help Microsoft maintain its
dominance in the PC operating system market.  By inhibiting
competing operating systems' access to PC manufacturers,
Microsoft's exclusionary contracts slow innovation and deprive
consumers of an effective choice among competing PC operating
systems.
     These contracts outlined below constitute illegal monopo-
lization and unlawful restraints of trade, and the United States
seeks this Court's order declaring Microsoft's anticompetitive
contracts illegal and otherwise remedying the unlawful effects of
Microsoft's anticompetitive conduct.

                Jurisdiction, Venue and Commerce
     1.   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.
     2.   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.
     3.   Microsoft sells and licenses operating systems for PCs
throughout the United States and the world.  Microsoft delivers
copies of its operating systems to PC manufacturers and retail
customers across state lines and international borders.  Thus,
Microsoft is engaged in, and its activities substantially affect,
interstate and foreign commerce.  The major developers of other
PC operating systems are exclusively U.S. companies.

            The Defendant Microsoft and Its Products
     4.   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.
     5.   Microsoft develops, licenses, sells and supports
several types of software products for PCs, including "operating
systems" and "applications."
     6.   PC operating systems control the operation of a
computer by managing the interaction between the computer's
microprocessor, memory and attached devices such as keyboards,
display screens, disk drives, and printers.  A PC operating
system functions as the "central nervous system" of the PC.  PC
operating system software is designed to work with specific
microprocessors, the integrated circuits that function as the
"brain" of the computer.
     7.   Most of the personal computers in the world today use
the x86 class of microprocessors, originally designed by Intel
Corporation.  The x86 class includes Intel 286, 386, 486, and
Pentium microprocessors, as well as microprocessors manufactured
by other companies that use a substantially similar architecture
and instruction set.  Unless otherwise specified, the term "PC"
refers to personal computers that use the x86 class of
microprocessors.
     8.   In 1980, Microsoft licensed from another company a PC
operating system which it modified and introduced in 1981 as the
Microsoft Disk Operating System ("MS-DOS").  According to
Microsoft's 1993 Annual Report, as of June 30, 1993,
approximately 120 million PCs in the world utilized MS-DOS.
     9.   In 1985, Microsoft introduced a more sophisticated PC
operating system product it calls "Windows."  Windows has a
"graphical user interface" which allows users to give
instructions by pointing and clicking on their computer screen
with a "mouse" or other similar device.  Windows also allows
users to run more than one application at a time.  All versions
of Windows released to date require the presence of an underlying
operating system, either MS-DOS or a close substitute.  Microsoft
estimates that over 50 million PCs now use Windows.
     10.  Applications are software programs that work "on top
of" PC operating systems to enable users to perform a broad range
of functions.  Applications communicate through the PC operating
system with the computer's hardware.  Commonly used applications
include word processors and spreadsheets, such as WordPerfect,
Lotus 1-2-3, and Quattro Pro among others.  At least 50,000
applications now run on MS-DOS and over 5,000 have been written
to run on Windows.  Microsoft sells a variety of its own very
successful and profitable applications.
     11.  Microsoft markets its PC operating systems primarily
through original equipment manufacturers ("OEMs"), which
manufacture PCs.  It also markets through independent, non-
exclusive distributors.  Microsoft has agreements with virtually
all of the major microcomputer OEMs.
     12.  Microsoft generally distributes MS-DOS only to OEMs.
To retail customers, Microsoft generally offers only upgrades for
MS-DOS.  In the first half of 1994, the share of Windows units
sold by Microsoft through the OEM channel was approximately 80%.

