2566 1 IN THE IOWA DISTRICT COURT FOR POLK COUNTY ----------------------------------------------- 2 JOE COMES; RILEY PAINT, ) 3 INC., an Iowa Corporation;) SKEFFINGTON'S FORMAL ) 4 WEAR OF IOWA, INC., an ) NO. CL82311 Iowa Corporation; and ) 5 PATRICIA ANNE LARSEN; ) ) TRANSCRIPT OF 6 Plaintiffs, ) PROCEEDINGS ) VOLUME X 7 vs. ) ) 8 MICROSOFT CORPORATION, ) a Washington Corporation ,) 9 ) Defendant. ) 10 ----------------------------------------------- 11 The above-entitled matter came on for 12 trial before the Honorable Scott D. Rosenberg 13 and a jury commencing at 8:30 a.m., December 1, 14 2006, in Room 302 of the Polk County 15 Courthouse, Des Moines, Iowa. 16 17 18 19 20 HUNEY-VAUGHN COURT REPORTERS, LTD. 21 Suite 307, 604 Locust Street 22 Des Moines, Iowa 50309 23 (515)288-4910 24 25 2567 1 A P P E A R A N C E S 2 Plaintiffs by: ROXANNE BARTON CONLIN 3 Attorney at Law Roxanne Conlin & Associates, PC 4 Suite 600 319 Seventh Street 5 Des Moines, Iowa 50309 (515)283-1111 6 RICHARD M. HAGSTROM 7 Attorney at Law Zelle, Hofmann, Voelbel, 8 Mason & Gette, LLP 500 Washington Avenue South 9 Suite 4000 Minneapolis, Minnesota 55415 10 (612)339-2020 11 RORBERT J. GRALEWSKI, JR. Attorney at Law 12 Gergosian & Gralewski 550 West C Street 13 Suite 1600 San Diego, California 92101 14 (619)230-0104 15 Defendant by: DAVID B. TULCHIN 16 SHARON L. NELLES JOSEPH E. NEUHAUS 17 Attorneys at Law Sullivan & Cromwell, LLP 18 125 Broad Street New York, New York 10004-2498 19 (212)558-3749 20 ROBERT A. ROSENFELD Attorney at Law 21 Heller Ehrman, LLP 333 Bush Street 22 San Francisco, California 94104 (415)772-6000 23 24 25 2568 1 BRENT B. GREEN Attorney at Law 2 Duncan, Green, Brown & Langeness, PC 3 Suite 380 400 Locust Street 4 Des Moines, Iowa 50309 (515)288-6440 5 RICHARD J. WALLIS 6 Attorney at Law Microsoft Corporation 7 One Microsoft Way Redmond, California 98052 8 (425)882-8080 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2569 1 THE COURT: Good morning, Ladies and 2 Gentlemen of the jury. 3 We will proceed with the remainder of 4 the instructions. There's not that many left. 5 However, at the end of that, I am 6 going to take a short recess to allow the 7 parties to have a few moments to prepare before 8 opening statements, and also there's a few 9 matters of law I have to take up with them 10 prior to that, so I thought we'd just get this 11 done first, take a short break, and then have 12 them come back for opening, all right. 13 We're at page -- duplicate page 14 numbers, but you want the last 66, all right. 15 It would be paragraph 352. 16 The technology agreement further 17 provides that any other Internet browsers 18 bundled in the Mac OS system software sold by 19 Apple shall be placed in folders in the 20 software as released. 21 In other words, Apple may not position 22 icons for non-Microsoft browsing software on 23 the desktop of new Macintosh PC systems or Mac 24 OS upgrades. 25 Moreover, the agreement states that 2570 1 Apple will not be proactive or initiate actions 2 to encourage users to swap out Internet 3 Explorer for Macintosh. Both Apple and 4 Microsoft read this term to prohibit Apple from 5 promoting non-Microsoft browsing software. 6 The agreement even states that Apple 7 will encourage its employees to use Microsoft 8 Internet Explorer for Macintosh for all 9 Apple-sponsored events and will not promote 10 another browser to its employees. 11 Pursuant to this provision, Apple's 12 management has instructed the firm's employees 13 to not use Navigator in demonstrations at trade 14 shows and other public events. 15 Also, with regard to the promotion of 16 browser technology, the agreement requires 17 Apple to display the Internet Explorer logo on 18 all Apple-controlled web pages where any 19 browser logo is displayed. 20 Finally, the agreement grants 21 Microsoft the right of first refusal to supply 22 the default browsing software for any new 23 operating system product that Apple develops 24 during the term of the agreement. 25 355. Apple increased its distribution 2571 1 and promotion of Internet Explorer not because 2 of a conviction that the quality of Microsoft's 3 product was superior to Navigator's or that 4 consumer demand for it was greater, but rather 5 because of the in terrorem effect of the 6 prospect of the loss of Mac Office. 7 To be blunt, Microsoft threatened to 8 refuse to sell a profitable product to Apple, a 9 product in whose development Microsoft had 10 invested substantial resources and which was 11 virtually ready for shipment. 12 Not only would this ploy have wasted 13 sunk costs and sacrificed substantial profit, 14 it also would have damaged Microsoft's goodwill 15 among Apple's customers, whom Microsoft had led 16 to expect a new version of Mac Office. 17 The predominant reason Microsoft was 18 prepared to make this sacrifice, and the sole 19 reason that it required Apple to make Internet 20 Explorer its default browser and restricted 21 Apple's freedom to feature and promote 22 non-Microsoft browsing software was to protect 23 the applications barrier to entry. 24 More specifically, the requirements 25 and restrictions relating to browsing software 2572 1 were intended to raise Internet Explorer's 2 usage share to lower Navigator's share, and 3 more broadly, to demonstrate to important 4 observers, including consumer developers, 5 industry participants, and investors that 6 Navigator's success had crested. 7 Had Microsoft's only interest in 8 developing the Mac OS version of Internet 9 Explorer been to enable organizational 10 customers using multiple PC operating system 11 products to standardize on one user interface 12 for web browsing, Microsoft would not have 13 extracted from Apple the commitment to make 14 Internet Explorer the default browser or 15 imposed restrictions on its use and promotion 16 of Navigator. 17 356. Microsoft understands that PC 18 users tend to use the browsing software that 19 comes preinstalled on their machines, 20 particularly when conspicuous means of easy 21 access appear on the PC desktop. 22 By guaranteeing that Internet Explorer 23 is the default browsing software on the Mac OS, 24 by relegating Navigator to less favorable 25 placement, by requiring Navigator's exclusion 2573 1 from the default installation of the Mac OS 8.5 2 upgrade, and by otherwise limiting Apple's 3 promotion of Navigator, Microsoft has ensured 4 that most users of the Mac OS will use Internet 5 Explorer and not Navigator. 6 Although the number of Mac OS users is 7 very small compared to the Windows installed 8 base, the Mac OS is nevertheless the most 9 important consumer oriented operating system 10 product next to Windows. 11 Navigator needed high usage share 12 among Mac OS users if it was ever to enable the 13 development of a substantial body of 14 cross-platform software not dependent on 15 Windows. 16 By extracting from Apple terms that 17 significantly diminish the usage of Navigator 18 on the Mac OS, Microsoft severely sabotaged 19 Navigator's potential to weaken the 20 applications barrier to entry. 21 357. The cumulative effect of the 22 stratagems described above was to ensure that 23 the easiest and most intuitive paths that users 24 could take to the web would lead to Internet 25 Explorer, the gate controlled by Microsoft. 2574 1 Microsoft did not actually prevent 2 users from obtaining and using Navigator, 3 although it tried to do as much in June 1995, 4 but Microsoft did make it significantly less 5 convenient for them to do so. 6 Once Internet Explorer was seen as 7 providing roughly the same browsing experience 8 as Navigator, relatively few PC users showed 9 any inclination to expend the effort required 10 to obtain and install Navigator. 11 Netscape could still carpet-bomb the 12 population with CD-ROMS and make Navigator 13 available for downloading. In reality, 14 however, few new users (ones not merely 15 upgrading from an old version of Navigator to a 16 new one) had any incentive to install, much 17 less download and install, software to 18 replicate a function for which OEMs and IAPs 19 were already placing perfectly adequate 20 browsing software at their disposal. 21 The fact that Netscape was forced to 22 distribute tens of millions of copies of 23 Navigator through high-cost carpet-bombing in 24 order to obtain a relatively small number of 25 new users only discloses the extent of 2575 1 Microsoft's success in excluding Navigator from 2 the channels that lead most effectively to 3 browser usage. 4 360. According to estimates that 5 Microsoft executives cited to support their 6 testimony in this trial, and those on which 7 Microsoft relied in the course of its business 8 planning, the shares of all browser usage 9 enjoyed by Navigator and Internet Explorer 10 changed dramatically in favor of Internet 11 Explorer after Microsoft began its campaign to 12 protect the applications barrier to entry. 13 These estimates show that Navigator's 14 share fell from above 80 percent in January 15 1996 to 55 percent in 1997 and that Internet 16 Explorer's share rose from around 5 percent to 17 36 percent over the same period. 18 In April 1998, Microsoft relied on 19 measurements for internal planning purposes 20 that placed Internet Explorer's share of all 21 browser usage above 45 percent. These figures 22 are broadly consistent with the ones AOL relied 23 on in evaluating its acquisition of Netscape. 24 AOL determined that Navigator's share 25 had fallen from around 80 percent at the end of 2576 1 1996 to the mid-50 percent range in July 1998 2 and that Internet Explorer's share had climbed 3 to between 45 and 50 percent of the domestic 4 market by late 1998. 5 372. In summary, the estimates on 6 which Microsoft and AOL relied and the 7 measurements made by AdKnowledge and the 8 University of Illinois provide an adequate 9 basis for two findings. 10 First, from early 1996 to the late 11 summer of 1998, Navigator's share of all 12 browser usage fell from above 70 percent to 13 around 50 percent, while Internet Explorer's 14 share rose from about 5 percent to around 50 15 percent. 16 Second, by 1998, Navigator's share of 17 incremental browser usage had fallen below 40 18 percent while Internet Explorer's share had 19 risen above 60 percent. 20 All signs point to the fact that 21 Internet Explorer's share has continued to rise 22 and Navigator's has continued to decline since 23 the last -- late summer of 1998. 24 It is safe to conclude, then, that 25 Internet Explorer's share of all browser usage 2577 1 now exceeds 50 percent and that Navigator's 2 share has fallen below that mark. 3 376. Including Internet Explorer with 4 Windows at no additional charge likely helped 5 the usage share of Microsoft's browsing 6 software. It did not, however, prevent OEMs 7 from meeting demand for Navigator which 8 remained higher than demand for Internet 9 Explorer well into 1998. 10 Moreover, bundling Internet Explorer 11 with Windows had no effect on the distribution 12 and promotion of browsing software by IAPs or 13 through any of the other channels that 14 Microsoft sought to preempt by other means. 15 Had Microsoft not offered distribution 16 licenses for Internet Explorer and other things 17 of great value to other firms at no charge, had 18 it not prevented OEMs from removing the 19 prominent means of accessing Internet Explorer 20 and limited their ability to feature Navigator, 21 and had Microsoft not taken all the other 22 measures it used to maximize Internet 23 Explorer's usage share at Navigator's expense, 24 its browsing software would not have weaned 25 such a large amount of usage share from 2578 1 Navigator, much less overtaken Navigator in 2 three years. 3 377. In late 1995 and early 1996, 4 Navigator seemed well on its way to becoming 5 the standard software for browsing the web. 6 Within three years, however, Microsoft had 7 successfully denied Navigator that status and 8 had thereby forestalled a serious potential 9 threat to the applications barrier to entry. 10 Indeed Microsoft's Kumar Mehta felt 11 comfortable expressing to Brad Chase in 12 February 1998 his personal opinion that "the 13 browser battle is close to over." 14 Mehta continued, "We set out on this 15 mission two years ago to not let Netscape 16 dictate standards and control of the browser 17 APIs. All evidence today says they don't. 18 394. In a further effort intended to 19 increase the incompatibility between Java 20 applications written for its Windows JVM and 21 other Windows JVMs, and to increase the 22 difficulty of porting Java applications from 23 the Windows environment to other platforms, 24 Microsoft designed its Java developer tools to 25 encourage developers to write their Java 2579 1 applications using certain key words and 2 compiler directives that could only be executed 3 properly by Microsoft's version of the Java 4 runtime environment for Windows. 5 Microsoft encouraged developers to use 6 these extensions by shipping its developer 7 tools with the extensions enabled by default 8 and by failing to warn developers that their 9 use would result in applications that might not 10 run properly with any runtime environment other 11 than Microsoft's and that would be difficult, 12 and perhaps impossible, to port to JVMs running 13 on other platforms. 14 This action comported with suggestion 15 that Microsoft Thomas Reardon made to his 16 colleagues in November 1996: "We should just 17 quietly grow j (Microsoft's developer tools) 18 share and assume that people will take more 19 advantage of our classes without ever realizing 20 that they are building win32-only Java apps. 21 Microsoft refused to alter its 22 developer tools until November 1998, when a 23 Court ordered it to disable its key words and 24 compiler directives by default and to warn 25 developers that using Microsoft's Java 2580 1 extensions would likely cause incompatibilities 2 with non-Microsoft runtime environments. 3 396. Determined to induce developers 4 to write Java applications that relied on its 5 version of the runtime environment for Windows 6 rather than on Sun-compliant ones, Microsoft 7 made a large investment of engineering 8 resources to develop high-performance Windows 9 JVM. 10 This made Microsoft's version of the 11 runtime environment attractive on its -- on its 12 technical merits. To hinder Sun and Netscape 13 from improving the quality of Windows JVM 14 shipped with Navigator, Microsoft pressured 15 Intel, which was developing a high-performance 16 Windows compatible JVM, to not share its work 17 with either Sun or Netscape, much less allow 18 Netscape to bundle the Intel JVM with 19 Navigator. 20 Gates was himself involved in this 21 effort. During the August 2, 1995 meeting at 22 which he urged Intel to halt IAL's development 23 of platform-level software, Gates also 24 announced that Intel's cooperation with Sun and 25 Netscape to develop a Java runtime environment 2581 1 for systems running on Intel's microprocessors 2 was one of the issues threatening to undermine 3 cooperation between Intel and Microsoft. 4 By the spring of 1996, Intel had 5 developed a JVM designed to run well on 6 Intel-based systems while complying with Sun's 7 cross-platform standards. 8 Microsoft executives approached Intel 9 in April of that year and urged that Intel not 10 take any steps toward allowing Netscape to ship 11 this JVM with Navigator. 12 397. By bundling its versions of the 13 Windows JVM with every copy of Internet 14 Explorer and expending some of its surplus 15 money power -- sorry -- surplus monopoly power 16 to maximize the usage of Internet Explorer at 17 Navigator's expense, Microsoft endowed its Java 18 runtime environment with the unique attribute 19 of guaranteed, enduring ubiquity across the 20 enormous Windows-installed base. 21 As one internal Microsoft presentation 22 from January 1997 put it, the company's 23 response to cross-platform Java entailed 24 "increased IE share integration with Windows." 25 Partly as a result of the damage that 2582 1 Microsoft's efforts against Navigator inflicted 2 on Netscape's business, Netscape decided in 3 1998 that it could no longer afford to do the 4 engineering work necessary to continue bundling 5 up-to-date JVMs with Navigator. 6 Consequently, it announced that 7 starting with Version 5.0, Navigator would 8 cease to be a distribution vehicle for JVMs 9 compliant with Sun's standards. 10 400. Recognizing ISVs as a channel 11 through which Java runtime environments that 12 complied with Sun's standards could find their 13 way onto Windows PC systems, Microsoft induced 14 ISVs to distribute Microsoft's version instead 15 of a Sun-compliant one. 16 First, Microsoft made its JVM 17 available to ISVs separately from Internet 18 Explorer so that those uninterested in bundling 19 browsing software could nevertheless bundle 20 Microsoft's JVM. 21 Microsoft's David Cole revealed the 22 motivation for this step in a message he wrote 23 to Jim Allchin in July 1997: "We've agreed 24 that we must allow ISVs to redistribute the 25 Java VM standalone without IE. ISVs that do 2583 1 this are bound into Windows because that's the 2 only place the VM works, and it keeps them away 3 from Sun's APIs." 4 401. Microsoft took the further step 5 of offering valuable things to ISVs that agreed 6 to use Microsoft's Java implementation. 7 Specifically, in the first wave 8 agreements that it signed with dozens of ISVs 9 in 1997 and 1998, Microsoft conditioned early 10 Windows 98 and Windows NT betas, other 11 technical information, and the right to use 12 certain Microsoft seals of approval on the 13 agreement of those ISVs to use Microsoft's 14 version of the Windows JVM as the default. 15 Microsoft and the ISVs all read this 16 requirement to obligate the ISVs to ensure that 17 their Java applications were compatible with 18 Microsoft's version of the Windows JVM. 19 The only effective way to ensure 20 compatibility with Microsoft's JVM was to use 21 Microsoft's Java developer tools, which in turn 22 meant using Microsoft's methods for making 23 native calls and (unless the developers were 24 especially wary and sophisticated) Microsoft's 25 other Java extensions. 2584 1 Thus, a very large percentage of the 2 Java applications that the first wave ISVs 3 wrote would run only on Microsoft's version of 4 the Windows JVM. 5 With that in mind, the first wave ISVs 6 would not have any reason to distribute with 7 their Java applications any JVM other than 8 Microsoft's. 9 So in exchange for costly technical 10 support and other blandishments, Microsoft 11 induced dozens of important ISVs to make their 12 Java applications reliant on Windows-specific 13 technologies and to refrain from distributing 14 to Windows users JVMs that complied with Sun's 15 standards. 16 The record contains no evidence that 17 the relevant provision in the first wave 18 agreements had any purpose other than to 19 maximize the difficulty of porting Java 20 applications between Windows and other 21 platforms. 22 Microsoft remained free to hold the 23 first wave ISVs to this provision until a Court 24 enjoined its enforcement in November 1998. 25 402. In addition to the first wave 2585 1 agreements, Microsoft entered an agreement with 2 at least one ISV that explicitly required it to 3 redistribute Microsoft's JVM to the exclusion 4 of any other and to rely upon Microsoft's 5 native methods to the exclusion of any other 6 methods. Such agreements were also prohibited 7 by the November 1998 injunction. 8 404. As discussed above, Microsoft's 9 effort to lock developers into its 10 Windows-specific Java implementation included 11 actions designed to discourage developers from 12 taking advantage of Java class libraries such 13 as RMI. 14 Microsoft went further than that, 15 however. In pursuit of its goal of minimizing 16 the portability of Java applications, Microsoft 17 took steps to thwart the very creation of 18 cross-platform Java interfaces. 19 The incorporation of greater 20 functionality into the Java class libraries 21 would have increased the portability of the 22 applications that relied on them while 23 simultaneously encouraging developers to use 24 Sun-compliant implementations of Java. 25 In one instance of this effort to 2586 1 stunt the growth of the Java class libraries, 2 Microsoft used threats to withhold Windows 3 operating system support from Intel's 4 microprocessors and offers to include Intel 5 technology in Windows in order to induce Intel 6 to stop aiding Sun in the development of Java 7 classes that would support innovative 8 multimedia functionality. 9 405. In November 1995, Microsoft's 10 Paul Maritz told a senior Intel executive that 11 Intel's optimization of its multimedia software 12 for Sun's Java standards was inimical to 13 Microsoft as Microsoft's support for non-Intel 14 microprocessors would be to Intel. 15 It was not until 1997, though, that 16 Microsoft prevailed upon Intel to not support 17 Sun's development of Java classes that would 18 have allowed developers to include certain 19 multimedia features in their Java applications 20 without sacrificing portability. 21 406. In February 1997, one of Intel's 22 competitors called AMD, solicited support from 23 Microsoft for its 3DX technology, which 24 provided sophisticated multimedia support for 25 games. 2587 1 Microsoft's Allchin asked Gates 2 whether Microsoft should support 3DX despite 3 the fact that Intel would oppose it. Gates 4 responded: "If Intel has a real problem with 5 us supporting this, then they will have to stop 6 supporting Java Multimedia the way they are. I 7 would gladly give up supporting this if they 8 would back off from their work on Java which is 9 terrible for Intel." 10 Near the end of March Allchin sent 11 another message to Gates and Maritz. In it he 12 wrote, "I am positive that we must do a direct 13 attack on Sun (and probably Oracle)... Between 14 ourselves and our partners, we can certainly 15 hurt their (certainly Sun's revenue) base.... 16 We need to get Intel to help us. Today, they 17 are not." 18 Two months later, Eric Engstrom, a 19 Microsoft executive with the responsibility for 20 multimedia development, wrote to his superiors 21 that one of Microsoft's goals was getting 22 "Intel to stop helping Sun create Java 23 Multimedia APIs, especially ones that run well 24 (i.e. native implementations) on Windows. 25 Engstrom proposed achieving this goal 2588 1 by offering Intel the following deal: 2 Microsoft would incorporate into the Windows 3 API set any multimedia interfaces that Intel 4 agreed to not help Sun incorporate into the 5 Java class libraries. 6 Engstrom's efforts apparently bore 7 fruit, for he testified at trial that Intel's 8 IAL subsequently stopped helping Sun to develop 9 class libraries that offered cutting-edge 10 multimedia support. 11 407. Had Microsoft not been committed 12 to protecting and enhancing the applications 13 barrier to entry, it might still have developed 14 a high-performance JVM and enabled Java 15 developers to call upon Windows APIs. 16 Absent this commitment, though, 17 Microsoft would not have taken efforts to 18 maximize the difficulty of porting Java 19 applications written to its implementation and 20 to drastically limit the ability of developers 21 to write Java applications that would run in 22 both Microsoft's version of the Windows runtime 23 environment and versions complying with Sun's 24 standards. 25 Nor would Microsoft have endeavored to 2589 1 limit Navigator's usage share to induce ISVs to 2 neither use nor distribute non-Microsoft Java 3 technologies, and to impede the expansion of 4 the Java class libraries, had it not been 5 determined to discourage developers from 6 writing applications that would be easy to port 7 between Windows and other platforms. 8 Microsoft's dedication to the goal of 9 protecting the applications barrier to entry is 10 highlighted by the fact that its efforts to 11 create incompatibility between its JVM and 12 others resulted in fewer applications being 13 able to run on Windows than otherwise would 14 have. 15 Microsoft felt it was worth 16 obstructing the development of 17 Windows-compatible applications where those 18 applications would have been easy to port to 19 other platforms. 20 It is not clear whether, absent 21 Microsoft's interference, Sun's Java efforts 22 would by now have facilitated porting between 23 Windows and other platforms enough to weaken 24 the applications barrier to entry. 25 What is clear, however, is that 2590 1 Microsoft had succeeded in greatly impeding 2 Java's progress to that end with a series of 3 actions whose sole purpose and effect were to 4 do precisely that. 5 409. To the detriment of consumers, 6 however, Microsoft has done much more than 7 develop innovative browsing software of 8 commendable quality and offer it bundled with 9 Windows at no additional charge. 10 As has been shown, Microsoft also 11 engaged in a concerted series of actions 12 designed to protect the applications barrier to 13 entry, and hence its monopoly power from a 14 variety of middleware threats, including 15 Netscape's web browser and Sun's implementation 16 of Java. 17 Many of these actions have harmed 18 consumers in ways that are immediate and easily 19 discernible. They have also caused less 20 direct, but nevertheless serious and 21 far-reaching, consumer harm by distorting 22 competition. 23 410. By refusing to offer those OEMs 24 who requested it a version of Windows without 25 web browsing software, and by preventing OEMs 2591 1 from removing Internet Explorer -- or even the 2 most obvious means of invoking it -- prior to 3 shipment, Microsoft forced OEMs to ignore 4 consumer demand for a browserless version of 5 Windows. 6 The same actions forced OEMs either to 7 ignore consumer preferences for Navigator or to 8 give them a Hobson's choice of both browser 9 products at the cost of increased confusion, 10 degraded system performance, and restricted 11 memory. 12 By ensuring that Internet Explorer 13 would launch in certain circumstances in 14 Windows 98 even if Navigator were set as the 15 default, and even if the consumer had removed 16 all conspicuous means of invoking Internet 17 Explorer, Microsoft created confusion and 18 frustration for consumers and increased 19 technical support costs for business customers. 20 Those Windows purchasers who did not 21 want browsing software -- businesses, or 22 parents and teachers, for example, concerned 23 with the potential for irresponsible web 24 browsing on PC systems -- not only had to 25 undertake the effort necessary to remove the 2592 1 visible means of invoking Internet Explorer and 2 then contend with the fact that Internet 3 Explorer would nevertheless launch it in -- 4 launch in certain cases. 5 They also had to (assuming they needed 6 new, nonbrowsing features not available in 7 earlier versions of Windows) content themselves 8 with a PC system that ran slower and provided 9 less available memory than if the newest 10 version of Windows came without browsing 11 software. 12 By constraining the freedom of OEMs to 13 implement certain software programs in the 14 Windows boot sequence, Microsoft foreclosed an 15 opportunity for OEMs to make Windows PC systems 16 less confusing and more user-friendly, as 17 consumers desired. 18 By taking the actions listed above and 19 by enticing firms into exclusivity arrangements 20 with valuable inducements that only Microsoft 21 could offer and that the forms reasonably 22 believed they could not do without, Microsoft 23 forced those consumers who otherwise would have 24 elected Navigator as their browser to either 25 pay a substantial price (in the forms of 2593 1 downloading installation, confusion, degraded 2 system performance, and diminished memory 3 capacity) or content themselves with Internet 4 Explorer. 5 Finally, by pressuring Intel to drop 6 the development of platform-level NSP software, 7 and otherwise to cut back on its software 8 development efforts, Microsoft deprived 9 consumers of software innovation that they very 10 well may have found valuable had the innovation 11 been allowed to reach the marketplace. 12 None of these actions had 13 pro-competitive justifications. 14 411. Many of the tactics that 15 Microsoft has employed have also harmed 16 consumers indirectly by unjustifiably 17 distorting competition. 18 The actions that Microsoft took 19 against Navigator hobbled a form of innovation 20 that had shown the potential to depress the 21 applications barrier to entry sufficiently to 22 enable other firms to compete effectively 23 against Microsoft in the market for 24 Intel-compatible PC operating systems. 25 That competition would have conduced 2594 1 to consumer choice and -- that competition 2 would have conduced to consumer choice and 3 nurtured innovation. 4 The campaign against Navigator also 5 retarded widespread acceptance of Sun's Java 6 implementation. 7 This campaign, together with actions 8 that Microsoft took with the sole purpose of 9 making it difficult for developers to write 10 Java applications with technologies that would 11 allow them to be ported between Windows and 12 other platforms, impeded another form of 13 innovation that bore the potential to diminish 14 the applications barrier to entry. 15 There is insufficient evidence to 16 find that, absent Microsoft's actions, 17 Navigator and Java already would have ignited 18 genuine competition in the market for 19 Intel-compatible PC operating systems. 20 It is clear, however, that Microsoft 21 has retarded, and perhaps altogether 22 extinguished, the process by which these two 23 middleware technologies could have facilitated 24 the introduction of competition into an 25 important market. 2595 1 412. Most harmful of all is the 2 message that Microsoft's actions have conveyed 3 to every enterprise with the potential to 4 innovate in the computer industry. 5 Through its conduct toward Netscape, 6 IBM, Compaq, Intel, and others, Microsoft has 7 demonstrated that it will use its prodigious 8 market power and immense profits to harm any 9 firm that insist on pursuing initiatives that 10 could intensify competition against one of 11 Microsoft's core products. 12 Microsoft's past success in hurting 13 such companies and stifling innovation deters 14 investment in technologies and businesses that 15 exhibit the potential to threaten Microsoft. 16 The ultimate result is that some 17 innovations that would truly benefit consumers 18 never occur for the sole reason that they do 19 not coincide with Microsoft's self-interest. 20 Ladies and gentlemen, we'll take a 21 short break. Remember the admonition 22 previously given. 23 We'll come get you as soon as we can. 24 Leave your notebooks there. 25 (The following record was made out of. 2596 1 the presence of the jury.) 2 THE COURT: You may be seated. 3 Stand by and I'll get my papers for 4 this next part. 5 There were two matters that I believe 6 needed to be cleared up before the opening 7 statements. One was request by the Plaintiffs 8 and a resistance by the Defendant that the 9 Plaintiffs mentioned spoliation, or evidence 10 regarding spoliation in the opening statement; 11 is that correct? 12 MS. CONLIN: That's correct, Your 13 Honor. 14 THE COURT: Any further record on that 15 before the Court rules? 16 MR. TULCHIN: No, Your Honor. 17 We've submitted some papers, and I 18 think that we've said what we needed to. 19 THE COURT: Ma'am? 20 MS. CONLIN: No, Your Honor, nothing 21 further. 22 THE COURT: In denying Plaintiffs' 23 motion for spoliation instruction, which the 24 Court did for the preliminary instructions, and 25 stating that the Court find that there has been 2597 1 no showing by substantial evidence of the facts 2 necessary to justify such a destruction, the 3 Court simply meant that the evidence set forth 4 by Ms. Conlin in support of her motion for 5 spoliation instruction was insufficient 6 evidence for the Court to make a threshold 7 determination. 8 And that the four requirements for the 9 instruction on spoliation have been met, and 10 consequently, that a preliminary instruction on 11 spoliation should not be given. 12 The evidence advanced by counsel in 13 support of her motion consisted of exhibits and 14 deposition or other testimony from differing 15 sources, cases, and proceedings. 16 It remains to be seen, if at all, if 17 all or any of the supporting documentation 18 would be admissible or admitted at trial in 19 this matter. 20 It is best that the Court not view the 21 supporting proffered evidence in a vacuum, but 22 rather in the context of trial with an 23 opportunity for any objections by Defendant on 24 evidentiary grounds, opportunity for 25 cross-examination of witness, and opportunity 2598 1 for cross-designations of prior depositions or 2 testimony. 3 The Court relied on the Hartsfield 4 case in stating that there must be substantial 5 evidence to show the evidence was in existence; 6 that such evidence was in the possession of or 7 under the control of the party charged with 8 destroying the evidence, the evidence would 9 have been admissible at trial and the party 10 responsible for the destruction of the evidence 11 did so intentionally. 12 These factual elements have not been 13 met. This is what the Court stated in its 14 prior ruling regarding the instruction. 15 It is not at this time clear by 16 substantial evidence that these elements 17 described above would have been met based upon 18 that evidence in a vacuum. 19 During the trial, however, the 20 evidence may demonstrate differently. Whether 21 the full requirements for spoliation have been 22 met in this case will be determined based on 23 evidence and witnesses' testimony at trial. 24 Therefore, Plaintiffs may be permitted 25 to discuss evidence in their opening that will 2599 1 be presented at trial in regard to this issue. 2 Anything further? 3 MS. CONLIN: No, Your Honor. 4 THE COURT: May I have that second 5 pile, please? 6 Court was also requested by Plaintiffs 7 to -- yesterday, with the Defendant present, to 8 give as soon as possible a ruling on three 9 exhibits which the Plaintiffs wish to use 10 during their opening statement. 11 One was Exhibit 6324; is that correct? 12 MS. CONLIN: 6324. 13 THE COURT: Correct. 14 MS. CONLIN: Yes, Your Honor. 15 THE COURT: Court's ruling on 6324, 16 the first paragraph of the document is 17 admissible. The rest is not admissible, and 18 the ruling of the Special Master sustained as 19 to the remainder of the document. 20 Plaintiffs' Exhibit 5800 was the 21 second one; is that right? 22 MS. CONLIN: I hope so, Your Honor. 23 MR. HAGSTROM: Yes, Your Honor. 24 THE COURT: First paragraph of page 1 25 is admissible; the rest is not admissible. 2600 1 Therefore, the Special Master's ruling on the 2 rest of it is sustained. 3 And the last one I have, I was told by 4 counsel, was Exhibit 7400. 5 MR. HAGSTROM: Yes, Your Honor. 6 THE COURT: You're shaking your head 7 affirmatively back there. 8 Second and third paragraphs of that 9 exhibit are inadmissible; the rest is 10 admissible. 11 With that, are you ready for opening 12 statements? 13 MS. CONLIN: Yes, Your Honor. 14 THE COURT: We will bring the jurors 15 in, please. 16 MS. CONLIN: Your Honor, may I ask one 17 thing? If my voice -- how often can I take a 18 little rest? 19 THE COURT: Whenever you need. Just 20 tell me. 21 Same for Defendant. Whenever you need 22 a break, just turn to me and say. 23 MR. TULCHIN: Your Honor, would it be 24 okay just to take a two-minute break right now? 25 THE COURT: Sure. You want to do 2601 1 that? 2 MR. TULCHIN: Before the jury comes 3 in. 4 (A recess was taken.) 5 (The following record was made in the 6 presence of the jury.) 7 THE COURT: Members of the jury, at 8 this time you are going to hear opening 9 statements. As I stated to you earlier, 10 opening statements are not evidence. They 11 merely are an outline of what each party 12 believes the evidence will show in the case. 13 They are important in that they give 14 some order to what is going to be presented, so 15 for that reason you should pay close attention 16 to them, but remember it is not evidence. 17 At this time are Plaintiffs ready to 18 proceed? 19 MS. CONLIN: Yes, Your Honor. 20 THE COURT: You may proceed. 21 MS. CONLIN: Your Honor, may it please 22 the Court, counsel, members of the jury. 23 Let me see if I can step over the 24 cords. 25 Good morning. We've been waiting a 2602 1 very long time to get to this part of the 2 proceedings. 3 I want to begin by reintroducing the 4 people who are here in court. You met 5 Mr. Hagstrom. He and I are the lead counsel 6 for members of the class. Angela Dennis is a 7 legal assistant on my staff, and this is Pat 8 Larsen. She is one of the class 9 representatives. 10 Mr. Tulchin and Mr. Rosenfeld and 11 Mr. Green and Ms. Nelles are lawyers on behalf 12 of Microsoft. Mr. Wallis is the -- one of the 13 in-house corporate counsel. 14 The rules say that companies should 15 compete as vigorously as they can, do 16 everything they can to win, make the best, the 17 most innovative, the most creative products, 18 get the best sales force, and try to win on the 19 merits. 20 But the rules also say you have to 21 compete fairly; and if you don't, you have to 22 be held accountable for the damage that you do 23 to the competitive process and to the free 24 market and to consumers. 25 For the higher prices and the loss of 2603 1 innovation and the lack of choice that 2 inevitably results when fair and free 3 competition do not occur. 4 The rules also say that monopoly's 5 cannot abuse their power. 6 You can't take your monopoly product 7 and combine it with a nonmonopoly product and 8 sell them together to make the nonmonopoly 9 product a monopoly product. 10 You cannot freeze out competitors and 11 punish or retaliate against people who 12 cooperate with your competitors; and if you do, 13 you will be held accountable for the higher 14 prices, the lack of innovation, the lack of 15 choice that you caused by those unlawful acts. 16 Microsoft did all that and more. 17 It isn't illegal to be successful. We 18 applaud that. It isn't illegal to grow your 19 company from little to huge. That's the 20 American dream. It isn't illegal to be tough. 21 It isn't illegal to be ruthless. It isn't 22 illegal to be aggressive. It isn't illegal to 23 become or remain a monopoly, as long as you 24 don't break the rules to do that. 25 Microsoft did break the rules. 2604 1 What the law requires of Microsoft is 2 exactly what the law requires of all companies, 3 compete fair and square. 4 Microsoft did not. 5 I'm going to start -- you all have 6 very different experiences with respect to 7 computers. Some of you are very experienced 8 users, and some of you are not. 9 Most of you will not know the lingo of 10 the computer industry. You will by the time 11 this is over. But right now, I'm going to 12 start by giving you some of the basics that you 13 will need to understand what's going on in this 14 courtroom. 15 Let's start with some terms, the first 16 of which is operating system. 17 An operating system is a software 18 program that manages the hardware and software 19 resources of the computer. It's the most basic 20 part of the software. 21 It does tasks such as controlling and 22 allocating computer memory, prioritizing the 23 tasks that the computer does, controlling 24 input, controlling output, facilitating 25 networking and managing files, operating system 2605 1 Windows, MS-DOS. Those are two types of 2 operating systems that we'll be dealing with. 3 Applications. They are the programs 4 that help you accomplish tasks. They are the 5 things that do things with the computer. 6 The applications program at issue in 7 Comes versus Microsoft are the spreadsheet and 8 word processing software. 9 A spreadsheet is an application 10 commonly used for budgets, forecasting, and 11 other finance-related tasks. Organizes your 12 data. 13 The relationship between the cells are 14 defined by a formula, and when you make a 15 change in one cell, it updates all the other 16 cells. That's the spreadsheet. 17 Here the spreadsheet at issue is 18 Excel. 19 The word processor, that's the other 20 application at issue in this case is -- it's 21 what you use to write letters with. It 22 manipulates text-based documents. 23 It's the electronic equivalent of a 24 pen and paper -- usually -- and an eraser, and 25 usually most include dictionaries and other 2606 1 things like that. 2 Middleware. When Judge Rosenberg was 3 reading to you from the findings of fact, he 4 talked to you about middleware, and three of 5 the type of middleware that he talked to you 6 about were Netscape Navigator, which is a 7 browser; RealNetworks Streaming Media, 8 RealNetworks Player, it's the streaming media; 9 and Java, which is a group of technologies 10 invented by Sun. The inventor, actually 11 Mr. James Gosling, will be one of the witnesses 12 before you. 13 Those middleware technologies sit 14 between the operating system and the 15 applications. They're in the middle. That's 16 why they're called middleware. 17 And they can work cross-platform. 18 They don't care what operating system they're 19 on. That, of course, is one of the things that 20 made them a danger to Microsoft's monopoly. 21 Another term that you will hear a lot 22 of is OEM, original equipment manufacturer. 23 Those are the computer makers. That's Gateway, 24 Dell, Compaq, OEMs. 25 There are two main channels that 2607 1 people get their software from. The first is 2 the OEM channel preloaded on the computer; and 3 the second is what's called the finished goods 4 channel. 5 Part of that is retail; Comp USA, 6 Wal-Mart, wherever you get software in a retail 7 store. And the other is called volume 8 purchasing. 9 I want to take a look at the computer 10 screen with you just to name the things that 11 you see. 12 What you see when you look at your 13 computer screen is the GUI, the Graphical User 14 Interface. 15 I bet not too many of you had heard 16 about GUI, at the least this kind of GUI, until 17 you got here. 18 The little things that you see, those 19 are the icons, and the -- you do not see the 20 operating system when you look. You see the 21 interface, the GUI. 22 The icons are what you press to 23 activate the application. 24 The browser on this, and most, is the 25 Internet Explorer. 2608 1 Can we show that, Darin? 2 I didn't introduce Darin Buchbinder, 3 who is a technician, who is able to do magic 4 things. But not as fast as I can talk. 5 I'm going to try to talk a little bit 6 more slowly than I ordinarily would, both for 7 Darin and for the court reporter. 8 Word processor, that would be Word 9 right there. And then the spreadsheet is 10 Excel. Those are the -- that's your GUI. 11 Let's look at the Microsoft home page. 12 We're going to a website, and this is what -- 13 you press your browser, you go to the home 14 page. Usually you go to some URL. 15 The URL is that address up at the top 16 that starts usually with www. URL. 17 And then the tool bar is right at the 18 top. That's your tool bar. You can't see that 19 very well. 20 But those are the little things that 21 give you options in terms of what functions you 22 want to perform on that website. 23 I know a lot about your views on 24 technology and Microsoft and Bill Gates from 25 your questionnaires, and thank you very much 2609 1 for filling out the questionnaires, and for 2 your patience in answering my questions and 3 those of the Microsoft attorneys. 4 One of the things that I know about 5 most of you is that you have positive views 6 about Microsoft and about Mr. Gates, and this 7 presents a bit of a problem for me. 8 We've sued Microsoft, and I am going 9 to be saying some not very nice things about 10 Bill Gates, based on the things that he has 11 said in Microsoft documents and the things that 12 he has done. 13 I think that some of what I will have 14 to tell you will be difficult for you to 15 accept. All I ask is that you keep an open 16 mind, that you listen, that you look. 17 I'm going to be in the course of this 18 opening statement showing you a lot of 19 documents, a lot of Microsoft internal 20 documents. 21 I am going to show you what happened 22 rather than just telling you, and most of what 23 I will be showing you are from the documents 24 that were created by Microsoft's high-level 25 executives in the course of their business. 2610 1 When I show you the documents, I will 2 only be reading portions of it, a sentence, a 3 paragraph usually at the most; the portions 4 that I think are relevant and things that I 5 think you should know at the outset. 6 You will have the whole document at 7 the end of the process, and you'll be able to 8 review all the quotes in context. 9 I will name the number for you of each 10 exhibit that I show you. Every exhibit has an 11 assigned number. They do not go in any 12 particular order, so if you are interested in 13 looking at the document, you may wish to make a 14 note about it and then look at it several 15 months from now when you have the opportunity 16 to do that. 17 Microsoft may wish to read you other 18 portions of the documents, same documents, 19 different documents that they think would be 20 relevant to your determination. 21 The same is true of depositions. I'm 22 going to be showing you some short clips from 23 the depositions of some of the witnesses. 