       The Relevant Market and Microsoft's Monopoly Power
     13.  The relevant product market is personal computer
operating systems for the x86 class of microprocessors
(hereinafter the "PC operating system market").  Because
operating systems written for other microprocessors will not work
on machines with an x86 class microprocessor, OEMs who sell x86
machines and customers who buy such machines cannot use other
operating systems.
     14.  The relevant geographic market is the world.
     15.  Microsoft has monopoly power in the relevant market and
has had monopoly power since at least the mid-1980s.  For almost
a decade Microsoft has retained an extremely high market share --
consistently in excess of 70%.
     16.  Substantial barriers to entry and expansion exist in
the relevant market.  One barrier to entry and expansion is the
considerable time and expense required to develop, test, and
market a new PC operating system.  Other interrelated barriers to
entry and expansion include:
          a.   the absence of a variety of high quality
applications that run on a new operating system, and the
difficulty of convincing independent software vendors ("ISVs") to
develop such applications;
          b.   the lack of a sizable installed base of users; and
          c.   the difficulty in convincing OEMs to offer and
promote a non-Microsoft PC operating system, particularly one
with a small installed base and relatively few applications
designed to run on it.
     17.  These barriers magnify and reinforce each other because
the value of an operating system to a consumer is directly
related to two factors:  the availability of a variety of high
quality applications that run on that system, and the number of
users who use that operating system and thus are able to share
information and work with the system without additional training.
ISVs, in turn, tend to develop applications for operating systems
with a large installed base of users, and consumers gravitate
towards operating systems with a large base of applications.
     18.  Microsoft's anticompetitive contracting practices
described below significantly increase the already high barriers
to entry and expansion facing competitors in the PC operating
system market.  These practices reduce the likelihood that OEMs
will license and promote non-Microsoft PC operating systems, make
it more difficult for Microsoft's competitors to persuade ISVs to
develop applications for their operating systems, and impede the
ability of a non-Microsoft PC operating system to expand its
installed base of users.

        Microsoft's Exclusionary and Anticompetitive OEM
         Licenses Foreclose Access to the OEM Channel by
           Microsoft's PC Operating System Competitors

     19.  In 1980, IBM agreed to license the original version of
MS-DOS from Microsoft for IBM's PC, which experienced
considerable success.  Other OEMs also used MS-DOS in order
better to emulate the IBM PC.  Microsoft quickly dominated and
gained a monopoly in the market for PC operating systems.  It
then entered into a series of exclusionary and anticompetitive
contract terms to maintain its monopoly.
     20.  Because of Microsoft's monopoly position in the
marketplace, OEMs believe that they must offer MS-DOS and Windows
to their customers.  Profit margins in the computer hardware
industry are very thin and OEMs want to obtain MS-DOS and Windows
at the lowest possible cost.  Microsoft has induced many OEMs to
execute anticompetitive "per processor" contracts for MS-DOS and
Windows, even though many would prefer to preserve their freedom
to offer PCs with non-Microsoft operating systems.

      Microsoft's Licenses Impose a Penalty or Tax Paid to
  Microsoft on OEMs' Use of Non-Microsoft PC Operating Systems

     21.  Microsoft's licenses impose a penalty or "tax" paid to
Microsoft upon OEMs' use of competing PC operating systems.  "Per
processor" licenses require OEMs to pay a royalty for each
computer the OEM sells containing a particular processor (e.g.,
an Intel 386 microprocessor) whether or not the OEM has included
a Microsoft operating system with that computer.
     22.  Microsoft's per processor contracts penalize OEMs,
during the life of the contract, for installing a non-Microsoft
operating system.  OEMs that have signed per processor contracts
with Microsoft are deterred from using competitive alternatives
to Microsoft operating systems.

       The Contract Length of Microsoft's Anticompetitive
   Per Processor Contracts Magnifies Its Exclusionary Effects

     23.  Microsoft further impedes PC operating system
competitors by executing long-term contracts with major OEMs, and
by requiring minimum commitments and crediting unused balances to
future contracts, which effectively extends the contract term and
makes it economically unattractive for an OEM to install a non-
Microsoft operating system.
     24.  Microsoft's exclusionary licenses are often for a
duration of three years or more -- a period of time equal to, or
exceeding, the product life cycle of most PC operating system
products.  Microsoft often extends the term of its OEM licenses
through amendment.  Thus, Microsoft's anticompetitive per
processor contracts can extend to beyond five years.