24 Short clips in the case of those that I show 25 you, you will hear perhaps not the whole 2611 1 deposition, but more of the deposition during 2 the course of the evidence. 3 You've also seen some of what we call 4 demonstrative evidence. 5 Demonstrative evidence is not going to 6 come to you. You won't have -- those little 7 pictures I showed you at the beginning, you 8 will not have those. Those are only meant to 9 give you a visual representation of some of the 10 concepts. So those will not be going with you 11 into the jury room. 12 Let me begin by summarizing for you 13 what we will prove. 14 Judge Rosenberg gave you instructions 15 of the law. He is the only person in the 16 courtroom who says what the law is. The rest 17 of us may summarize it, but obviously the law 18 as provided to you by the Court is what you 19 will rely on. 20 We will prove that Microsoft 21 unlawfully monopolized the world market for 22 personal computer operating systems. We will 23 prove that Microsoft unlawfully monopolized the 24 world market for word processing, and we will 25 prove that Microsoft unlawfully monopolized the 2612 1 world market for spreadsheet applications 2 software. 3 There are three basic things that we 4 will prove, three overriding, overarching 5 things that we will be spending our time 6 proving. 7 The first issue is we will prove that 8 Microsoft broke Iowa's Competition Law in 9 several ways that fall into two main 10 categories. 11 We were talking about this yesterday. 12 You probably have been subjected to the world's 13 record longest preliminary jury instructions, 14 and a record we expect to stand for a very long 15 time. So you may not have memorized all of 16 them yet. 17 So I'm going to go back to the two 18 that define the liability concepts in this 19 lawsuit. 20 The first is Instruction Number 5. 21 As I said, we, the classes say, that 22 Microsoft broke Iowa's Competition Law in two 23 main ways, the first of which is defined for 24 you by your Instruction Number 5. 25 We say basically that Microsoft used 2613 1 its monopoly power to exclude competition and 2 control prices. 3 And the Court defined that for you as 4 any company that acquires, maintains, or uses 5 monopoly power over any part of trade or 6 commerce for the purpose of excluding 7 competition or controlling, fixing, or 8 maintaining prices violates the Iowa 9 Competition Law. 10 And then he told you the four things 11 under there that are the elements of that 12 anticompetitive claim. 13 First, that Microsoft had monopoly 14 power in the relevant product market, and you 15 will recall that for the operating system 16 market between the years 1995 and 1999, that 17 has already been proven. 18 The second is that Microsoft willfully 19 acquired or maintained that power through 20 conduct designed to exclude competition or 21 through anticompetitive conduct. 22 And then the third is that what 23 Microsoft did that broke the law harmed Iowa 24 consumers, Iowa class members. 25 And four, that Iowa class members 2614 1 suffered damages resulting from the injury. 2 That's our first main claim. 3 By shorthand, we're going to call that 4 the monopolization claim. 5 The second main claim is set out for 6 you in Instruction No. 10, and that is that 7 Microsoft agreed with others to restrain trade 8 and to harm competition. 9 The title of that instruction is 10 Contract, Combination, or Conspiracy. 11 And basically that means we say that 12 Microsoft agreed directly, or indirectly, with 13 other people or entities to accomplish wrongful 14 acts. 15 A conspiracy is an agreement by two or 16 more persons to accomplish some unlawful 17 purpose or to accomplish a lawful purpose by 18 unlawful means. 19 And I'm not going -- this one -- this 20 instruction is very, very long. I'm just going 21 to tell you the four things again and the 22 things that are important to remember. 23 First, we will show that Microsoft 24 entered into a combination -- a conspiracy 25 combination or agreement, or otherwise 2615 1 collaborated with one or more persons or 2 companies to restrict trade or prevent 3 competition. 4 We have to show, and we will show, 5 that either that the purpose or the effect of 6 the conspiracy agreement, and so on, was to 7 harm competition in any of the personal 8 computer software markets involved in the case. 9 That's the three; operating systems, word 10 processing, spreadsheet. Any of those three 11 markets. 12 We also say that some of the 13 combinations were imposed on the other party. 14 We don't have to show that the other party 15 voluntarily entered into any kind of a written 16 agreement. 17 What we have to show is that there was 18 -- that there was a combination or conspiracy, 19 but we don't have to show that the other party 20 was voluntarily a member. 21 Let me give you just an example. An 22 OEM who agreed to a type of license we're going 23 to talk about called per processor would be 24 potentially a part of the conspiracy, even 25 though they were not necessarily participating 2616 1 in the wrongful conduct. 2 So what the Court says to you is 3 because the Plaintiffs allege that the 4 combinations between Microsoft and others may 5 have been imposed or coerced by Microsoft, 6 they, meaning the class members, do not have to 7 show that any party who was coerced by 8 Microsoft shared Microsoft's goal to prevent or 9 exclude competition. 10 The third thing is that Microsoft 11 committed one or more exclusionary acts -- 12 that's sort of the overt act requirement -- 13 that had the purpose or effect of unreasonably 14 restraining competition. 15 And fourth, we must show, and we will 16 show, that the Plaintiffs were injured by the 17 restraint of trade. 18 So first we will show that Microsoft 19 broke the law. And remember that. That's 20 already been shown for the period 1995 through 21 1999 in one market, one of the three; in the 22 operating system market. That's already been 23 proven. 24 Second issue is did Microsoft's 25 wrongful conduct harm Iowa class members. 2617 1 There's your two. 2 As I talk with you, I will focus on 3 Microsoft's acts against competitors. 4 Microsoft didn't come into Iowa and slap a 5 higher price tag on computer software. 6 What Microsoft did was act to destroy 7 competition by destroying competitors. And not 8 one or two competitors, dozens. 9 Any company who threatened their 10 monopoly power, and by destroying competition, 11 they harmed Iowa class members. 12 How did they do it? Though the facts 13 can be complicated, the overall concepts are 14 simple. 15 Microsoft used two illegal choke 16 holds, one on input and one on output. 17 Input is the sockets. Sockets are in 18 the operating system. I'm going to talk about 19 that in a minute. And output is the 20 distribution channels. 21 In Instruction 4, the Judge told you 22 about the purpose of Iowa's Competition Law. 23 He told you that the Iowa Competition 24 Law presumes that competition in a free market 25 will result in better goods and services, 2618 1 including better quality, better service, 2 better safety, better durability, all at lower 3 prices. 4 So if Microsoft destroyed Iowans' 5 opportunity to have competition in a free 6 market, then Iowans were deprived of those 7 better goods that would have been better 8 quality and have had better security, and 9 Iowans paid higher prices than the lower prices 10 that competition brings. 11 Issue 3. What amount of money based 12 on reasonable estimates will compensate Iowa 13 class members for overcharges and for security 14 problems? 15 Class members were harmed in two ways. 16 They paid too much for Microsoft's monopoly 17 products. The monopoly overcharge. 18 A couple of things to know. You will 19 have these as a part of the experts' testimony, 20 but the number of licenses here in Iowa for 21 Windows, the number of licenses in Iowa, we 22 believe the evidence will show, are 5,148,614. 23 That's for the operating system. 24 For Office, which is the office 25 productivity suite that includes Word and 2619 1 Excel, the number of licenses 1,838,308. 2 For Excel, the spreadsheet, 21,304, 3 and for Word, free standing by itself, 445,435. 4 When you add that up, it's about seven 5 and a half million total licenses over the 6 entire class period. 7 I also wanted to mention to you the 8 average overcharge. And again, keep in mind 9 that this is the average over the class period 10 and over the period of time -- over the class 11 period and over the entire class. 12 The average overcharge for the 13 operating system is $42.49. For Office it's 14 $56.94, for Excel $56.51, and for Word $10.55. 15 Now, again, in the early part of the 16 class period, you know, the prices were a bit 17 lower, and then they raised over the course of 18 time. So this again, for the entire 12 years 19 and one month, approximately, of the class 20 period. 21 The second type of -- that's harm one, 22 the overcharge. 23 To prove harm one, we will use three 24 economic methods. 25 You will recall in our voir dire, we 2620 1 talked a little bit about economic 2 methodologies and the two -- the three types of 3 -- the three ways, the three economic models 4 that will be used to show you what the 5 competitive world would have looked like absent 6 Microsoft's anticompetitive conduct are these 7 three. 8 I'm not going to explain them to you. 9 That is Mr. Hagstrom's duty and responsibility. 10 I'm just going to tell you what they are. 11 The profit margin method, the rate of 12 return method, and the price premium method. 13 That's harm one, the overcharge. 14 Then the second harm that we say 15 Microsoft caused Iowa class members, we say 16 that Microsoft by joining the browser with the 17 operating system, the conduct that Judge 18 Rosenberg spoke with you about in the findings 19 of fact, by putting those two things together, 20 Microsoft increased the security risks that 21 people have in using their computers. 22 By that anticompetitive act, they 23 raised the security vulnerabilities, and 24 because of that, consumers, class members had 25 to spend a lot of time doing things to protect 2621 1 their data, downloading patches, and making 2 sure that they had as much safety as they could 3 get. 4 That's the second harm that we say 5 that Microsoft's anticompetitive conduct caused 6 Iowa class members. 7 Here are some things to know. 8 The market for computer software is 9 worldwide. That means that things that happen 10 around the world, not just in the United 11 States, but in Germany and Korea, and things -- 12 other places all affect the market in the 13 United States. 14 You may wonder, you know, why is 15 Roxanne talking to us and showing us documents 16 from Germany and England and Korea. And there 17 is a two-part answer. 18 Answer one is what they did everywhere 19 affects us here in Iowa, worldwide market. And 20 two is Microsoft did business the same way 21 everywhere. 22 The second thing to know is that every 23 computer must have an operating system. If it 24 doesn't have an operating system, it isn't 25 going to do anything. Must have an operating 2622 1 system; essential part of any computer. 2 The third thing is that the way that 3 most people get their operating systems is with 4 their computer when they buy it, preloaded, 5 it's already there, and it's almost certain 6 that the operating system that is already there 7 will be the Microsoft operating system, not 8 because class members chose it, but because the 9 OEM, the computer manufacturer, has a contract 10 with Microsoft that virtually requires that 11 they put a Microsoft operating system into the 12 computer that class members bought. 13 Not because class members wanted it, 14 but because Microsoft has a contract with the 15 computer maker. 16 The fourth thing to know is what makes 17 a computer attractive to purchasers is not what 18 operating system is on it, but what 19 applications will it run. 20 The word -- what word processors, what 21 spreadsheets, what games, what applications 22 that helps you trace your ancestors or keep 23 track of collections, or whatever interests you 24 have. It's the applications that matter. 25 And the more applications that can run 2623 1 on a particular operating system, the more 2 attractive that operating system is. 3 Judge Rosenberg talked to you about 4 the applications barrier to entry. Sometimes I 5 call that the ABTE just to make more acronyms 6 for you. 7 But the applications barrier to entry 8 is what protects Microsoft's monopoly product. 9 The more applications, the more attractive. 10 We'll talk about that some more. 11 Five, what Microsoft did to its 12 competitors is what hurts consumers because it 13 harms the competitive process. 14 I'm not going to go to Instruction 8, 15 but it is Instruction 8 that talks about that. 16 If Microsoft uses illegal tactics to 17 destroy competitors, class members ultimately 18 pay the cost both in terms of higher prices and 19 less security. 20 Please remember that the tactics do 21 not have to be illegal by themselves if they 22 have the effect of achieving or maintaining 23 monopoly power. 24 Instruction 8 gives you guidance on 25 all of those factors. 2624 1 Some of the things that I'm going to 2 talk with you about happened long ago, 3 sometimes ten years ago or 15 years ago, 4 sometimes longer. But what happened long ago 5 in the market for computer software affects us 6 today. 7 For example, one of the first things I 8 want to talk about is a company called Digital 9 Research, Incorporated, a company that created 10 an operating system that competed with 11 Microsoft's MS-DOS from the late '80s until it 12 was withdrawn from the market in 1994. 13 I will tell you why it was withdrawn 14 later, but if it had survived, Microsoft would 15 have had competition. And you will see from 16 the documents that when Microsoft did have 17 competition, they lowered their prices. 18 So if DRI -- if DR-DOS, which was the 19 name of the product that DRI created, if they 20 had survived, Microsoft would have had 21 competition, and consumers would have had all 22 the benefits that competition brings. 23 One unusual factor, one unusual 24 feature of this case is that the Judge has 25 already found that Microsoft violated the 2625 1 antitrust laws of Iowa. 2 And, of course, in your deliberations, 3 as Judge Rosenberg told you, you must accept 4 those findings of fact. Those issues are 5 decided. 6 Is that fair? Yes, because Microsoft 7 already went to trial on those issues. They 8 presented witnesses, they presented documents, 9 and they lost. So Microsoft had its chance, 10 and the Judge says they broke the law. 11 We still have to prove that 12 Microsoft's breaking of the law caused harm to 13 Iowa class members and the amount of the 14 damages. 15 I'm going to go over with you also 16 some of the -- Judge Rosenberg read you a list 17 of acronyms. Oh, my goodness, there are so 18 many acronyms, so many acronyms in this case. 19 I have a red notebook that has about a 20 hundred pages of acronyms in it. I'm going to 21 need to remember to bring it. 22 We are not going to go over all of 23 them. We will try to supply what those things 24 mean as we go along, but here is a list of some 25 that we'll be using quite a bit. 2626 1 I'm going to come back to API. 2 Application Program Interface is so important 3 that it deserves more than a one-sentence 4 definition. 5 Applications we've talked about. 6 Chicago, Microsoft named it's -- had code names 7 for its products, and the code name internal to 8 Microsoft for Windows 95 was Chicago. 9 You will hear other city names, but 10 Chicago Windows 95 is one that you'll hear 11 right off so we thought you needed to know code 12 names. 13 Cost of doing business or cost of 14 goods sold -- I'm sorry, cost of goods sold, 15 COGS, C-O-G-S. 16 I mentioned DR-DOS. That is an 17 operating system called DR-DOS, and it was 18 manufactured by DRI, Digital Research, 19 Incorporated. 20 FTC, Federal Trade Commission. 21 FUD, it's used as a noun and a verb, 22 and it means fear, uncertainty, and doubt. 23 GUI, we talked about. 24 ISV. And ISV or ISVs are independent 25 software vendors. ISVs, we'll just hear that 2627 1 all the time. Those are the people who write 2 the applications outside of Microsoft. 3 Independent software vendors write 4 applications. 5 MDA is a market development agreement 6 that is an agreement between Microsoft and 7 usually an OEM. 8 We'll talk -- Dr. Noll will talk about 9 that. Dr. Noll is a professor at Stanford who 10 has been studying issues of antitrust for many, 11 many years, decades, and who will be here to 12 give you the benefit of his experience. 13 And one of the things he's going to 14 talk about are the anticompetitive effects of 15 the market development agreements. 16 Middleware, we've talked about that. 17 And Microsoft is obvious, and MS-DOS, 18 that's Microsoft's first operating system. 19 NDA, I'm sure some of you have heard 20 that particular acronym before. That is a 21 nondisclosure agreement. 22 When companies need to share 23 information confidential to one of them, they 24 ask the recipient of the information to sign an 25 NDA, promising that the information that is 2628 1 provided will be kept secret, NDA. 2 OEM we've talked about. 3 OS we've talked about. 4 OS/2. OS/2 was a competing operating 5 system. It was initially developed jointly by 6 IBM and Microsoft, and ultimately marketed by 7 IBM. 8 The joint marketing agreement between 9 IBM and Microsoft was entered into in 1985, and 10 we will talk about that later. 11 Peripherals, printers, mouse, 12 keyboard. Those are the peripherals. 13 PPB, prepaid balances. That is a part 14 of a Microsoft contract with the OEMs with the 15 computer manufacturers that we believe had an 16 anticompetitive effect and had an 17 anticompetitive purpose. 18 PC, personal computers. 19 PM, that is usually -- usually this 20 means presentation manager. Presentation 21 manager was the GUI, the Graphical User 22 Interface for OS/2, IBM's competing operating 23 system. 24 IBM's competing operating system 25 didn't have the Windows GUI, it had a separate 2629 1 GUI called presentation manager, which was 2 developed for it, and as I said, which competed 3 with Microsoft products. 4 And I put ubiquitous down here not 5 because I didn't think -- it's a word that I 6 had heard before, but it is a word used in the 7 documents and used by the witnesses quite a 8 bit, and it simply means everywhere, just 9 everywhere. 10 I want to return now to these APIs and 11 talk with you for a while about them. 12 The APIs in this piece of 13 demonstrative graphics are the little -- the 14 little things sticking up, okay, and what -- 15 lots of different items, pieces of software can 16 expose APIs, meaning that the ISVs, the 17 independent software developers can see them 18 and use them. 19 And what ISVs use the APIs for is to 20 do the functions needed to be done by the 21 software they're developing. 22 They need to be able -- an API set is 23 what the ISVs develop to. 24 Let me try another analogy. Think of 25 a house, okay. And the APIs are the doors into 2630 1 the house. The house is the operating system, 2 and the APIs are the way you get into the 3 operating system to get it to do what you want 4 it to do. 5 Microsoft doesn't want any other 6 company to expose APIs that ISVs, the 7 independent software developers, the people who 8 write the software, the applications, could 9 write to. 10 And why does that matter? Because it 11 is the APIs, it is these little levers that 12 protect the applications barrier to entry and 13 that protect Microsoft's monopoly. 14 Other APIs, other API sets could serve 15 as a platform for the ISVs to develop on and 16 that -- that's what worried Microsoft about 17 Netscape and Java and Real. They expose APIs. 18 One of the things that I wanted to 19 mention also before we begin, I know you think 20 we've already begun, but really, not yet. 21 Version numbers. Microsoft and all 22 other -- not all other -- many software vendors 23 name their products, and then to distinguish 24 one from the other, they give them a version 25 number. 2631 1 There's Windows 1.0 and Windows 2.0. 2 Then between the big versions like 1.0 and 2.0, 3 there are smaller versions like Windows 3.11, 4 okay. 5 Before Windows 4.0, there was Windows 6 3.0, Windows 3.1, Windows 3.11. Sometimes to 7 distinguish between the major releases like 8 Windows 3.0 and Windows 4.0 they call it like 9 Windows 3x, meaning any version of Windows 3.0 10 or Windows 3. 11 I know that this may seem confusing. 12 It certainly has been occasionally quite 13 confusing to me. 14 And in fact, try to keep firmly in 15 mind the -- particularly in the beginning when 16 Windows was only the Graphical User Interface 17 and MS-DOS was the operating system, it's 18 sometimes difficult to keep straight -- because 19 they're coming out at around the same time and 20 the same people are sometimes in charge of them 21 and working on them. 22 So I'll try to remind you which is 23 which, and you may be better at telling the 24 difference than -- keeping that straight than I 25 have been. 2632 1 Let me tell you how I'm going to 2 approach the task of guiding you through the 3 evidence and telling you about Microsoft's 4 conduct, about the people, the products, the 5 companies over this long period of time. 6 The first thing I'm going to talk 7 about are the basics of the case, the class 8 members, the class period representatives, and 9 so on. 10 I'm going to give you a very brief 11 history of computing. 12 I'm going to talk about the categories 13 of Microsoft's anticompetitive acts, then the 14 stories of the competitors Microsoft committed 15 those acts against, then some of the Court 16 procedure and the details that may be helpful 17 for you to know. 18 Then some of the things we believe 19 that Microsoft's evidence will be trying to 20 prove, and then I'm going to sit down. 21 Mr. Hagstrom will then talk to you 22 about the two remaining major issues, and that 23 is causation and damages. 24 Microsoft's anticompetitive conduct 25 caused harm to Iowa class members and the 2633 1 nature and extent of that harm in two areas, 2 the overcharge and the security problems. This 3 will take a few days. 4 I'm not going to commit as to how many 5 days because, as you have seen, it's a little 6 unpredictable. Legal issues come up, things 7 happen that sometimes we get a late start in 8 the morning or -- after the lunch hour, but 9 this is the only time that I will have to talk 10 with you directly for the next several months. 11 I hope to put the actions of Microsoft 12 in context and to give you a basic 13 understanding of the things Microsoft has done 14 and sort of set them into a framework for you 15 to use as you view the evidence. 16 Please, I ask you to be patient with 17 me and give me a chance to walk you through 18 these events and how they impacted the market 19 and how they impacted Iowa class members. 20 The class representatives. Joe Comes, 21 he thought he could be here today, but he could 22 not. He is a Des Moines resident, he and his 23 wife Jill live here in Des Moines with their 24 daughter Jackie. He is the person who started 25 the original lawsuit back in the year 2000. 2634 1 He will be a witness. He is a small 2 business owner here. 3 Pat Larsen, Pat is here. Pat is a 4 retired -- is retired from Eaton Corporation up 5 in Spencer, Iowa. She started -- she worked 6 there 22 years. She started as a factory 7 worker on the floor, and when she retired she 8 was a manufacturing product supervisor. 9 Those are the two individual people. 10 There are also two small businesses, 11 two businesses. Riley Paint is a paint 12 manufacturing business down in Burlington. Sam 13 Jennison, or other officer of the company, will 14 be the representative of the Riley Paint 15 Company. 16 And the other business, which is the 17 one most of you knew about or rented tuxes 18 from, that is a -- that's a family business. 19 It has five locations around Iowa. Mary Jo 20 Harty is the president, and either she or 21 another representative of Skeffington's will 22 occasionally be present. 23 And those are the four class 24 representatives, two individuals, two 25 businesses. 2635 1 And they -- these four entities, two 2 people and the two businesses, represent people 3 who are not here. 4 We do not know how many individuals 5 and businesses are class members. What we know 6 is how many licenses. That's what we can 7 figure out. 8 If you think about it, you will see 9 how that's true. 10 One person with one computer might 11 have three licenses. People replace their 12 computers and they get more licenses. 13 We can't tell you -- we know it's 14 hundreds of thousands, or we think it's 15 hundreds of thousands of individuals and 16 businesses. A big business would have 17 thousands and thousands of licenses. 18 So we don't know numbers of entities, 19 but we do know numbers of licenses, and that is 20 what I told you, seven and a half million 21 total, roughly, licenses for all of the 22 products involved. 23 What do the class members do? They 24 pay attention to what's going on. They at 25 least scan the pleadings that we send them 2636 1 hoping to get some clue from the legal 2 terminology what's happening. 3 They talk to us as their lawyers. 4 They answered the interrogatories and request 5 for production of documents that Judge 6 Rosenberg told you about. 7 They sat for their depositions where 8 Microsoft lawyers could ask them questions, and 9 they provided answers. 10 They recognize and accept the 11 responsibility that they have to represent all 12 of the individuals and businesses who are not 13 present here in Court. 14 These folks are just regular people. 15 They won't be able to tell you what Microsoft 16 did to break the law. They haven't looked at 17 the millions of documents. They're not 18 technical experts. 19 They don't know a thing about the 20 source code. They just know what most people 21 know about Microsoft and its products and its 22 activities. 23 I guess that's probably not true 24 anymore because they have looked at the 25 pleadings and had their depositions taken and 2637 1 the like, but they will be here as much as they 2 can and when they can. 3 There are two classes. 4 I'm going to show you, but not read to 5 you, the definitions of the classes. This is 6 the operating systems software class. 7 It names the products that are 8 covered, the operating system products. It 9 names and it gives the class period and 10 indicates that you have to be -- you have to be 11 at the time of the purchase, you have to reside 12 in or be incorporated in Iowa and to not be 13 buying the operating system to resell it to 14 somebody else. 15 The second Microsoft applications 16 software class is indirect purchasers of the 17 applications that we've talked about, either by 18 themselves or within the office suites. 19 Let's look at the products involved. 20 This is a list of the operating 21 systems, the products that Microsoft has 22 provided, and also a list of the applications. 23 Two are not -- two that we know about 24 are not on the applications list. Word, Excel, 25 and Office, of course, are probably familiar to 2638 1 you, but there's a product called -- or was a 2 product called Home Essentials that also 3 included applications, as well as Works. 4 Microsoft Works at some point have also either 5 included Word or Excel or both. 6 The time period is from May of 1994 7 until June 30 of 2006, 12 years and one month. 8 And remember, the government case that 9 Judge Rosenberg told you about covers only a 10 part of this period. It also is only for the 11 operating systems. 12 So the whole class period, there's a 13 year before the government case started and 14 then there are years after. 15 The government case covers '95 through 16 '99, '94 before and '99 -- some part of '99 to 17 June of 2006. Those are not covered by the 18 government case. And only operating systems, 19 not applications covered by the government 20 case. 21 We talked about the two channels 22 preinstalled or the finished good channels. 23 Let me talk a little bit about the 24 history of computers. 25 I'm going to start in 1974 at a place 2639 1 called Xerox Palo Alto Research Center. Xerox 2 Parc, P-a-r-k -- P-a-r-c. 3 It was an R and D facility, and it was 4 legendary for developing some of the technology 5 that's used together, including a thing called 6 the Alto high-tech -- or high-end workstation. 7 Keep in mind that -- I really do 8 expect that you will see me fall down at some 9 point. Don't worry, I'll get right back up. 10 The computers were huge. You know, 11 they were kept in cooled rooms. They were 12 enormously expensive. And this Xerox Parc 13 developed a much smaller version, and it 14 featured the first Windows style operating 15 system. 16 It had -- it had a GUI, complete with 17 icons and pull-down menus and other niceties 18 that wouldn't appear on the market for almost a 19 decade. 20 In January of 1975, there's a magazine 21 called Popular Electronics. It announced the 22 world's first minicomputer kit, and it said 23 world's first minicomputer kit to rival 24 commercial models, meaning, you know, the huge 25 room size things. Was called the Altair 8800, 2640 1 the Altair -- it was a build-it-yourself 2 computer. It cost $500. It was available from 3 a company called Mits, M-i-t-s, down in 4 Albuquerque, New Mexico. 5 It was a sensation. Orders flooded in 6 from everywhere. Enthusiasts, hobbyists just 7 went crazy. 8 Now, let me tell you that it didn't do 9 anything. I mean, it just sat there and 10 blinked. But it was so unique, so remarkable 11 just sitting there blinking that it was 12 terribly popular. 13 In 1979 a company called VisiCorp 14 publishes a spreadsheet for Apple. 15 This is moving -- I'm not going to 16 fill in the details. There will be witnesses 17 who will talk to you about this. 18 But this -- they created a 19 spreadsheet. The first what is called a killer 20 app. And a killer app is an application that 21 is -- does such a useful thing that it drives 22 the sales of computer. 23 And so this VisiCalc was the first 24 commercial spreadsheet for many computers, or 25 personal computers, and businesses became, 2641 1 then, interested in buying small computers as 2 opposed to the big room-sized ones. 3 IBM, the producer of most of the big 4 room-size computers, took notice, and by 1980, 5 it's planning to enter this new field, desktop 6 personal computers. 7 This is a new industry growing. 8 Bill Gates is born in 1955. He's the 9 middle child of three. His dad is a lawyer. 10 His mom is a homemaker and volunteer. And by 11 junior high he discovers computers. 12 He and his friend Paul Allen worked 13 together to develop computer languages. How do 14 you talk to that box? How do you make it 15 actually do something besides sit there and 16 blink? 17 And he and Mr. Allen found ways to 18 communicate with the computer in words rather 19 than numbers binary code, zeros and ones, 20 words. 21 When he's 18 he goes off to Harvard. 22 Mr. Allen goes to Washington State. And they 23 write to Mits, the company that manufactured 24 the Altair 8800, and say that they have a 25 version of Basic, which is a computer language 2642 1 -- they don't -- but when Mits expresses 2 interest in what they say they have, they get 3 it. They develop it. 4 Mr. Gates borrows from the deck 5 programming language. Mits buys the 6 programming language. Mr. Gates drops out of 7 Harvard, and he and Allen move to Albuquerque 8 and found Microsoft in mid-1975. In the 9 beginning it's a partnership between Paul Allen 10 and Bill Gates. 11 At around this same period in 1976, 12 Digital Research, Incorporated, is founded, and 13 it is founded to develop the operating systems. 14 DRI's founder is a man named Gary 15 Kildall. He has a Ph.D. in computer science. 16 And in 1973, he develops an operating system 17 called CP/M. That is -- that means control 18 program for microprocessors. And it's one of 19 the very first operating systems for these 20 minicomputers. It becomes very quickly the 21 standard operating system for 8-bit computers. 22 I was going to tell you about a bit -- 23 I was going to tell you all kinds of things 24 about a bit, but let me not do that. 25 Let me just tell you that a bit is the 2643 1 smallest unit of storage used in computing -- 2 the computers went from 8 bits to 16 to 32, and 3 now we're on our way to 64, and this is sort of 4 geometric progression. 5 Microsoft's initial focus is on these 6 programming languages, the language -- 7 languages used to write the applications. And, 8 of course, to use the computer language, you 9 have to have an underlying operating system, 10 and Microsoft chooses the then standard CP/M 11 operating system. 12 Gates visits Gary Kildall, the head of 13 DRI, in November of 1977 and obtains a license 14 for using CP/M. 15 In July 1980, July of 1980, IBM comes 16 calling to Microsoft and asks Microsoft if they 17 want to develop -- if they're willing to 18 develop compatible 16-bit versions of its 19 popular language programs, okay. 20 They've got them for 8 bit and now 21 IBM's going to develop a personal computer, and 22 they come to Gates and Allen and they say, will 23 you develop languages for a 16 -- a larger, 24 more powerful, 16-bit computer. And they 25 agree. But IBM still needs an operating 2644 1 system. Languages won't do it any good unless 2 the operating system is there. 3 IBM goes to Kildall at DRI. There are 4 some legends about this. But somehow the deal 5 isn't done. So IBM goes back to Gates. 6 By April of 1980, there's a guy named 7 Tim Paterson. He works for Seattle Computing, 8 and he has developed an operating system. It 9 is basically a clone of the CP/M, the DRI CP/M 10 operating system. 11 And let me say a moment about clones. 12 Clones are not bad. What it means is a 13 different product which mirrors the function of 14 the original. 15 All PCs are clones of the original IBM 16 PC. And Paterson's clone is of DRI's CP/M. 17 He calls it QDOS. That means quick 18 and dirty operating system. That's what it 19 means. 20 He was a cleaver guy. Anyway, he 21 develops this quick and dirty QDOS, and on -- 22 in January of 1981, Microsoft licenses Mr. 23 Patterson's QDOS for $25,000 and then 24 sublicenses it to IBM for use in their -- 25 what's going to be their new PC. 2645 1 It's not a matter of public knowledge 2 yet. So Microsoft for -- licenses the QDOS for 3 $25,000 originally and buys QDOS outright for 4 another $50,000 and also in 1981. 5 So Microsoft has QDOS for about -- for 6 exactly $75,000 and MS-DOS, Microsoft's 7 operating system, is a clone of QDOS, which is 8 a clone of CP/M, which was developed by DRI. 9 And according to the three people who 10 work on MS-DOS, one of whom is Chris Peters, 11 from a programmer's point of view, MS-DOS 1.0 12 was a clone of CP/M. 13 Then Microsoft gives IBM a royalty 14 free license for MS-DOS, but Microsoft retains 15 the ownership rights of MS-DOS so it can -- it 16 retains the ownership rights and the right to 17 license it to all of the IBM clones which are 18 about to come onto the market. 19 Then you'll hear about PC-DOS. MS-DOS 20 and PC-DOS are virtually identical; MS-DOS is 21 the Microsoft product. PC-DOS is also based on 22 the Microsoft MS-DOS, but is the operating 23 system in the IBM or in the original IBM 24 computers. 25 The links from CP/M to QDOS to MS-DOS 2646 1 are well recognized, and our technical expert, 2 a man named Andrew Schulman, will explain to 3 you what those links are. 4 So Microsoft gets into the operating 5 system business with Mr. Patterson's product 6 for about $75,000, and IBM then releases its PC 7 with the MS-DOS operating system loaded in it. 8 I want to return to the GUI, the user 9 interface. 10 During the '80s and early '90s, the 11 way that people talked to their computer was by 12 typing in commands. I think you've heard a 13 little bit about that the character based 14 interface. 15 Persuading my secretary to leave the 16 character-based interface was very difficult 17 because people who knew how to do it really 18 knew how to do it, and changing was difficult. 19 You type in characters and numbers. 20 If you get one wrong, then your computer won't 21 do what you want it to do. 22 She didn't get them wrong, but it was 23 a very slow and difficult thing for most people 24 to learn, but then Apple commercializes the 25 Xerox Parc GUI with the little icons, and so 2647 1 instead of typing commands, all you did, you 2 had your mouse and you clicked on the icon, and 3 your computer would do what you wanted it to 4 do; most of the time. 5 And here is the first Apple GUI with 6 the icons. It was revolutionary. 7 Using your mouse you point and click. 8 This -- of course, this Apple is great for the 9 world of Apple computer users, but there is no 10 Graphical User Interface for the world of IBM 11 PCs and IBM clones; you know, Compaq, Gateway, 12 so on. 13 Microsoft comes out with an imitation 14 of the GUI and calls it Windows -- this is a 15 screen shot of Windows version -- actually, 16 that says 1.01, and it comes out in 1985. And 17 that is the Windows GUI. 18 For up until 1995, you buy -- you can 19 buy the Windows GUI separately from Microsoft's 20 MS-DOS operating system. Two separate 21 products, the GUI and the operating system. 22 For a while Windows is pretty crude 23 and most people prefer to stick with a 24 character-based -- the character user interface 25 that allows you to communicate by typing. 2648 1 But Microsoft improves Windows, and by 2 the beginning of the 1990s on the PC; and, you 3 know, the PC is different than the Apple, not 4 in the same market. Microsoft improves it, and 5 by the early '90s the Windows is the dominant 6 GUI on personal computers. 7 I want to stop for a moment and make 8 sure that I tell you as clearly as I can that 9 Iowa class members are not here to criticize 10 Microsoft for the popularity of its Windows 11 GUI. 12 If Microsoft had simply sold a good, 13 quality Graphical User Interface product at a 14 reasonable price, we'd be here applauding -- 15 well, actually we wouldn't even be here, but we 16 would be applauding Microsoft rather than suing 17 it. 18 The reason for this lawsuit is that 19 Microsoft is not satisfied with the results of 20 lawful competition. We are here because 21 Microsoft abuses its dominance in the Windows 22 GUI and in the operating system and in the word 23 processing and spreadsheet applications market 24 to eliminate competition in those markets. 25 I said I would return to sockets and 2649 1 plugs, and here we are again. 2 All right. Microsoft -- this is 3 Microsoft's operating system, MS-DOS, sitting 4 under the GUI Windows. Those are the sockets. 5 Those are -- what Microsoft internally calls 6 the sockets is the operating system. 7 The plugs are the various software 8 applications that need to connect with the 9 socket. 10 I want to talk about something that's 11 familiar to all of us, and that is assume -- 12 the evidence will include testimony from Roger 13 Noll who I told you about. He's an antitrust 14 economist from Stanford University; has devoted 15 years to analyzing the harmful effects that 16 certain practices have on competition and on 17 consumers, and he will use Microsoft's own 18 description of the operating system and 19 applications as sockets and plugs to help you 20 decide if competition and consumers are hurt by 21 Microsoft's practices of interfering with the 22 connections between Microsoft's monopoly 23 sockets and the GUI and competitors' plugs. 24 Suppose, for example, that here's this 25 Xcel Energy Corporation, and it supplies all 2650 1 the electrical power in a particular area. It 2 also makes toasters and washing machines and 3 other kind of things. 4 But let's stick with the toasters and 5 blenders. We've got toasters and blenders 6 there. 7 To compete, all other toaster 8 manufacturers would have to know how to plug in 9 to -- how to use -- how to get access to the 10 electricity that Xcel has. 11 The Westinghouse toaster has to have 12 information in order to make its plug fit into 13 the socket that will get its electricity from 14 the Xcel company. If it doesn't know how to 15 plug into the socket, it won't have any 16 electricity, and it won't toast your toast. 17 So it needs information how do we make 18 our plug, so it plugs into your socket so we 19 can get your electricity and Xcel has all the 20 electricity. They can't get electricity but 21 from Xcel. 22 What if Xcel won't tell it or the 23 energy company Xcel won't tell it everything it 24 needs to know? Or what if Xcel tells it things 25 that aren't true? 2651 1 Professor Noll will explain why it's 2 necessary to both competition and lower prices 3 that Xcel not use its monopoly power over 4 electricity to give its own toasters an 5 advantage. 6 So its own toasters are the only 7 toasters who can plug in properly to the 8 sockets. Otherwise toast -- other toaster 9 companies, Westinghouse, Black & Decker, and so 10 on could never have their products work. 11 At this trial we'll prove that 12 Microsoft's monopoly over Windows was like the 13 power company's monopoly over electricity. 14 Other software companies could not compete 15 unless they could plug into Microsoft's 16 sockets. 17 And so this analogy, while not 18 perfect, is very like what's happened here. 19 Part of what Microsoft did was use its 20 monopoly power over the operating system to 21 leverage monopolies in applications, Word, 22 Excel, Office. And they did that by denying 23 important information to other companies so 24 their plugs would not fit properly into the 25 sockets. 2652 1 In a very real sense, we are going to 2 be going behind Microsoft's corporate walls and 3 down their corridors and into the offices of 4 their executives to see hundreds, even 5 thousands, of these internal documents authored 6 by its top executives from Bill Gates on down. 7 Where did we get all of these 8 documents? They were provided under the 9 discovery process. 10 Judge Rosenberg talked to you about 11 interrogatories. We can ask questions; tell 12 us. They can ask questions of us. We can say 13 give us all of the documents that you have that 14 bear on a particular issue, and they're 15 required to make a reasonable search and 16 provide them. We used those discovery 17 processes; we got documents from other cases. 18 We will also hear testimony from 19 witnesses, either from the witness stand, and 20 I've already talked to you a little bit about 21 depositions, both by video and ones that we're 22 going to read to you. 23 You will hear all of these strange 24 words, all of these strange acronyms. I'll do 25 everything that I can to explain them once or 2653 1 twice or three times, or however many times it 2 occurs to me to do so. 3 As you hear all of this strange 4 language and see it all in the documents, we'll 5 explain as they come up. We'll try to explain. 6 Some of them I still haven't figured 7 out with all of the documents. There's one I 8 was looking at last night, and I thought um, I 9 looked in my red notebook and it wasn't there. 10 We're going to try to find that out before I 11 talk to you about it. 12 Now let me talk to you about 13 Microsoft's illegal tactics, the things that 14 Microsoft does that destroy competition. What 15 are the illegal tactics that restrict 16 competition and harm consumers? 17 We have created some icons for you. 18 These are graphical representations. They are 19 among the things that you will not have in the 20 jury room. They're only for the purpose of 21 identifying and helping you to remember what 22 these tactics are. 23 I will talk about what they mean as we 24 go along, but here are these graphical icons 25 and representations. Here are the things we 2654 1 say Microsoft did to destroy competition. 2 One of the things were exclusionary 3 contract terms. 4 Microsoft entered into contracts with 5 OEMs that for all practical purposes prevented 6 other operating systems from competing. 7 Tying and bundling, putting products 8 together in a way that leveraged the monopoly 9 power and the operating system into other 10 markets. 11 Buying out the competition. You'll 12 hear stories a couple of times about Microsoft 13 just saying, you know, you're competing with 14 us, stop that, we'll buy you. 15 Dishonoring contracts. I think that's 16 self-explanatory. You enter into a contract, 17 you're supposed to keep your word. If you 18 don't, in the case of Microsoft when it -- its 19 anticompetitive; it constitutes an illegal 20 tactic. 21 Vaporware, that may be something that 22 you've not heard about. That's when you 23 announce a product that isn't going to come or 24 -- either isn't going to come at all or isn't 25 going to come very soon for the purpose of 2655 1 freezing the market for the purpose of stopping 2 a competitor. 3 FUD. Fear, uncertainty, and doubt. 4 That's not like telling people my competitor's 5 product -- buy my product, not my competitor's, 6 because mine is better, and here's what's wrong 7 with the competitor. 