          Microsoft's Exclusionary Contracts Foreclose
      Other PC Operating System Vendors From a Substantial
         and Critically Important Segment of the Market

     25.  Access to the OEM channel is critical to the success of
a competing operating system.  The overwhelming majority of PCs
are sold with a pre-installed operating system.  Thus, to reach
the ultimate consumer of an operating system, it is important
that competitors have access to OEMs.  Operating system vendors,
as well as OEMs, confirm that successful entry is extremely
difficult in the absence of "proper support" in the OEM channel
in the form of public commitments to sell a new operating system.
     26.  Since 1988, Microsoft has induced major OEMs to execute
per processor contracts, many of which extend for several years.
These OEMs are critical to the success of a new operating system
entrant; it would be virtually impossible for a new entrant to
achieve commercial success solely through license agreements with
small OEMs that are not covered by Microsoft's per processor
agreements.  According to Microsoft, in fiscal year 1993, per
processor agreements accounted for an estimated 60% of
Microsoft's MS-DOS sales to OEMs and 43% of Windows sales to
OEMs.
     27.  Competing operating system developers, finding the
largest OEMs contractually bound by Microsoft's exclusionary
licenses, are disadvantaged in their efforts to bring to the
consumer less expensive and/or better quality operating system
products.
     28.  The effect of Microsoft's licensing practices has been
to exclude competitors by unreasonable and anticompetitive means
and to lessen competition in the relevant market.  Microsoft's
practices deter OEMs from entering into licensing agreements with
competing operating system providers, discourage OEMs who agree
to sell non-Microsoft operating systems from promoting those
products, and raise the price of computers sold with competing
operating systems, thereby depressing the demand and restricting
the output of these products.  Microsoft's licensing practices
have effectively foreclosed a substantial share of the relevant
market; they are exclusionary, anticompetitive, and not justified
by legitimate business considerations.

      Microsoft's Anticompetitive Non-Disclosure Agreements
     29.  ISVs develop applications, which motivate consumers to
purchase PCs.  Microsoft has sought to have several commercially
important ISVs and their employees agree to non-disclosure
agreements that would restrict their ability to work with
competing PC operating systems as well as restrict their ability
to develop competitive products.
     30.  Microsoft moved to impose these restrictions in
connection with its "beta tests" of its new operating system, the
next version of Windows, code-named Chicago.  Microsoft
anticipates commercially releasing Chicago in late 1994 or early
1995.  Beta tests of new versions of an operating system, which
are conducted prior to the commercial release of that new
version, help both Microsoft and the ISVs.
     31.  For the ISVs, the beta tests provide, among other
things, critical information about the interfaces in the
operating system that connect with applications--information
which the ISVs need to write applications that run on the
operating system.  Early access to the beta tests is especially
valuable to the ISVs if they are to be able to release their
applications within a short time after the commercial release of
a new Microsoft operating system, such as Chicago.
     32.  For Microsoft, the beta tests enable ISVs, informed
experts, and selected members of the media to provide important
feedback about the advantages and drawbacks of the operating
system.  In addition, the demand for Microsoft's operating
systems depends to a significant extent on the availability of
applications designed to work with it. Accordingly, it is in
Microsoft's interest to provide ISVs early access to beta tests.
     33.  At the same time, because Microsoft necessarily must
disclose certain confidential information during the course of
the beta tests, it has legitimate interests in maintaining that
confidentiality.  In the past, Microsoft has protected its
interests through non-disclosure agreements that prohibit those
participating in the beta tests from disclosing such confidential
information.
     34.  In connection with its beta tests of Chicago, however,
Microsoft sought to impose on certain leading software companies
far more restrictive non-disclosure agreements than it had
previously used.  The terms of these non-disclosure agreements
would preclude developers at these companies from working with
operating system companies, other competitors of Microsoft, and
competing technologies for an unreasonably long period of time.