8 Truthful information, that's not FUD. 9 FUD is something else, and I'll tell you what 10 it is. 11 The beta black list, I guess we 12 haven't even talked about betas. But some of 13 you, I'm sure, are aware that before a product 14 is released generally to the market, it's 15 tested; and usually by the people who are going 16 to use it, the businesses, the consumers who 17 are going to use it. Called a -- the product 18 goes out to some group of people for the 19 purpose of seeing whether or not it's going to 20 work. And that's called a beta. 21 And Microsoft had a black list that 22 said certain companies trying to plug into 23 their sockets could not have their betas to 24 make their products competitive with 25 Microsoft's products, okay. 2656 1 I don't think I said that exactly 2 right. 3 The beta -- Microsoft would not let 4 people have their betas if they made products 5 that competed with Microsoft, not with a 6 product that was in the beta, but with other 7 products. 8 You have to have the beta if you're 9 going to -- you've got to have the socket if 10 you're going to plug into it. You've got to 11 know whether your product is compatible with 12 the socket with the operating system. 13 Technical sabotage, that means you can 14 see the plugs don't fit. There's -- the wires 15 don't go. And that means Microsoft did things 16 on purpose to make other people's products not 17 work with their monopoly operating system. 18 Undocumented APIs. We talked about 19 the APIs and the -- some of them Microsoft 20 doesn't tell other people about. They keep 21 them secret. 22 The DOS Windows merge, that's Windows 23 95, when they bolted the operating system and 24 the GUI together, we say they did that in order 25 to kill DRI, to kill DR-DOS, and OS/2. 2657 1 Dividing the market. You will hear 2 evidence that Microsoft, when it has a 3 competitor, rather than competing fair and 4 square, would make proposals. 5 You've already heard about the 6 Netscape proposal. You'll hear others. You 7 know, I'll take -- Microsoft generally would 8 say, in effect, I'll take the big share of the 9 market and you can have the little share. 10 As you might suspect, competitors 11 didn't want the little share; they wanted their 12 fair share. 13 The deception and misinformation, I'm 14 sure that's very self-explanatory. 15 Technology espionage, I think that's 16 self-explanatory. 17 Unqual treatment, you understand that. 18 And threats and intimidation. 19 These kinds of tactics were part of 20 Microsoft's formula to destroy competition. 21 I'm going to talk to you about the 22 following Microsoft -- these are the 23 competitors we're going to talk about. These 24 are not all of them. These are all of them I'm 25 going to talk about. 2658 1 Digital Research, Incorporated, which 2 I've said that's Gary Kildall's group CP/M, 3 from which QDOS came, from which MS-DOS came, 4 that's Digital Research. 5 You will hear from -- actually, you're 6 going to hear from the guy who wrote DR-DOS. 7 He's coming from England to talk to you about 8 how he wrote it and what it did and why it 9 died. 10 The story I tell you about DR-DOS will 11 be the longest because it is in that story that 12 I'm going to define terms and talk with you 13 about the tactics. So that will be the 14 longest, I promise, and then they'll get 15 shorter. 16 GO. GO was the developer of a 17 notebook computer. I'm going to show that to 18 you. A little tablet that a man named Jerry 19 Kaplan thought of in 1987, and that was 20 released to the market in 1991. 21 You wrote it -- remember, you were 22 asked the question did you ever have one of 23 those. You wrote on it with electronic ink. 24 Now I'm talking a long time ago. We'll talk 25 about that. 2659 1 IBM had the operating system called 2 OS/2. 3 Then I'm going to talk again to you 4 about the findings of fact and try to sort them 5 into some categories. Microsoft's actions 6 against Netscape, against Intel, against Sun's 7 Java, against RealNetworks. Sort of go through 8 them in a way that is, I hope, helpful to you. 9 Then we're going to talk about the 10 applications software, Word and Excel, about 11 RealNetworks, about another operating system 12 called the BeOS. It was a multimedia operating 13 system. And then Linux, which is -- you heard 14 a little bit about Linux in the findings of 15 fact, the free software, the open-source 16 software model. 17 And then I'm going to talk about Acer. 18 Acer was an OEM, an international OEM, usually 19 in the top ten, and I'm going to try to fit in 20 together, all of the pieces of the stories into 21 the Acer story as kind of a summary. 22 These are, as I said, not all of the 23 companies, but we think that these are 24 representative of what Microsoft did. 25 It has taken me many years to 2660 1 understand this material. I have had periods 2 of intense frustration, and I ask you to listen 3 carefully. And I think for you, as some of you 4 may get this right off, but those of you who do 5 not, I just don't want you to think you'll not 6 get it because you will, because I did. 7 It's -- I kept going, and pretty soon 8 I got the pieces together. I could understand 9 what they were talking about. I think for some 10 of you that will be easier, and for some of you 11 it will be not. 12 For most of us the technical aspects 13 are difficult, and what makes it harder is the 14 sheer volume; the sheer volume of companies, 15 the sheer volume of people, the sheer volume of 16 products, and the long time period. And the 17 sheer volume of illegal actions which appear to 18 be separate, but which we will show you are all 19 intertwined. 20 I really wrestled with how best to 21 present this information to you in a way that 22 would make sense. I thought about organizing 23 them chronologically, but Microsoft often had 24 several competitors under attack at the same 25 time, so we would be going back and forth. 2661 1 You know, we'd be going with what 2 happened to DRI and then what happened to OS/2 3 and what happened to Lotus, and that seemed too 4 confusing to me. 5 Then I thought about organizing them 6 by illegal tactic. You know, by those icons 7 that I showed you. But that has the same 8 problem. You know, they're going back and 9 forth, and different people are involved. 10 So I don't think there is any perfect 11 approach, but by organizing by company it seems 12 to me likely to be the clearest. 13 I will point out wherever it seems 14 necessary what envelope the tactics go in, and 15 on some of the documents you will see an icon. 16 Let me make it absolutely clear to you the icon 17 wasn't on there when it was sent out to other 18 people. 19 We have applied the icon, and it won't 20 be on the document when you get the document. 21 It's only for your assistance in sorting out 22 what tactic we believe that that document 23 shows. 24 Just because -- and I will try to 25 watch you to see whether or not it seems that I 2662 1 am helping you to understand or whether I'm 2 putting you to sleep. 3 Then I'll drop something or -- just 4 because I organize this by competitor does not 5 mean that the issue is what the competitors did 6 or didn't do or how well their products worked. 7 The issue is what did Microsoft do to 8 restrain trade and to eliminate these 9 competitors, and therefore competition, and 10 therefore harm Iowa class members. 11 Keep your eye on the ball, and the 12 ball is Microsoft's anticompetitive tactics. 13 Before we begin the stories, I want to 14 show you an old E-mail because so many of the 15 documents are E-mail. I wanted to be sure that 16 you understood how to read these things. 17 At the top you will see Nathan M. -- 18 from, I know it's very clear to all of you. 19 But these are called in Microsoft E-mail 20 aliases, and Nathan M. is Nathan Myhrvold. 21 In the beginning it was the first name 22 -- Microsoft was very little. It was the first 23 name of the person and their last initial. 24 That was the E-mail alias. 25 I also want to show you two dates -- 2663 1 Bill Gates, Bill G. is Bill Gates. You will 2 see him referred to as Bill G. often. And 3 Steve B., Steve Ballmer. So that's how you 4 read those -- Paul M. is Paul Maritz, and Peter 5 N. is Peter Neupert, I think. Subject: Do we 6 have a future? And two dates. 7 This is -- I don't know how to work 8 this out, but if you see at the top, the top 9 date is Friday, June 10, 1988. 10 Can you see that? Yes. 11 And the bottom date is March 9, 1992. 12 So there are a number of documents 13 like that that have two, you know, quite 14 divergent dates, and the only way that -- we 15 don't know which one is the correct one, except 16 by the context of the E-mail and sometimes by 17 who is there at the time. 18 Pretty soon that all gets straightened 19 out and there's just going to be one date, one 20 date on the documents, but at the beginning 21 that's not so. 22 You'll also hear us talking about 23 Bates numbers, see -- exhibit numbers and Bates 24 numbers. The X521273, that is a Bates number. 25 It is a document control number. 2664 1 In cases like this where a large 2 number of documents are going to be produced, a 3 number is applied by the producer so that we 4 can all keep track, so there's some way of 5 keeping track of them. 6 This happens to have two Bates 7 numbers. You'll see them with six Bates 8 numbers. You'll see a lot of numbers. You'll 9 also see a lot of exhibit numbers. 10 This is the one that counts. It says 11 Comes versus Microsoft. That is the exhibit 12 number that counts. 13 But, Darin, can we go back to that 14 handwritten one at the bottom? 15 That's also an exhibit number. We 16 have to leave those on. Those are deposition 17 exhibit numbers, and when the depositions are 18 read to you or when you hear them, those are 19 the numbers that you'll be seeing and hearing. 20 The exhibit numbers that matter will 21 have either Comes versus Microsoft, or just so 22 you don't get confused they may also say Gordon 23 versus Microsoft. Most of them will say Comes 24 versus Microsoft. 25 Let's change to 1332 just -- now look, 2665 1 look there's real names on there. It goes back 2 and forth. Depends on, I think, the E-mail 3 system in use. But that one is a lot easier. 4 What I wanted to show you on this, 5 though, is the redaction. 6 There will be big holes in some of 7 your E-mails, and as the Judge told you, don't 8 be concerned about that. Some material is not 9 relevant. It's not -- it went to a lawyer so 10 that's not something that is a part of what you 11 may consider, so we just take it off. 12 What I've learned over the course of 13 time in trying cases, that anything that you 14 don't get, you want to know why. So there you 15 go. 16 There was something else. Oh, 17 including another E-mail. 18 Sometimes it is very difficult to tell 19 what came from whom, but this I wanted to -- 20 this is a usual way. 21 You see where it says from Joachim 22 Kempin to Brad Silverberg? That E-mail was 23 sent -- you see the little hash marks along the 24 side? That means that that was enclosed in the 25 E-mail from Brad Silverberg back to Mr. Kempin 2666 1 and to Mr. Ballmer and Gates and Brad Chase. 2 That's an enclosed E-mail, but you'll 3 see a lot of that. Sometimes there are little 4 carats, little arrows, and usually you can see 5 what's enclosed E-mail and what came from the 6 original person. 7 Also, ordinarily you read these back 8 to front. In other words, the first E-mail is 9 at the back page, and then the next, and the 10 next, and the last E-mail is at the very front. 11 As you look at these hundreds of 12 E-mails, please remember what the Court told 13 you in Instruction 23, and that is that 14 Microsoft is a corporation and can only act 15 through its officers, its employees, and its 16 agents, and the action of those people, 17 Microsoft's officers and employees and agents, 18 as long as they're within the scope of the 19 employment, are the actions of the corporation. 20 Your Honor, I have finished my 21 introductory remark. I'm ready to begin DRI, 22 but perhaps we should take a break. 23 THE COURT: This is the time I told 24 you we'd break, at 11 o'clock. 25 Remember the admonition previously 2667 1 given. You'll be in recess for lunch until 12. 2 You may go, of course, wherever you wish. You 3 have to leave your notebooks here, please. 4 Remember the admonition. 5 If you'll gather back in the jury 6 lounge at 12, we'll begin as soon as we can. 7 See you then. 8 (A recess was taken from 11 a.m. 9 to 12 p.m.) 10 THE COURT: Ms. Conlin, you may 11 continue with your opening. 12 MS. CONLIN: Thank you, Your Honor. 13 The Judge has put a microphone here 14 just in case I'm not speaking loud enough, and 15 we all expect that I will knock it off. 16 All right. DRI. First competitor 17 story. 18 As I told you, DR-DOS is a competing 19 operating system. It was developed in 1988 and 20 withdrawn in December of 1994. 21 I'm going to outline evidence about 22 Microsoft and DR-DOS. 23 The evidence will prove that Microsoft 24 did not compete fair and square, and it did not 25 beat DR-DOS on the merits of its products. 2668 1 It destroyed DR-DOS by illegal acts, 2 illegal anticompetitive acts. It maintained 3 its monopolies by breaking Iowa's Competition 4 Law. 5 I'm going to talk first about the 6 things that we will prove. 7 That's a little outline. It's four 8 pages long, just FYI. And the first part goes 9 real fast, and then it slows down a bit. 10 Exclusionary licensing tactics. 11 Microsoft says it offers three types of 12 licenses. 13 One is a per copy license. You pay 14 for each copy as you use it. 15 The second is called a per system 16 license. These are the licenses that Microsoft 17 has with the OEMs. 18 The second kind is a per system 19 license, and that is, you pay Microsoft for 20 every computer of a particular model. Compaq, 21 Presario, Acer, every model. 22 It doesn't matter whether the 23 Microsoft operating system is on the computer 24 or not, the license is by system. 25 Until the early 1990s, this was the 2669 1 equivalent of a per processor license, and that 2 is the license where you pay Microsoft, the OEM 3 pays Microsoft for every single computer 4 shipped out of the company with a particular 5 kind of processor. 6 Processor is the CPU. We're going to 7 talk about that in a minute. 8 And again, doesn't matter whether or 9 not Microsoft's operating system is on the 10 computer. 11 The license requires that the OEM pay 12 Microsoft. 13 The types of predatory conduct that 14 Microsoft engaged in in connection with 15 contracts also happen to fall into three 16 categories. 17 The first is the per processor license 18 where the OEM must pay Microsoft for every 19 computer with a particular kind of CPU. That's 20 the processor. 21 The CPUs that started out with an 22 8088, and then moved through various -- usually 23 there is -- there are only a couple in effect. 24 By that I mean at the same time when 25 computer makers are making computers, they're 2670 1 -- they often are using a high-end Intel 2 processor or Intel-compatible processor and a 3 low end. 4 So these per processor licenses means 5 that an OEM could only ship a competing 6 operating system if they were willing to pay 7 twice for the Microsoft operating system, not 8 on the computer and for the competing operating 9 system on the computer. 10 The OEM has to pay the maker of the 11 competing system, for example, DRI, and it 12 still has to pay Microsoft. 13 The second type of predatory conduct 14 in connection with Microsoft exclusionary 15 licenses is the minimum commitment. 16 The OEM has to pay for its estimated 17 number of licenses on a quarterly basis, 18 whether they sell all those computers or not. 19 They estimate we're going to sell 20 100,000 computers in a year. They pay 21 quarterly. They pay for 25,000 every quarter. 22 If they don't sell $25,000 -- or 25,000 a 23 quarter, they still pay. That's the minimum 24 commitment. 25 If they sell fewer than they estimate, 2671 1 Microsoft can keep the money. Those are called 2 prepaid balances. I have mentioned PPDs, 3 prepaid balances. 4 And the OEM forfeits that balance, 5 unless they renew their contract with 6 Microsoft. 7 The third type of predatory conduct in 8 connection with exclusionary licenses is the 9 long-term contracts. 10 After DRI comes along, Microsoft's 11 licenses -- it started out to be a year long, 12 and they got to be two years, then three years, 13 and even four years. 14 So during that time, when a per 15 processor license, if an OEM wants to ship a 16 competing product, they'll be paying twice. 17 Second type of predatory conduct 18 towards DRI is the tying. Combining by 19 contract, by pricing, the Windows monopoly 20 product, a GUI, with a DOS monopoly product and 21 operating system, or vice versa. 22 To prevent consumers from using DR-DOS 23 with Windows, Microsoft began tying the two 24 together. You'll see reference to the WIN DOS 25 combo license. And charging prohibitively high 2672 1 prices to any OEM that wanted to buy Windows 2 alone; that wanted to take the GUI and use it 3 with DR-DOS. 4 You will see from the evidence that 5 Microsoft charged more for Windows alone than 6 for Windows and the operating system together. 7 Third type of illegal conduct is 8 vaporware. Announcing products that just don't 9 exist to stall the market. 10 For example, within a week of DRI's 11 announcement of their product, DR-DOS 5.0, 12 Microsoft announced plans to ship its MS-DOS 13 5.0 within four months. 14 And Microsoft's executives circled the 15 globe and talked about MS-DOS 5.0 and deterred 16 purchasers from trying out DR-DOS. 17 The product did not come out -- okay, 18 this is in April, May, of 1990. The product 19 MS-DOS 5.0 did not come out until June of 1991. 20 First promised in September, then to 21 the end of the year. Then kind of moved out in 22 increments. All the while OEMs are waiting for 23 the Microsoft product. 24 And when it came out, it didn't even 25 include all the features that Microsoft had 2673 1 promised and that DR-DOS 5.0 had in April, May, 2 June of 1990. 3 FUD. That is the next -- the fourth 4 illegal tactic. Fear, uncertainty and doubt. 5 Microsoft's FUD strategy was to 6 portray DR-DOS as full of bugs, full of 7 technical glitches, and incompatible with 8 Windows, the GUI, which, of course, translates 9 the commands to the pictures on the screen. 10 Neither charge was remotely truthful, 11 and Microsoft knew it, and I will tell you how 12 they knew it. 13 Microsoft's own documents reveal the 14 predatory intent behind these spurious charges, 15 which was convince customers that DR-DOS was 16 too risky a venture. You know, don't try it, 17 it might be incompatible. 18 And also the idea was to keep the 19 market, keep OEMs from taking a risk with a 20 product that might be incompatible. 21 Betas, we've just talked about. That 22 is the prerelease version, goes out to some 23 people to check it to try it out, see how it's 24 going to work. 25 I told you about the beta black list. 2674 1 DRI was put on the beta black list for Windows 2 3.1, the GUI product. 3 DR-DOS is an operating system at -- in 4 June of 1991, DR-DOS -- DRI merges with Novell. 5 So Novell, another computer manufacturer -- 6 software manufacturer, also gets put on the 7 beta black list. 8 And I will tell you that companies who 9 do business with DRI stand on a stage with DRI, 10 promote DRI, put DRI products in their 11 catalogs, they get on the beta black list. 12 They can't get their hands on the 13 betas that they need to make their products 14 compatible with Microsoft's monopoly operating 15 system. 16 The next tactic, illegal tactic is 17 technical sabotage. 18 I'm going to talk to you about four 19 types -- four things they have named. 20 First one is a verify DOS. The second 21 one is called the AARD code, A-A-R-D, named 22 after its developer Aaron Reynolds. 23 And that is a type of technical 24 sabotage which existed in the Christmas beta of 25 Windows 3.1. 2675 1 When you put your GUI, your Windows 2 3.1 beta onto a computer that used the DR-DOS 3 operating system, a warning message came up. 4 That's the AARD code. 5 This is stronger than the typical FUD, 6 which is words. But Microsoft engaged in 7 affirmative action to create the strong 8 appearance of incompatibility when -- and then 9 marketed that apparent incompatibility against 10 DRI. 11 The third technical incompatibility is 12 called Bambi. I just was so surprised to learn 13 they named it after Bambi. 14 And the fourth is the nested task 15 flag. 16 Microsoft also uses an illegal tactic 17 of threats and intimidation against anybody who 18 consorts with DRI. 19 And the next illegal tactic is the DOS 20 Windows merge, which became Windows 95, 21 Chicago. 22 In 1993 Microsoft begins to 23 preannounce the development of a new product 24 that is supposedly an integrated Windows 25 operating system and which will simply 2676 1 eliminate the need for any DOS on the machine. 2 Microsoft can eliminate all the 3 competition in the operating system market by 4 simply incorporating DOS, the operating system, 5 into Windows. 6 In other words, Microsoft can use its 7 uncontested monopoly in the operating system to 8 swallow the DOS market in one gulp. 9 It's released in August of 1995, and 10 this is a type of tying and bundling. 11 There is a secret to Microsoft's 12 Windows 95. And what Microsoft describes as an 13 integrated product is in fact simply the 14 operating system with Windows bolted to it. 15 DOS is still in there. You can still 16 get to it and -- but for Windows 95, DR-DOS 17 could have survived as an independent product. 18 There would have been competition in the 19 operating system market. 20 Competition; there would have been 21 choice, there would have been innovation, and 22 there would have been lower prices. 23 I'm going to do this in time order 24 starting with what I call the stagnation of a 25 standard. That's from 1981 to 1989. 2677 1 As I indicated to you, by 1985 MS-DOS 2 is the standard operating system for personal 3 computers. It has a huge installed base. 4 The vast majority of -- this is 1985. 5 The vast majority of PC users use MS-DOS. 6 With monopoly comes complacency, comes 7 stagnation. 8 In November of 1989 Gates told his DOS 9 developers, in Exhibit 184, while DOS continues 10 to be our most important and most profitable 11 product, over the last four years we have done 12 very little with it technically. 13 He admits in this document that 14 Microsoft has abandoned product innovation and 15 has put little or no effort into improving 16 MS-DOS. 17 It's a monopoly product. People 18 aren't going to go anyplace else. So there's 19 no reason to move the product forward. 20 From April of 1987 to May 1990, that's 21 the advent of DR-DOS. 22 Dick Williams, who you will hear from 23 by deposition, takes the helm of DRI in January 24 of 1987. 25 Some OEMs are not very happy with 2678 1 MS-DOS and with Microsoft's control of the 2 whole operating system market. 3 Within 30 days of taking control of 4 DRI, Williams begins development of DR-DOS. 5 John Constant, who is an engineer, 6 and he's in Hungerford, England, begins 7 development of DR-DOS. And he uses as the base 8 an existing DRI product called concurrent DOS. 9 Contrary to Microsoft's public 10 statements at the time, he does no reverse 11 engineering of MS-DOS. He uses as his base a 12 DRI product. 13 The first product is called DR-DOS 14 3.31, and it launches in May of 1988. 15 I've got to move back just a little. 16 In April 1997, at the spring COMDEX, 17 the industry's -- you may have heard about it 18 or read about it. This COMDEX occurs in Las 19 Vegas, and all of the people interested in 20 computer software; not all of them, certainly, 21 but that's the primary meeting place for 22 computer people. 23 Microsoft and IBM in April of 1987 24 announce this joint development agreement, JDA, 25 where they are going to produce OS/2, an 2679 1 operating system, that will be the successor to 2 the DOS standard, and available by year's end 3 they say on IBM's new PS2 systems, and this 4 comes to be known as the DOS is dead 5 announcement. 6 Microsoft and IBM begin the 7 development process for OS/2. 8 IBM then takes the laboring ore with 9 some of the MS-DOS product. They do most of 10 Version 3.3 and virtually all of MS-DOS 4.0 11 totally on their own. 12 And, you know, the product, MS-DOS, 13 has become so unimportant that there is no beta 14 testing at all of MS-DOS 4.0 or the MS-DOS 15 4.01. 16 Bill Gates concedes this point in the 17 memorandum to his executive staff in October, 18 1988. This is Plaintiffs' Exhibit 37. 19 DOS 4 is a mess to discuss. Bugs, too 20 big, strange shell interface. Who wrote it? 21 DOS 4 has a terrible reputation. 22 Now, remember, this is the one that 23 IBM did on their own. But it's going out under 24 Microsoft's name, so Microsoft bears 25 responsibility, and its reputation is at stake. 2680 1 What forces Microsoft to recognize its 2 error in writing a premature obituary for the 3 DOS standard is simple. DR-DOS. And 4 particularly the innovations that DR-DOS comes 5 up with in DR-DOS 5 and DR-DOS 6. 6 DR-DOS is better, faster, cheaper than 7 MS-DOS, according to many people, including 8 some within Microsoft, and it is fully 9 compatible with applications that run on 10 MS-DOS, including Windows. 11 Microsoft's own internal evaluations 12 confirm that DR-DOS is a strong competitor to 13 MS-DOS. 14 In April 1989, internal report 15 entitled DOS and Windows Monthly Summary, which 16 is Plaintiffs' Exhibit 103 -- this is April of 17 1989, says, "Initial consensus from DOS program 18 management is that DRI has a product which 19 competes very favorably against MS-DOS." 20 Even Bill Gates views DR-DOS as a 21 serious competitive threat. 22 On December 1, 1989, in a letter to a 23 guy named Jim Cannavino. Mr. Cannavino is at 24 IBM. 25 And remember, they've got this joint 2681 1 development agreement going on at this time. 2 Mr. Cannavino is a VP and general 3 manager of IBM personal systems. 4 Gates in this letter makes the case 5 for taking -- for Microsoft taking back control 6 of MS-DOS. He says in Exhibit 185, "DOS 7 remains the backbone, though, of both of our 8 software businesses. It is under extreme 9 attack by high-quality clones like DR-DOS." 10 This is Mr. Gates admitting that 11 DR-DOS is a high quality product. 12 Monopoly maintenance begins with an 13 effort by Microsoft to purchase DRI. 14 Initially rather than deal with the 15 threat of competition, Microsoft attempts to 16 pay off DRI to just go out of the DOS business. 17 In December 1988, Steve Ballmer and 18 Dick Williams, Dick Williams the president of 19 DRI, go to a conference in England, and Ballmer 20 speaks privately with Williams. 21 Ballmer proposes that DRI sell MS-DOS 22 as their product instead of DR-DOS and that 23 each company license the other's company -- the 24 other's product. 25 DRI is not interested, not interested 2682 1 in a long-term relationship with Microsoft, and 2 so offers DR-DOS technology for a very high 3 fee, 30, 40 million -- I can't remember for 4 sure -- and expected Microsoft to refuse, and 5 Microsoft did refuse to pay so much cash, and 6 they just went their separate ways. 7 So the buying doesn't work, and so 8 they begin technical sabotage. 9 At around this same time, Gates 10 directs his development staff to identify ways 11 that a Microsoft application can break DR-DOS. 12 On September 22, 1988 -- 13 I hope you can see this better than I 14 can. Can you? 15 Let me read it to you. I've gotten a 16 magnifying glass to look at some of these. 17 Some of these are old documents. They've been 18 faxed, they've been messed with, and they 19 weren't all that good to begin with. 20 This is Plaintiffs' Exhibit 21. Again 21 Mr. Gates writing on September 22, 1988. 22 "You never sent me a response on the 23 question of what things an app would do that 24 would make it run with MS-DOS and not run with 25 DR-DOS. Is there any version check or API that 2683 1 they fail to have? Is there features they have 2 that might get in our way? I am not looking 3 for something they can't get around. I am 4 looking for something that their current binary 5 fails on." Binary source code. 6 In other words, what can an 7 application do to check to see if it's running 8 on MS-DOS or DR-DOS, and if it's running on 9 DR-DOS, fail, break, stop. 10 He goes on to say, "This is a fairly 11 urgent question for me, and I have received 12 nothing." 13 He's clearly saying he wants Microsoft 14 applications not to run if they're loaded on 15 DR-DOS. 16 Gates receives a reply that day from 17 Phil Barrett, and he is a guy who runs Windows 18 development at Microsoft. His title is 19 development group manager. 20 What he learns from Mr. Barrett on 21 that day is that DR-DOS approaches nearly 22 perfect compatibility. 23 In Plaintiffs' Exhibit 34A, he 24 identifies three differences. 25 "Here follow the three differences 2684 1 between DR and MS-DOS that Aaron has been able 2 to find so far. Except for these differences, 3 the two OSs behave similarly, including 4 undocumented calls." 5 Even Reynolds -- this is Aaron 6 Reynolds, who is one of Microsoft's software 7 developers, can only find three differences 8 between these two operating systems in all the 9 hundreds of APIs that exist, all the hundreds 10 of calls. And that includes even those that 11 Microsoft keeps secret beyond documented ones, 12 which we'll talk about later. 13 He goes on to say, Mr. Barrett goes on 14 to say, "The bottom line is that given Aaron's 15 current findings, an application can identify 16 DR-DOS. 17 "However, most apps usually have no 18 business making the calls that will let them 19 decide which DOS, MS or DR, they are running 20 on." 21 Truer words were never spoken. There 22 is simply no legitimate reason for an app to do 23 this, and this is Barrett's attempt to put up a 24 stop sign to prevent this kind of conduct. 25 It's ignored. 2685 1 Next comes the warning messages. As I 2 told you, the market for software is worldwide, 3 and so I'm going to talk to you a little bit 4 about Korea. 5 DRI is making in roads in Korea where 6 a lot of computers are produced. 7 Early on they considered DR-DOS 8 favorably. 9 Here's what happens. Microsoft sends 10 people to Korea, and in open-forum seminar they 11 tell OEMs, representatives of OEMs, that DR-DOS 12 is a copy of MS-DOS, and anybody that uses the 13 product will be sued by Microsoft. Needless to 14 say, kind of discourages people from buying 15 DR-DOS. 16 Gates also decides that Microsoft 17 products should test whether DR-DOS is running 18 despite Mr. Barrett's reservations that I told 19 you about. 20 First, his idea is to crash it, make 21 it stop, but then he changes focus and wants to 22 warn the user about using DR-DOS instead of 23 MS-DOS. 24 And he writes on February 8, 1989, in 25 a memo to his executive staff about DR-DOS. 2686 1 That's a little bit better. 2 "I want to make sure we get the 3 message implemented in all of our products. 4 Languages are important, Windows is important, 5 applications are important. How can we spread 6 the message about getting this done, including 7 the localized versions? I guess we have to 8 localize the message. Russ, please let me know 9 what your action plan for this is." 10 Localized version is one that speaks 11 the language of a locality. And Russ is Russ 12 Warner, who is at that time in charge of 13 MS-DOS. 14 The message they're talking about, and 15 that goes into Microsoft products, warns people 16 that they are running what Microsoft calls an 17 untested DOS. In other words, not Microsoft 18 DOS, not MS-DOS. 19 Within three months Microsoft products 20 are shipping with the DOS clone check. 21 Mr. Schulman will talk to you about 22 that. The code is verify DOS. 23 And in May 1989, Mark Chestnut, who is 24 Microsoft's -- I'm going to give you the 25 titles. 2687 1 The titles change. They have 2 different meanings at different times, but I 3 thought you should at least know that the 4 people who are talking are people who have 5 roles to play, significant roles to play in the 6 production of these products. 7 Mr. Chestnut is Microsoft MS-DOS 8 product manager. And he confirms in May of 9 1989 that this warning has been implemented. 10 DRI competitive response. This is 11 Plaintiffs' Exhibit 109. 12 The first Microsoft product with the 13 nontested DOS warning code, QuickPascal, was 14 released. 15 Tom Reeve and Cindy Kasen in have 16 committed to implementing it in all new MS 17 application and language releases from this 18 point forward, including international. 19 And the warning is not a bit subtle. 20 This is Plaintiffs' Exhibit 3228. 21 The warning says, "Microsoft 22 QuickPascal has been tested for use only with 23 MS-DOS and PC-DOS operating systems." 24 PC-DOS is the IBM one. 25 "Your use of this product with another 2688 1 operating system may void valuable warranty 2 protection provided by Microsoft on 3 QuickPascal." 4 By August of 1989 the warning is 5 implemented in foreign versions of Windows, as 6 evidenced by this message, by the Microsoft 7 Korean subsidiary. This is Plaintiffs' Exhibit 8 125. 9 I'm going to read it to you just as 10 it's there, written by a person for whom 11 English is not his first language. 12 He says, "Bill Gates ordered to all 13 application business units to include checking 14 routines of operating environments, and if it 15 is Microsoft DOS, nothing will happen. But if 16 it is non-MS-DOS, such as DR-DOS, application 17 will display messages saying that, quote, this 18 application has been developed and tested for 19 Microsoft MS-DOS. 20 Since you use different environment, 21 this application may not work correctly." 22 The question from MS-CH -- that's the 23 Microsoft Korean subsidiary -- is, "How to 24 check the DOS is MS-DOS or clone. MS-CH wants 25 to include such routine in Hangeul Windows so 2689 1 that Hangeul Windows can run only Hanguel 2 MS-DOS. Could you tell me to whom I can ask to 3 resolve this problem?" 4 Other language products, such as 5 Microsoft QuickC, Programmers Workbench, and 6 6.0 setup have similar messages. 7 And it makes DOS -- DR-DOS users 8 wonder what kind of a risk are they taking not 9 using MS-DOS, and that, of course, is what 10 Microsoft wants. 11 This is Microsoft's first type of FUD 12 against DR-DOS. 13 Exclusionary licenses. Despite 14 Microsoft's action, DRI does make headway, 15 significant headway, into several substantial 16 Microsoft accounts. 17 And Gates thinks how to protect 18 Microsoft's DOS monopoly and the emerging power 19 of its Windows GUI. 20 On May 18, 1989, Gates writes his 21 executive staff addressing operating system 22 strategy. 23 He says, "The DOS gold mine is 24 shrinking and our costs are soaring, primarily 25 due to low prices, IBM share, and DR-DOS. 2690 1 Making Windows a strong product benefits our 2 gold mine. 3 "I believe people underestimate the 4 impact DR-DOS has had on us in terms of 5 pricing." 6 On August 6, in an E-mail directed 7 only to Mr. Ballmer, who is then his -- then. 8 And for a long time, his top lieutenant, Gates 9 writes in Plaintiffs' Exhibit 135, "DOS being 10 fairly cloned has had a dramatic impact on our 11 pricing for DOS. I wonder if we would have it 12 around 30 to 40 percent higher if it wasn't 13 cloned. I bet we would." 14 So this is Bill Gates admitting in an 15 internal document to Steve Ballmer what the 16 effect of competition is on Microsoft's 17 profits. We'd have it 30 to 40 percent higher 18 if it was not for DR-DOS. 19 This is good for consumers, including 20 Iowa consumers. 21 Joachim Kempin, whose name I am 22 hopefully now pronouncing correctly, is someone 23 who you'll hear quite a bit about. He is the 24 worldwide director of OEM sales for Microsoft. 25 He is the person in charge of selling to the 2691 1 computer manufacturers, the OEMs. 2 He knows that despite Microsoft's lack 3 of innovation, Microsoft's DOS monopoly permits 4 it to maintain a steady price, notwithstanding 5 a rapid decline in the price of other 6 components of the personal computer. 7 Microsoft not only wants to exclude 8 DR-DOS and the lower prices that DR-DOS and 9 competition entails, Microsoft is searching for 10 a way to maintain higher prices, even though 11 it's, as Mr. Gates says, they're not doing much 12 to improve the product. 13 On February 9, 1990, Kempin tells us 14 that DOS monopoly prices are bucking the trend 15 of other computer components. 16 This is Plaintiffs' Exhibit 222. 17 Can you do anything about that, Darin? 18 Is there any way to make that a bit bigger or 19 clearer? 20 I'm not sure that helps. 21 Here is what he says: "OEM 22 manufacturers are increasingly sensitive to 23 added costs. OEMs are pressuring us more and 24 more to accept the fact that operating system 25 software needs to follow their economy of scale 2692 1 model, expressed in percentage of SRP per. 2 Today we are asking for two to three times as 3 much money for MS-DOS as we did five years 4 ago." 5 Let me explain what he's saying there. 6 Expressed in percentage is clear. SRP, 7 suggested retail price. Per means per unit per 8 computer. And he says, "...expressed in 9 percentage of SRP per. To date we are asking 10 for two to three times as much money for MS-DOS 11 as we did five years ago." 12 In five years, Microsoft has increased 13 its price -- the price it sells MS-DOS to OEMs 14 by two to three times, according to the guy who 15 knows for sure, because he's in charge of 16 selling MS-DOS to OEMs. 17 Let me talk about tying. 18 Before obtaining monopoly power in the 19 GUI market with Windows, Microsoft sort of 20 threatened and intimidates OEMs into accepting 21 licenses that exclude DR-DOS. 22 One thing they offer is very low 23 bundled prices for MS-DOS and Windows together. 24 DR-DOS is identified early as a threat 25 in the Vobis account. Vobis was the largest 2693 1 OEM, the largest computer manufacturer in 2 Germany. Maybe in Europe. 3 Theo Lieven is its CEO. We expect 4 Mr. Lieven to come to trial from Germany and 5 tell you about how Microsoft drove DRI out of 6 his company. 7 The Microsoft OEM status report, 8 you'll see lots of these. Microsoft does 9 status reports on a monthly basis and covers 10 the whole world and says what's going on. 11 In November of 1980 -- and they're 12 done to and for Mr. Kempin. 13 Here is Exhibit 4459. It is the 14 November 1989 status report. 15 Here is what it says: "Also, they are 16 interested in having Windows 3 on their 17 computer systems as soon as the product is 18 released. At this time we still offer DOS and 19 Windows on per system level. If there is any 20 danger, we will offer the DOS-WIN combo 21 license." Two together. 22 In this report Microsoft admits that 23 it is contractually tying the two product 24 together. 25 Microsoft also uses another method of 2694 1 tying by giving OEMs more favorable minimum 2 commitment packages for DOS and Windows 3 combined as opposed to Windows alone. 4 When closing a license with Acer -- 5 Acer International is one of the -- usually one 6 of the top ten OEMs in the country. 7 When closing a license with Acer in 8 November 1989 where DR-DOS is a threat, Jeff 9 Lum, L-u-m, who is the international VP of 10 Microsoft, proposes crediting some prepaid 11 monies on MS-DOS. 12 PPDs are also known as UPBs. 13 They owe money -- Microsoft got some 14 of Acer's money on the Microsoft MS-DOS 15 contract. What they're doing here is saying to 16 Acer, we will give you -- we will credit some 17 of the money that you owe for MS-DOS on 18 Windows, okay, to the new Windows contract. 19 This is Plaintiffs' Exhibit 169. 20 "If we want to attract them using 21 UPBs, we could apply some of the UPB to the new 22 Windows license that is about to be signed, 23 which has a totally separate minimum 24 commitment" -- he says "min commit schedule." 25 After -- as I mentioned earlier, in 2695 1 the beginning Windows 1.0 and Windows 2.0, not 2 much of a product. 3 Along comes Windows 3.0, and they've 4 -- you know, third generation, it's much 5 better. And once it launches and starts to 6 become popular, what was once a carat becomes a 7 great big stick. We are at DR-DOS on the rise. 8 As I said, even though -- even despite 9 all of this, DR-DOS does show strong growth, 10 especially in the OEM channel DRI's management 11 reports for the fiscal year ending August 31, 12 1989 -- this is Exhibit 143. 13 General purpose operating systems 14 revenue grew 43 percent from 1988. This 15 included significant growth through OEM 16 channels, 62 percent over 1988, attributable 17 primarily to DR-DOS. 18 The company expects a minimum growth 19 rate of 24 percent in 1990 as new functionality 20 is provided with DR-DOS and it gains even more 21 widespread OEM acceptance worldwide. 22 So now we are to May 1990, July 1990. 23 This is -- during this time DR-DOS 5.0 is 24 released, and this is when the real competition 25 begins. 2696 1 By the late 1980s, PC users' two 2 biggest complaints are, first, not enough 3 memory. Those of you who were using computers 4 in this time probably remember the very serious 5 problems we had running applications. They'd 6 hit the memory limit and down everything would 7 go. 8 And second, limitations on hard disk 9 size. The problem lays in the operating 10 system's inability to take advantage of 11 increased memory size and increasingly large 12 disk size. 13 Despite the fact that users have been 14 complaining about these problems for years, 15 Microsoft gives no indication that it is 16 interested in solving them. 17 In June 1990 -- remember this date -- 18 June 1990, DR-DOS provides advanced features 19 that mitigate these problems, not suggesting to 20 you that they're solved, but DR-DOS provides a 21 way for people to get access to more memory, 22 and it includes numerous other improvements as 23 well. 24 It's just a tremendous breakthrough. 25 Not only does the product include the memory 2697 1 management features that Mr. Constant will tell 2 you about, it has expanded disk drive 3 capabilities, and it features innovative things 4 like online help, the ability to sort file 5 directory listings in a number of ways, a file 6 transfer utility, and a very easy-to-use setup 7 program, you know, how you get the -- how you 8 install the product. 9 MS-DOS does not provide any of these 10 features in June 1990. 11 When DR-DOS 5.0 ships in the United 12 States, comparable features in MS-DOS do not 13 appear until June of 1991, a year later. 14 When DR-DOS comes out, it receives 15 praise and endorsement from everywhere, 16 including from within Microsoft itself. 17 On April 15, 1991, Phil Barrett -- 18 Phil Barrett, head of the department that is in 19 charge of MS-DOS, receives the following review 20 from one of his subordinates. This is 21 Plaintiffs' Exhibit 682. 22 "Last Thursday you asked me for a 23 user's view of DR-DOS 5.0. When I worked for 24 David Wiese's brother Ira, I used DR-DOS 5.0 25 with a huge number of apps. I found it 2698 1 incredibly superior to MS-DOS 3.31 and IBM-DOS 2 4.01." 3 Those are the products on the market 4 at the time DR-DOS 5.0 comes out. 5 "1. DOS compatibility. The most 6 important reason to use any version of DOS is 7 to run DOS apps. DR-DOS 5.0 runs every DOS app 8 I know. DR-DOS 5.0 works successfully with 9 Windows 2.11, WIN 386, 2.11 again, and Windows 10 3.0 and 3.0A. 11 And here is the reviewer's conclusion. 12 "DR-DOS is vastly superior to MS PC-DOS 3.31 13 and 4.01. It is about as good as MS-DOS 5.0. 14 Both have nearly identical features, 386 UMB 15 memory" -- UMB means upper memory block -- 16 "upper memory management, command history, help 17 included in utilities, format optional 18 installation, high compatibility with existing 19 DOS apps. I don't see any real cutting-edge 20 advantage of one over the other." 21 Now, this is April 15, 1991, so Mr. -- 22 this guy whose name is Percy T. has access to 23 the -- by this time to the beta of MS-DOS 5.0, 24 but it is not yet released to the public, 5.0 25 is, and it's almost a year after DR-DOS comes 2699 1 on the market. 2 And this guy, Percy T., is well 3 qualified to make this assessment. That's why 4 Phil Barrett, who is in charge of the 5 department, asks him to do it, and he will tell 6 you, he, Barrett, will tell you by deposition 7 that's why he asked him to do it. 8 Monopoly maintenance. Microsoft knows 9 it is facing a legitimate and credible threat, 10 and it simply declares war. 11 In May 1990, Microsoft's executive 12 staff attends an annual executive staff 13 retreat, and they clearly discuss monopoly 14 maintenance. 15 This is Plaintiffs' Exhibit 280, and 16 it says, "Desktop" -- you can see that. "On 17 the desktop, we have a strategic win today 18 (monopoly). We must keep the desktop." 19 And this was not some random thought. 20 It is a presentation by, among others, John 21 Shirley, the outgoing CEO and president of 22 Microsoft; Brad Silverberg, whose name you will 23 hear a lot, he's an incoming executive from 24 Borland taking charge of MS-DOS and Windows, 25 made to, among others, Bill Gates and Steve 2700 1 Ballmer. 2 The focus is still on defending and 3 extending the DOS market monopoly a year later, 4 and this would be in 1991. 5 Then Microsoft's president is a guy 6 named Mike Hallman, and he gathers a collection 7 of E-mails from all of his executives listing 8 their top ten priorities. 