       The Anticompetitive Effects of Microsoft's Conduct
     35.  Microsoft's exclusionary contracting practices have had
the effect of excluding competitors on a basis other than
competition on the merits and have thereby allowed Microsoft
illegally to perpetuate its monopoly in the PC operating system
market.
     36.  Through the unlawful acts and practices described above
Microsoft has harmed competition, consumers and innovation:
          a.   Microsoft has unlawfully maintained a monopoly in
the PC operating system market.
          b.   Microsoft's exclusionary conduct has significantly
impeded the ability of rival operating systems to compete in the
PC operating system market.  Competitors find it more difficult
to convince OEMs to offer and/or promote their product and must
incur greater marketing expenses to penetrate the market.
Microsoft raised hurdles to fair competition even higher through
unreasonably restrictive non-disclosure agreements.
          c.  Microsoft's exclusionary licenses deprive rival PC
operating systems of a significant number of sales that they
might otherwise secure.  These lost sales impede the ability of
PC operating systems to develop an installed base sufficient to
convince OEMs to bundle the new system with their hardware, to
convince ISVs to write applications that run on the new system,
and to convince users that the system is, and will remain, a
viable alternative to the existing MS-DOS and Windows standard.
          d.   Microsoft's conduct also substantially lengthens
the period of time required for competitors to recover their
development costs and earn a profit, and increases the risk that
an entry attempt will fail.  In combination, all of these factors
deter entry by competitors and thus harm competition.
     37.  The harm to competition caused by Microsoft's unlawful
conduct harms consumers.  OEMs that do offer customers a choice
of operating systems may charge customers a higher price for PCs
with non-Microsoft operating systems in order to be able to pay
the double royalty necessitated by the Microsoft per processor
agreements.  Thus, users who do not receive a Microsoft operating
system are still, indirectly, paying Microsoft.
     38.  In addition, Microsoft's unlawful conduct has deterred
the development of competing operating systems, depriving
consumers of a choice of systems with possibly superior features.
Similarly, the slower growth of competing operating systems has
slowed the development and diffusion of applications designed to
work on non-Microsoft operating systems and has limited choices
of consumers and users of PCs.
     39.  Those injured by Microsoft's conduct will continue to
suffer such injury unless the relief prayed for herein is
granted.

            First Claim for Relief -- Sherman Act 2
     40.  Plaintiff realleges and incorporates herein by
reference the allegations set forth in paragraphs 1 through 39
above.
     41.  By engaging in the acts and practices described above,
Microsoft has monopolized the market for PC operating systems in
the United States.
     42.  Such conduct constitutes monopolization in violation of
Section 2 of the Sherman Act, 15 U.S.C. 2.

           Second Claim for Relief -- Sherman Act 1
     43.  Plaintiff realleges and incorporates by reference the
allegations set forth in paragraphs 1 through 39 above.
     44.  The licensing agreements and unnecessarily restrictive
non-disclosure agreements described above constitute contracts
and combinations which unreasonably restrain trade in the market
for PC operating systems, which affect interstate trade and
commerce, in violation of Section 1 of the Sherman Act, 15 U.S.C.
1.
                        PRAYER FOR RELIEF
        WHEREFORE, PLAINTIFF PRAYS FOR RELIEF AS FOLLOWS:
     1.   That the Court adjudge and decree that Microsoft has
monopolized the interstate trade and commerce in the market for
PC operating systems in violation of Section 2 of the Sherman
Act.
     2.   That the Court adjudge and decree that Microsoft has
entered into unlawful contracts and combinations which
unreasonably restrain the trade in interstate commerce in PC
operating systems, in violation of Section 1 of the Sherman Act.
     3.   That Microsoft and all persons, firms and corporations
acting on its behalf and under its direction or control be
permanently enjoined from engaging in, carrying out, renewing or
attempting to engage, carry out or renew, any contracts,
agreements, practices, or understandings in violation of the
Sherman Act.
     4.   That plaintiff have such other relief that the Court
may consider necessary or appropriate to restore competitive
conditions in the markets affected by Microsoft's unlawful
conduct.
.     5.   That the plaintiff recover the costs of this action.

     Dated: July 15, 1994

     ________________________      ________________________
     ANNE K. BINGAMAN              SAMUEL R. MILLER
     Assistant Attorney General

     ________________________      ________________________
     ROBERT E. LITAN               DONALD J. RUSSELL

     ________________________      ________________________
     MARK C. SCHECHTER             JOYCE BARTOO

     ________________________      ________________________
     RICHARD L. ROSEN              ROBERT J. ZASTROW

                                   ________________________
                                   RICHARD L. IRVINE

                                   ________________________
                                   PETER A. GRAY

                                   ________________________
                                   JUSTIN M. DEMPSEY

                                   ________________________
                                   GILAD Y. OHANA