9 And the obsession over monopoly power 10 is just a little bit startling. 11 This is Plaintiffs' Exhibit 567. It's 12 from a guy named Rick Macintosh, and he is in 13 MS sales for North America. 14 He says, "Keep and expand the system 15 franchise. Identify the minimum acceptable DOS 16 penetration, i.e., 95 percent, and absolutely 17 attain it and keep it." 18 Exhibit 570 is from Scott Oki. You 19 will hear from him by deposition. He's senior 20 VP for sales and marketing. 21 He says, "Maintain control of the 22 desktop systems platform. DOS is still the 23 gold mine. It is the cash cow that allows us 24 to invest in other potential cash cow 25 businesses." 2701 1 And then Silverberg, in an Exhibit 2 563, who is the vice president of personal 3 systems group says, "Protect and expand the 4 system franchise so that Windows is the 5 dominant standard. Windows needs to own both 6 stand-alone machines, as well as client 7 connected desktops." 8 Now let's talk about the exclusionary 9 licenses. 10 The most effective tactic Microsoft 11 uses in defeating any operating system 12 competitor is these exclusionary licensing 13 tactics with the OEMs. And the three ways that 14 they exclude other operating systems, not just 15 DR-DOS, but also OS/2. 16 During this '90-'91 period, Microsoft 17 -- Microsoft licenses do not say right out you 18 can only load MS-DOS. They utilize a 19 collection of devices to create the same 20 effect; per processor licenses, minimum 21 commitments, long terms. 22 Exclusionary licenses are the key to 23 Microsoft's defeat of both DR-DOS and OS/2. It 24 is another competing -- Microsoft sort of 25 creates a wall of these per processor licenses. 2702 1 You'll hear Microsoft say that these 2 licenses did not cover all OEMs and that DRI 3 and IBM could compete for OEMs that were 4 covered when the licenses expired. Then they 5 made the licenses longer. 6 And besides that, they have these 7 prepaid balances that you can only get back if 8 you renew your license, and then if all else 9 fails, you got FUD and vaporware and all of 10 these other tactics. 11 The processor of a computer is also 12 called the chip, and it -- or the CPU. It 13 really is the computer. 14 All the other parts, the monitor, the 15 keyboard, even the memory, are peripherals, 16 just peripherals that work with the computer. 17 What the processor does is process. 18 It processes instructions. 19 Instructions are loaded into memory, and the 20 processor is told where in the memory to start 21 reading from. 22 It reads an instruction and carries it 23 out and then moves onto the next one. 24 And, of course, it does it a lot 25 faster than I'm talking. 2703 1 The instructions are simple. This is 2 a basic item, like move or add. 3 The important CPU family in this case 4 is, of course, the Intel and the 5 Intel-compatible processors because that's what 6 most PCs use. All PCs use either the Intel 7 processor or an Intel-compatible processor. 8 The first processor is 8086, then 9 8088, then 80286, which led to 80386. And I'm 10 telling you these numbers because you will see 11 them. 12 You'll see talk in the documents about 13 a 286. That's the number of the processor. Or 14 a 386. 15 Again, the number of a processor. 16 Then after 486 you get the Pentium. 17 At any given time there's a high end 18 and a low end usually on the market. 19 Under per processor licenses, an OEM 20 has to pay to Microsoft a royalty, a license 21 fee on every single machine with that processor 22 that ships out the door, no matter what's on 23 it. 24 The per processor license means that 25 an OEM could only ship a competing operating 2704 1 system by paying twice. 2 The OEM pays Microsoft, and -- you 3 know, this is the OEM who wants to ship DR-DOS, 4 pays Microsoft, pays DRI. 5 Microsoft's licenses also require the 6 OEM to make large minimum commitments with 7 up-front payments. 8 Microsoft's pricing structure rewards 9 OEMs for -- that make sort of overoptimistic 10 predictions about what they're going to sell. 11 So OEMs regularly have these very large prepaid 12 balances. 13 And when their licenses expire, they 14 have paid Microsoft hundreds of thousands, 15 sometimes millions of dollars, for licenses 16 that have not shipped on any computer. And, of 17 course, they don't get that back unless they 18 renew their license. 19 And then Microsoft is willing to give 20 them some of the money that they've already 21 paid for licenses that have not shipped. They 22 credit those sometimes at their discretion on a 23 new per processor license. 24 The stranglehold on OEMs is tightened 25 by the -- by extending the terms. Longer and 2705 1 longer and longer licenses -- license terms. 2 Microsoft's own documents show that 3 the reason for these tactics is to cut out, cut 4 off, block out DR-DOS. 5 OEMs simply cannot afford to license 6 DR-DOS even if they think it's a superior 7 product, even if they think it's something 8 their customers would want to buy. 9 85 percent of folks at this time get 10 their operating system with their computer. It 11 comes on the computer when you buy it. 12 The per processor license is the most 13 effective weapon in Microsoft's arsenal against 14 DR-DOS. 15 When competition for accounts 16 increases after DR-DOS 5.0 hits the market, 17 Jeff Lum, we've heard of him before, he is the 18 group manager for North America OEM sales. 19 Directs his sales team -- this is July 23, 20 1990. 21 Comes -- DR-DOS 5.0 is released in the 22 United States about June of 1990. 23 This is Plaintiffs' Exhibit 338. And 24 he is directing all of his sales team. 25 "All DOS 5.0 amendments need to be 2706 1 finalized. Push for all processors if you 2 don't have it for DOS today, or else add 15 3 percent for per machine basis." 4 Okay. So sign the per processor 5 license or pay 15 percent more for your 6 operating systems for every computer. 7 Chestnut, Mark Chestnut, testifies 8 that in many -- in the many months leading up 9 to the launch of MS-DOS 5.0, the repeated 10 objective is to have the per processor DOS 5 11 licenses for any OEM account that was in the 12 business of manufacturing desktop PCs. 13 You won't believe this, but I have 14 apparently skipped some of this, so I will make 15 it up as I go along. 16 I'm sure Darin knows that I've 17 skipped. 18 There's a woman named Stephanie 19 Reichel, and she's over in Germany, and she 20 works on the Vobis account, okay. And she is 21 the Microsoft representative to the Vobis 22 account. 23 Mr. Lieven is pretty resistant, to say 24 the least, to the idea of the per processor 25 license. He wants to offer his customers a 2707 1 choice, and he likes DR-DOS. He thinks it's a 2 superior operating system. 3 So Ms. Reichel -- Mr. Chestnut, Mark 4 Chestnut says that in the many months leading 5 up to the launch of MS-DOS 5.0, everybody's 6 supposed to get these per processor licenses, 7 and Stephanie Reichel says this is an order 8 that comes directly from Kempin, the head of 9 worldwide OEM sales. 10 Repeated entries in Microsoft's OEM 11 status reports reveal starkly the awareness 12 that why we're doing this, folks, is to get 13 DR-DOS. 14 Here are just a few of the entries. 15 And I'm telling you, there are dozens and 16 dozens of these, and the reason that I think 17 it's important for you to realize this is 18 because Microsoft's going to have other excuses 19 for these licenses. 20 I want you to remember that when 21 they're talking to each other, when they're 22 writing their reports, there's one reason 23 mentioned for per processor licenses. 24 Here is Exhibit 409 from October of 25 1990. 2708 1 Opus agreement has finally been signed 2 by Redmond. Opus is an OEM; Redmond is 3 Microsoft. 4 Another DRI prospect bites the dust 5 with a per processor DOS agreement. 6 Exhibit 410. This has to do with 7 Hyundai Electronics, Inc., called HEI. 8 "DRI is still alive. We are pushing 9 them to sign the amendment on processor based 10 license. This will block out DR once signed." 11 Here is Exhibit 484 from December 10 12 of 1990. 13 "Congratulations are in order for 14 John, DRI killer, McLaughlan (no, he isn't 15 having another baby) who signed a $2.5 million 16 agreement with Acbek (Sun Moon Star). The 17 agreement licenses DOS 5 per processor on a 18 worldwide basis for three years (they will be 19 replacing DR-DOS which they currently ship 20 outside the United States." 21 Here is Plaintiffs' Exhibit 485 from 22 December 11 1990. 23 This is about an OEM called Trigem. 24 Their new license agreement is per 25 86/286/386 -- the three processor numbers -- 2709 1 processor system license for DOS 3, 4, and 5. 2 "No more DR-DOS from Trigem." 3 Here is Plaintiffs' Exhibit 539. 4 Again a month or so later from HEI. 5 DRI visited Hyundai executives and the 6 pricing issue was raised again. "The new 7 license is a per processor deal which allowed 8 us to completely kick out DRI." 9 Here is Plaintiffs' Exhibit 647 from 10 March 31, 1991. 11 Liuski, which has been an MS-DOS PP -- 12 that means packaged product -- customer for 13 several years now at a run rate of 14 approximately 25,000 to 27,000 per year has 15 signed a license for MS-DOS 4.01 and 5.0. 16 The per processor license is a 17 one-year license at a one-year minimum of 18 18,000 units per year at a royalty rate of $35. 19 On the surface, this would seem like a 20 decrease in revenues. They currently pay $50 21 for MS-DOS PP, packaged product. 22 Remember there are COGS, cost of goods 23 sold, in the $50. The reason for the 24 conversation -- that's what it really says. 25 The reason -- yes, the reason for the 2710 1 conversation -- I think that must mean 2 conversion. 3 "The reason for the conversion to 4 royalty is to retain their loyalty to MS-DOS. 5 They were seriously considering DRI product, 6 thus we needed to be more aggressive." 7 You see a lowering of the price there 8 because of competition. 9 Exhibit 710, March 1991. 10 Budgetron is the one account in Canada 11 where DRI's presence was very strong. 12 Budgetron's market is strictly the low end VAR, 13 value-added reseller or dealer, who would 14 endure DRI DOS for a lower-priced machine. 15 This new contract guarantees MS-DOS on every 16 processor manufactured and shipped by Budgetron 17 there for excluding DRI. 18 Ron Hosogi during this time frame is 19 director of OEM sales -- and he's not Kempin. 20 Kempin is above him. 21 He states Microsoft's licensing 22 attacked succinctly, in Plaintiffs' Exhibit 23 379. "We are forcing them not ship any DRI 24 machines." 25 Indeed, Microsoft makes getting a per 2711 1 processor license the top priority, top 2 priority even sacrificing income to get it. 3 Why? So after driving competitors out of the 4 market, they can charge higher prices than in a 5 free market. 6 Microsoft insists that OEMs were free 7 to depart from the per processor license and 8 that price differentials between the two 9 license types per processor per system were 10 minimal. 11 That's just not so. Microsoft is well 12 aware also of the price points and margin 13 pressure that OEMs feel. 14 OEMs work on a very small margin. 15 You'll hear that from lots of people. And 16 Microsoft obviously knows that a dollar or two 17 is very important to OEMs because when they 18 come out with their incentives -- when they 19 come out with their -- I thought that was the 20 furnace again. 21 When they come out with their 22 incentives, they vary -- you know, an incentive 23 can be 50 cents a machine -- by Microsoft, what 24 Microsoft pays in this market development fund, 25 up to 5.50. 2712 1 So what I'm saying to you is, 2 Microsoft may poo-poo the idea that a dollar a 3 buck is important to OEMs, but they know that's 4 not true. A dollar per unit is very meaningful 5 in a small margin business, and Microsoft knows 6 that. 7 OEM executives and developers say that 8 even if the price differentials were slight, 9 they'd still have to go with per processor. 10 Indeed, Microsoft itself emphasizes 11 these price differentials in its negotiations 12 with OEMs. 13 We have a surprising lack of price 14 sheets, you know, the price -- the negotiations 15 for price in our documents. We just do not 16 find very many, you know, of these price quotes 17 from Microsoft. 18 But here is a letter to AST -- that's 19 an OEM -- dated September 14, 1990. 20 This is Plaintiffs' Exhibit 520. The 21 letter is from Jeff Daniels. He's the -- he's 22 an OEM account manager. 23 Did I tell you -- it's September 14, 24 1990. 25 He says, "Microsoft has a per 2713 1 processor price, per system price, and a per 2 copy price. Our per processor price has the 3 lowest royalty rate. This agreement is based 4 on paying royalties for every processor 5 shipped. MS-DOS does not have to ship out with 6 every system. 7 Per processor agreements list all 8 processors in the back of the licenses from 9 8086, 8088, to 80486." 10 Then you see he lists the prices for 11 100,000, 250,000 and 500,000. This is the 12 number of PCs sold in a year. 13 Now, under the per processor license, 14 if you sign up for 100,000, you pay $24 per 15 unit. If you sign up for the per system, you 16 pay $37 per unit. That's a $13 a unit 17 difference. 18 The per copy, $45. So that's an $8 19 difference. 20 When you get out -- and it runs about 21 the same. Between per processor, every 22 processor you pay for to per system in this 23 price quote is $13 at 250. It's $7.50 if you 24 buy 500,000 -- if you license 500,000 a year. 25 That's a lot more than a dollar or two 2714 1 a system. That's a big, big difference for the 2 OEMs, and it holds true across the board in 3 this price quote that we found. 4 Microsoft is even more aggressive when 5 the OEM -- when they know that the OEM is 6 trying to get some wiggle room, so they can 7 load some DR-DOS. 8 Here's one. Commodore Business 9 Machines is very interested in DR-DOS. 10 Microsoft knows that. 11 On September 26, 1990, Commodore 12 receives the following letter from the 13 Microsoft account manager. 14 "If you were to take your consumer 15 machines to DRI, this is what would happen. 16 Your DOS contract would go from a per processor 17 agreement to a per copy agreement when it 18 expires at the end of January. 19 If you choose to take your consumer 20 business to DRI, your unit volume decreases 75 21 percent, and you no longer have a per processor 22 agreement. Therefore, your new price on all 23 DOS products will jump to $30 per copy." 24 When you see this exhibit, it is 402, 25 you will see that he then offers Commodore a 2715 1 per processor license for $6, $6 per machine 2 for the computer that accounts for most of 3 their business. 4 This is a low end computer so there is 5 a difference between those two. $30 minus 6 is 6 $24. Not the 1 or $2 that Microsoft says. 7 You can see DRI's predicament and the 8 power of Microsoft's economic coercion. 9 The presence of DR-DOS in the 10 marketplace makes Microsoft compete on features 11 and price as we see from Microsoft's own 12 internal documents, but ultimately rather than 13 that kind of fair competition, please 14 understand fair competition, fine. This is not 15 fair. 16 When they cannot win on fair 17 competition on features on price, they resort 18 to unfair and illegal tactics like these 19 exclusionary contract terms. 20 The minimum commitments again directed 21 toward excluding competition. The OEM pays at 22 one per unit rate, you know, for 100,000 and a 23 lesser one for 250,000. 24 As I've told you, they have to pay 25 whether it ships or not, and if their shipment 2716 1 falls short, Microsoft keeps the money, but you 2 pay less money, obviously, if you say you're 3 going to buy more. 4 That component is a volume pricing 5 component. The per processor is not a volume 6 license. We'll talk about that. 7 But Microsoft gives the money back, 8 the money that they get on these minimum 9 commitments, or credits the money to the next 10 contract. Microsoft manipulates minimum 11 commitments to its advantage. 12 Here is an Exhibit 302, which is a 13 discussion of prepaid balances from the 14 worldwide OEM in the fourth quarter of 1990. 15 And it contains the following 16 admission. "Prepaid balances have become a 17 byproduct of the way we conduct our OEM 18 business. They are well-understood by our 19 OEMs. They also have definite benefits tying 20 customers to us. We can use prepaid balances 21 to encourage OEMs to license more of our system 22 products, increase our market penetration, and 23 create opportunities for increased sales of our 24 application products." 25 You see here what they're talking 2717 1 about is taking the prepaid balance they get 2 from the OEM and crediting that on the purchase 3 of applications, and of course it has the 4 advantage of also blocking out DRI. 5 As with per processor licenses, 6 Microsoft's OEM status reports reveal that 7 Microsoft is using those minimum commitments to 8 block out DRI. 9 Plaintiffs' Exhibit 4393 from Hyundai 10 Electronics, says, "The DRI threat still lives, 11 especially in the export section which needs a 12 low-priced DOS for XTs to be shipped to the 13 Eastern Block. We will maintain and utilize 14 HEI's UPB situation to keep out DRI." 15 UPB, PPB, those are the prepaid 16 balances. 17 Here is Plaintiffs Exhibit 1332. 18 "Will sign WIN and DOS per processor license 19 this Friday. This will include all of 20 Compuadd's notebooks (386sx up) which they had 21 never licensed for WIN. The only concession we 22 had to make was to let them recoup $500,000." 23 This is 500 they paid for stuff they 24 didn't ship prepaid this quarter. 25 OEMs know the truth. Theo Lieven of 2718 1 Vobis will tell you that Microsoft was quite 2 flexible in permitting recoupment because then 3 they knew the customer would make a new 4 contract with them. If the customer walked 5 away, they would forfeit all that minimum 6 commitment. 7 And then finally, the third tactic is 8 increased license duration. 9 By 1990, the standard license goes 10 from one year to two years during the push for 11 5.0, the one that comes out in June of 1991, 12 but they start licensing clear back in a year 13 earlier. Microsoft increases the average 14 license duration to three years. 15 Microsoft's price guidelines indicate 16 a one dollar discount for an OEM agreeing to 17 add that year on, and a one dollar penalty. So 18 $2 difference between two years and three years 19 in terms of license agreement. 20 I'm sorry, between one year and two 21 year. 22 Microsoft understands the blocking 23 effect this has against DR-DOS. 24 Here is Plaintiffs' Exhibit 353 for an 25 OEM called Printaform. "The new contract is 2719 1 for a three-year term so that we don't have to 2 worry about low-end competition. This will be 3 the first OEM in Mexico bundling Windows 3.0 on 4 its system, and we eliminated DRI's chances 5 with Printaform for at least three years." 6 Robert Frankenberg, a name that you 7 will hear, was the CEO of Hewlett-Packard 8 during this time frame, and he addresses this 9 whole issue of long-term contracts. 10 He says HP was offered a four-year 11 contract and just felt they had no choice. But 12 even a big OEM like HP has got to have the 13 operating system. So they agreed to the four 14 -- a four-year per processor contract every HP 15 machine to get the best price for -- from 16 Microsoft. 17 In his deposition, Mr. Lieven draws an 18 act analogy. Here's what he says -- 19 (Whereupon the following video was 20 played.) 21 MR. LIEVEN: When you -- when you -- 22 when you -- today decide to buy your milk for 23 the next three years from one supplier to make 24 prepayments. You'll never go to another 25 grocery -- or to another store to have a look. 2720 1 MS. CONLIN: I don't know if you heard 2 what he said, but when he comes, we'll make him 3 slow down a little bit. 4 He says when you go -- when you agree 5 to buy your milk for three years from the same 6 supplier and you make a payment, you just don't 7 ever go to another grocery store to have a 8 look. You got all your milk. 9 These powerful anticompetitive license 10 terms to OEMs present an almost insurmountable 11 barrier to any competitor, and certainly to 12 DRI. 13 Okay. Let's talk about vaporware. 14 Could we take just a few moments, Your 15 Honor? I know we're close to the end, but if 16 we could just maybe have a little stand up and 17 I could have a little -- or do you want me to 18 just press on? 19 THE COURT: Do you want a break? 20 MS. CONLIN: I was thinking maybe just 21 to stand up for a second. 22 THE COURT: Why don't we take a brief 23 recess. Ten minutes okay? 24 MS. CONLIN: Oh, it's only after one. 25 See, I'm thinking it's after two. 2721 1 I'm having such a good time, Your 2 Honor. 3 THE COURT: Why don't we take a 4 ten-minute recess. 5 Remember the admonition previously 6 given. 7 (The following record was made out of. 8 the presence of the jury.) 9 MR. TULCHIN: If I may, Your Honor, of 10 course during Ms. Conlin's opening, I'm doing 11 everything I can to not interrupt. 12 There was at least one document used 13 -- I thought there was one. I'm being told now 14 we better double-check. 15 I thought there was a document used 16 that was not in evidence because during the 17 Special Master process an objection was 18 sustained as to it. 19 But I apologize for taking your time. 20 I'm told we better double-check to make sure 21 this is right. 22 THE COURT: Okay. 23 MR. TULCHIN: Thank you, Your Honor. 24 (A recess was taken from 1:18 p.m. 25 to 1:33 p.m.) 2722 1 (The following record was made in 2 the presence of the jury.) 3 THE COURT: Sorry about that. You may 4 continue. 5 MS. CONLIN: Thank you, Your Honor. 6 Vaporware. Beginning with DR-DOS 5.0, 7 Microsoft makes preemptive preannouncements of 8 MS-DOS long before the next version is going to 9 be available. These announcements are false, 10 they're misleading, and this is the practice 11 commonly known as vaporware. 12 The point of vaporware is to freeze 13 the market so users don't buy the competitor's 14 real product but wait for a product that may or 15 may not ever appear. 16 Microsoft understands vaporware very 17 well. On January 5, Nathan Myhrvold confesses 18 to what Microsoft had done with its original 19 Windows clear back in Windows 1.0. 20 Here's what he says in Plaintiffs' 21 Exhibit 52. And as I said, he's talking about 22 the original Windows. 23 Microsoft preannounced Windows, signed 24 up the major OEMs, and showed a demo to freeze 25 the market and prevent VisiOn from gaining any 2723 1 momentum. It sure worked. VisiOn died, 2 VisiCorp died, and DOS kept on chugging. 3 With that context, on April 23, 1990, 4 April 23, 1990, at a conference in England 5 called the which conference, w-h-i-c-h, with a 6 question mark after it. DRI announces DR-DOS 7 5.0. DR-DOS 5.0 simply catches Microsoft 8 flatfooted. 9 Until DR-DOS is released, Microsoft 10 does not, does not intend to release a new DOS 11 in 1990. 12 Mark Chestnut, who is the product 13 manager for MS-DOS 5.0, says that as of 14 November 1989, the plan was to release only a 15 4.1 upgrade in 1990. 16 Do we have Mr. Chestnut speaking. 17 (Whereupon the following videotape was 18 played.) 19 MR. CHESTNUT: As I said, I didn't 20 have any expectation that we would have a 5.0 21 product shipping in '90 after shipping a 4.1 22 product in '90 at that point. 23 MS. CONLIN: So Microsoft -- keep in 24 mind also, Microsoft has just taken back DOS 25 development from IBM and four months prior to 2724 1 the announcement of DR-DOS 5.0. 2 Now, not actually having any product 3 doesn't stop Microsoft. It goes right ahead 4 and preannounces MS 5.0 to influential trade 5 press. And trade press is like PC World and 6 Info World, Computer World. 7 And succeeds in having articles about 8 MS-DOS 5.0 -- doesn't ship till a year later, 9 but on April 30, one week after DR-DOS is 10 announced in England, out comes articles in 11 influential trade press about MS-DOS 5.0. 12 Mr. Chestnut, Mark Chestnut summarizes 13 what he's done to make that happen in a memo to 14 Microsoft executives on May 2, 1990, titled 15 DR-DOS 5.0 competitive analysis, and one of the 16 entries is competitive response to DR-DOS 5.0. 17 This is Plaintiffs' Exhibit 276. 18 On the PR side, he says, "We have 19 begun an aggressive leak campaign for MS-DOS 20 5.0. The goal is to build in anticipation for 21 MS-DOS 5.0 and diffuse potential excitement 22 momentum from DR-DOS 5.0 announcement. 23 At this point, we are telling the 24 press that a major new release from Microsoft 25 is coming this year which will provide 2725 1 significant memory relief and other important 2 features." 3 This was picked up by the major 4 weeklies in the U.S. and was the page 1 story 5 in PC Week on 4-30. See attached articles. 6 Mr. Chestnut is real busy following 7 the DRI April 1990 announcement. By April 30, 8 this is the day where we have the page 1 story 9 Chestnut meets with two OEMs, Tandon and AST, 10 to predisclose MS-DOS 5.0 and its supposed 11 availability in September of 1990, three, four 12 months later and he's also interested in 13 finding out what DR-DOS's features are. 14 Here's a summary of the Tandon meeting 15 from Plaintiffs Exhibit 274. 16 He says, "We dismissed the engineering 17 and support people and discussed DRI. At 18 first, they were very hesitant to divulge any 19 competitive information but after asking a few 20 roundabout questions we were able to find out 21 that DRI has been very aggressive in trying to 22 sell Tandon DRI DOS," he says, "and had been 23 there recently with a full presentation and 24 demonstration. Peter and Eric" -- these are 25 the Tandon guys in the unit -- "assured us that 2726 1 our DOS 5.0 product was, quote, as good as 2 DRI's current version, but according to Peter 3 we still had some work to do in the following 4 areas in order to be competitive." 5 And he mentions three. 6 CPU management. They advised us to 7 take a close look at concurrent DOS because DRI 8 is leveraging that technology in their product. 9 Concurrent DOS is a DRI product. 10 Second, memory management. DRI 11 appears to be way ahead of Microsoft in this 12 area. 13 And three is compatibility. DRI 14 claims to work much better with existing 15 applications than our current product is, 16 Windows 386. 17 Now, keep in mind that what is 18 happening here is Tandon is comparing the 19 existing DR-DOS 5.0 product with a nonexistent 20 MS-DOS 5.0 product and still finds the MS-DOS 21 product -- pretend product is not as good as 22 the existing DR-DOS product. 23 By May 4 -- April 23, DRI announces 24 DR-DOS 5.0. April 30, trade press on MS-DOS 25 5.0. 2727 1 By May 4, Mr. Chestnut has prepared a 2 DR-DOS backgrounder that goes out to the entire 3 OEM sales force of Microsoft, and it has a 4 feature comparison between the nonexistent 5 MS-DOS 5.0 and the existing DR-DOS 5.0. 6 OEM sales also receives a DOS 5 -- an 7 MS-DOS 5 PowerPoint slides and speaking points, 8 and this talks about the product in detail and 9 promises availability in August or September of 10 1990. This is May 4. 11 Then Chestnut circles the globe. He 12 meets with OEMs in Korea, Taiwan, England 13 France, Italy, and the Netherlands. Lots and 14 lots of people hear about MS-DOS 5.0, and they 15 hear that it's going to be out by September of 16 1990. 17 Chestnut admits that his presentations 18 and promised delivery date would certainly 19 prompt OEMs to rely on them. Of course, that's 20 what he wants them to do and cause them to 21 postpone any decision to move to DR-DOS. 22 He admits that if he had told them the 23 truth that MS-DOS would not be available until 24 June of 1991. He says I'm sure they would have 25 been less excited. Let's look at what 2728 1 Mr. Chestnut said in his testimony. 2 (Whereupon the following videotape was 3 played.) 4 QUESTIONING ATTORNEY: Was part of the 5 -- it said you were successful in gaining OEM 6 enthusiasm. Was part of the enthusiasm that 7 you were gaining for the fact that it was going 8 to be shipping to them in September 1990? That 9 that was their belief? 10 MR. CHESTNUT: I'm sure some of the 11 enthusiasm was based on the fact that it was a 12 relatively near term release. 13 QUESTIONING ATTORNEY: And the fact 14 that it was being disclosed as a relatively 15 near term release was at least, in part, what 16 made your seminary successful in defusing the 17 threat from DRI's new release, correct? 18 MR. CHESTNUT: It would be reasonable 19 to probably assume that. 20 QUESTIONING ATTORNEY: I don't want to 21 just assume it. I mean but do you think that? 22 MR. CHESTNUT: I don't know. I 23 honestly don't know. I mean, it certainly 24 would have been less well received if we had 25 said, oh, it was going to ship in 1992, are you 2729 1 excited or what, you know. They probably 2 wouldn't be very excited. 3 QUESTIONING ATTORNEY: What if you had 4 said it was going to ship in June of 1991, it 5 being June of 1990 when you were talking with 6 them? 7 MR. CHESTNUT: At the time I had no 8 reason to state that because that wasn't the 9 schedule. 10 QUESTIONING ATTORNEY: Well, of 11 course, that wasn't the schedule, but do you 12 think they would have been more or less excited 13 about the product if you had been there saying 14 that this will ship to you in June 1991? 15 MR. CHESTNUT: Had I said that, I'm 16 sure they would have been less excited. 17 MS. CONLIN: Of course that's true, 18 and that's why Microsoft sends Chestnut around 19 the world, to tell them to expect MS-DOS 5.0 in 20 September, in three or four months. 21 The directive also goes forth from 22 Joachim Kempin to the entire domestic and 23 international sales force, fog the marketplace 24 with MS-DOS 5.0 vaporware. 25 On May 14, 1990, and this is the day 2730 1 that DRI announces -- formally announces DR-DOS 2 in the United States, Kempin writes in 3 Plaintiffs' Exhibit 283, "They are trying to 4 put the heat on us. We are distributing to you 5 a comparison between MS-DOS 5.0 and their 6 version. Inform your customers as discussed 7 and keep them at bay." 8 There is a comparison chart that you 9 will see done in May of 1990 comparing DR-DOS 10 5.0 with MS-DOS 5.0 MS-DOS 5.0 does not exist. 11 When Microsoft tells you that its own 12 internal schedules reflect the truth of the 13 preemptive announcements its executives are 14 making, look at the internal records 15 Microsoft's own internal records that show that 16 such schedules don't reflect reality and 17 Microsoft knows it. 18 Let me shift for a moment to Windows 19 3.0. That ships in May of 1990. Just right 20 around the time when DR-DOS 5.0 is coming out. 21 And just as Microsoft begins its vaporware 22 announcements about MS-DOS 5.0. 23 After Microsoft releases a product, 24 they often do what's called a postmortem, and 25 they go through -- this is a particularly -- 2731 1 it's a lengthy report, and they go through, you 2 know, what went right, what went wrong, and 3 what could have been better, and that sort of 4 thing. 5 The Windows 3.0 postmortem contained 6 the following remarkable admissions here -- 7 this is Plaintiffs' 3193. Plaintiffs' Exhibit 8 3193. 9 Under schedule, it says, "Set by Bill 10 G. before feature definitions are outlined. 11 Problem motivating people to achieve fake ship 12 dates." 13 And then down a little further, "lying 14 to people on the team about schedules. Morale 15 hit to the team." 16 The MS-DOS 5.0 postmortem report, and 17 this is written by a guy named Mike Dreyfus. 18 He is a software engineer. It all reveals the 19 fake schedule for MS-DOS 5.0. This is Exhibit 20 5387. 21 "Some individuals produced estimates 22 that represented best-case scenarios rather 23 than realistic ones and then were surprised to 24 see their best-case guesses show up on schedule 25 charts." 2732 1 On April 17, 1990, Microsoft's 2 preeminent DOS architect, he's a guy named 3 Gordon Letwin, he calls a guy named Glenn 4 Stephens in Hungerford, England. 5 Mr. Stephens is the head of DRI 6 development April 17, 1990, Mr. Letwin from 7 Microsoft calls Mr. Stephens in England who is 8 DRI's head of development. 9 And he wants to recruit Mr. Stephens 10 to come to Microsoft, and he talks with 11 Mr. Stephens about Mr. Stephens joining 12 Microsoft for about an hour, and Mr. Stephens 13 we hope will testify by video, but is this the 14 one we don't have a video for? I'm sorry, that 15 we don't have the video for you. We'll get it. 16 But this is what he says about that 17 conversation with Mr. Letwin of Microsoft. 18 "Stephens testifies my impression was 19 they weren't working on anything. Actually, 20 one of the things they were asking for me to 21 work on, if I went over there, was a file 22 system. Since that is a core component of the 23 DOS operating system to not already have an 24 engineer assigned to that tells me there's 25 nobody working on it." 2733 1 So Stephens concludes from the 2 conversation with the person directly involved 3 in the production of MS-DOS that as of 4 April 17, 1990, Microsoft has nothing much 5 going on with respect to MS-DOS. 6 Now they do get a rough beta into the 7 field in about June 15. Microsoft knows that 8 it's not a completed product. It doesn't have 9 the features to compete with DR-DOS 5.0, and 10 they still have lots of things to add. 11 At an MS-DOS 5.0 plan overview given 12 to IBM on June 15, Eric Straub, who is one of 13 the key developers for MS-DOS, discloses in 14 Plaintiffs Exhibit 5126 that they have 15 currently under consideration -- and this is 16 for MS-DOS 5.0 -- upper memory block support in 17 EMM 386, a task switcher called winoldapp and a 18 file transfer utility. 19 Now, these are major features. This 20 is not a line code, these are major features 21 that take considerable time to develop and 22 test. They're complicated, they're advanced 23 features, and Microsoft doesn't have them yet. 24 Back to the Microsoft postmortem 25 report for MS-DOS 5.0 Microsoft admits that it 2734 1 is scrambling to identify and create features 2 that match DR-DOS 5.0 already out. 3 This is Plaintiffs' Exhibit 5387 4 again. 5 "One of the most important stimulants 6 for adding features was competitive pressure 7 from DR-DOS 5.0 which we first learned of in 8 the spring of 1990. The DR-DOS feature set led 9 us -- led us to add UMB support, task swapping, 10 and undelete. 11 "Unfortunately, it took us some time 12 to revise our schedules to match the changing 13 product. We adjusted the schedule outward in 14 small increments and the end dates lost clarity 15 and credibility inside and outside the team." 16 After Microsoft released Windows 3.1, 17 they transferred Phil Barrett over to look at 18 the MS-DOS 5.0. 19 His assessment of the team plan is not 20 very kind. 21 (Whereupon the following videotape was 22 played.) 23 MR. BARRETT: The schedules have not 24 been really well thought through. There was a 25 lot of engineering work that had to be done. 2735 1 Testing, test plans. There's no beta test 2 plan. There was just a lot of stuff that 3 needed to be done. A lot of activities that 4 needed to be completed in order to ship a 5 product had not even been completed and not 6 even been started at that point. 7 MS. CONLIN: I don't know why that 8 didn't move, but I hope that you heard what he 9 said, which is, when he gets over there in May 10 of 1990, they don't have a beta test plan, they 11 don't have features, they're just a lot of 12 activities that needed to be completed in order 13 to ship a product hadn't been begun. 14 The ship date moves from the original 15 promise date to a new promise delivery date 16 which is now -- goes from September to the end 17 of 1990. 18 In mid summer the trade press begins 19 to report this new sort of end of the year 20 date, but Microsoft does keep telling the world 21 to expect MS-DOS 5.0 before the end of the year 22 1990. 23 And Chestnut says he's the source for 24 these stories that say to the OEMs and other 25 members of the trade, expect MS-DOS 5.0 by the 2736 1 end of the year. 2 On July 24, 1990, Silverberg, Brad 3 Silverberg submits his DOS 5.0 plan edition 4 since 6-90 and reveals a list of new features 5 still being added. 6 And at that point, this is July 24, 7 1990 at that point, the shipment two OEMs is -- 8 begins to be listed as TBD, to be determined. 9 By the end of August, 1990, Microsoft 10 knows that its tactics are working and indeed 11 OEMs are licensing MS-DOS 5.0. Ten months 12 before its release. 13 Chestnut does a self-evaluation in his 14 performance review for the period ending 15 June 15, 1990, and here's what -- this is 16 Plaintiffs' Exhibit 5134. 17 Here's what he says, "During this 18 evaluation, I discovered early on DRI's plans 19 for DR-DOS 5.0 and implemented a competitive 20 response plan which included (1) contacting all 21 major resellers in the U.S. and informing them 22 early on about our product plans for DOS 5 23 RUP." 24 We think that means retail upgrade. 25 "(2) Getting the word out to OEMs 2737 1 earlier than planned about our plans for DOS 5 2 I met with a number of OEMs personally and 3 provided a presentation script to the domestic 4 and international OEM sales group. By the end 5 of March, virtually all of our OEMs worldwide 6 were informed about DOS 5 which diffused DRI's 7 ability to capitalize on a window of 8 opportunity with these OEMs." 9 Skipping 3 and going to 4. Taiwan 10 visit and OEM seminar in June. "Two days 11 before DRI's seminar there to announce DR-DOS 12 5.0" -- 13 This isn't very complete, but he goes 14 over there and has a seminar, and he plans it 15 -- gets it on board two days before DRI's long 16 planned seminar to announce DR-DOS 5.0. So 17 he's there two days ahead of that. 18 By the fall of 1990, Microsoft has 19 locked up computer makers worldwide in per 20 processor licenses for a product that does not 21 -- that is not shippable or shipping, and that 22 won't be shipped until June of 1991. 23 By September, however, Microsoft's PR 24 people are trying to keep a lid on these false 25 dates, and by this time, Microsoft has admitted 2738 1 that the product that they told OEMs in June 2 would ship by September has now moved to the 3 end of the year. 4 But internally they know the end of 5 the year isn't likely either. This is from 6 their outside PR group called Waggener Edstrom, 7 and it's Plaintiffs' Exhibit 381, and it says, 8 "What to acknowledge about MS-DOS 5.0. 9 "With MS-DOS 5.0, we have already 10 acknowledged a great deal more than we had with 11 Microsoft Windows." 12 And these are the things. "Will ship 13 by the end of the year (could be proven 14 incorrect) and has additional planned features 15 not in the first beta release." 16 And then, "What we shouldn't say in 17 order to provide flexibility and some measure 18 of deniability -- we shouldn't say when the 19 product will ship." 20 This is dated September 11, the month 21 Chestnut tells people originally in his 22 round-the-world visits the product's going to 23 be out. 24 Now, even the end of the year promise 25 is raising a lot of suspicions in the press and 2739 1 media investigators are concerned about the 2 truthfulness of what Microsoft is telling them, 3 and one of them is a guy named Paul Sherer of 4 PC Week. 5 And he begins pressing for interviews, 6 and then on October 17, nineteen -- October 17, 7 1990, he gets through to Mark Chestnut and 8 Chestnut talks to him. 9 This is an internal Microsoft E-mail 10 from Chestnut to his superiors and others in 11 Microsoft after he talks to the press. Paul 12 Sherer, here's what he says. 13 "I'm afraid that this guy is going to 14 write that we are being open about the DOS 5 15 beta because we are trying to preempt DR-DOS 5 16 sales. I tried real hard to present a 17 different point of view, but I don't think he 18 bought it. I'm concerned that this article may 19 make us look bad. Can you guys follow up and 20 see if we need to do some damage control? 21 This was the toughest interview I've done. I 22 felt like Richard Nixon giving his I am not a 23 crook speech." 24 Sherer doesn't buy Chestnut's I am not 25 a crook speech, and there is an article. 2740 1 And then on November 5, 1990, PC Week 2 reprints a letter by Brad Silverberg. 3 Let me go back just for a moment. 4 After Chestnut talks to Sherer, Sherer 5 puts an article in that says basically they're 6 announcing this product in order to -- they are 7 announcing MS-DOS to freeze DR-DOS, and then 8 Brad Silverberg, who is in charge of the MS-DOS 9 development, VP writes a letter to PC Week to 10 respond to PC Week's article that they get from 11 Chestnut. They don't get it from Chestnut, 12 they interview him for it. Here's what Mr. 13 Silverberg says in his letter. 14 "This is in response to your October 15 22 story alleging that Microsoft released 16 information about the upcoming Microsoft MS-DOS 17 Version 5.0 in an attempt to create fear, 18 uncertainty, and doubt regarding DRI's DR-DOS 19 5.0. The feature enhancements of MS-DOS 20 Version 5.0 were decided and developed long 21 before we heard about DR-DOS 5.0. There will 22 be some similar features." 23 As for the timing of the leaks, it was 24 not an orchestrated Microsoft plan, nor did the 25 leaks come from Microsoft. In the past, users 2741 1 expressed frustration when we neither 2 acknowledged that a new product was in 3 development nor gave a sense of our direction 4 for the release. Thus, to serve our customers 5 better, we decided to be more forthcoming about 6 Version 5.0. 7 Now I've already showed you the 8 evidence that directly contradicts what 9 Mr. Silverberg tells the world in his letter to 10 the editor on October 22. 11 First of all, he says Microsoft does 12 not add features as a result of DR-DOS. Well, 13 they did, and they say they did. 14 This is the 5387 Mr. Dreyfus. One of 15 the most important stimulants for adding 16 features was competitive pressure from DR-DOS. 17 Number two, Microsoft does in fact, 18 and remember Chestnut's aggressive leak 19 campaign? That's what they're doing. He, 20 Chestnut, is contacting the press. When 21 Silverberg says there was no orchestrated 22 Microsoft plan, that is plainly false based on 23 Microsoft's own internal documents, some of 24 which you have already seen. 25 Exhibit 276 is the Chestnut document. 2742 1 On the PR side we have now begun an aggressive 2 leak campaign. The goal is to build 3 anticipation for MS-DOS 5.0 and diffuse 4 potential excitement for -- from the DR-DOS 5 announcement. 6 So that's the second point in 7 Silverberg's letter that is just flat out 8 false. And then Microsoft discloses MS-DOS 5.0 9 plans to preempt DR-DOS not to serve its 10 customers better, and Mark Chestnut will admit 11 that. 12 On October 1, 1990, five months after 13 Microsoft begins its campaign of vaporware 14 against DR-DOS Nathan Myhrvold -- Mr. Myhrvold 15 you'll hear -- there are two Myhrvolds, Cameron 16 and Nathan. 17 Nathan is sort of a technology guru, 18 and you'll hear about Cameron later in 19 connection with ISVs. He's sort of the head of 20 what Microsoft calls evangelists. 21 But this is Nathan, and he's the -- he 22 is the -- here, I'll give you his title. The 23 VP of advanced technology and business 24 development group. 25 He sends the following memo to the 2743 1 Microsoft executive staff. He's the one who I 2 showed you his memo earlier about how Microsoft 3 used vaporware to defeat vision. And here, 4 he's now talking about how Microsoft could use 5 preannouncement to crush the demand for a 6 different competitive product. 7 This is Plaintiffs' Exhibit 411. 8 He says, "The purpose of announcing 9 early like this is to freeze the market at the 10 OEM and ISV levels in this respect it is just 11 like the original Windows announcement. This 12 time we have a lot better development team so 13 the time between announce and ship will be a 14 lot smaller. Nevertheless, we need to get our 15 message out there." 16 And Microsoft conducted dozens of 17 briefings with reporters under NDAs, 18 nondisclosure agreements, but Microsoft 19 acknowledges that these NDAs with the press are 20 just illusions. 21 Here is Plaintiffs' Exhibit 381 on 22 September 11, 1990, which recommends -- we 23 recommend we acknowledge the frustration NDAs 24 can entail and allow them, meaning the trade 25 press, to write stories prior to the product 2744 1 announcement based on information already 2 rumored in the weeklies and by beta testers. 3 I'll tell you how rumors get started 4 in a little bit. 5 I'm going to talk a little more about 6 the NDAs later. 7 Let's move to tying. 8 As an aside, Microsoft also makes a 9 significant change in Windows with the 3.0 10 product. 11 In the past, if you got a game and it 12 needed a part of Windows to run the Windows run 13 team -- runtime, the game ISV, the game 14 developer could ship the Windows runtime with 15 the game. 16 In Windows 3.0, Windows had to be 17 resident on the machine. No more shipping with 18 games. You had to have Windows 3.0 on the 19 machine to use the Windows GUI with any app. 20 And, of course, this opens a huge new 21 market for Windows as a stand-alone 22 application. And, of course, nothing 23 anticompetitive about that. But now if a user 24 wants to play a game and wants to use Windows, 25 they've got to buy Windows. 2745 1 Windows in 1990 is also a separate 2 product, a separate application running on top 3 of DOS. And it launches in May of 1990, right 4 before Microsoft -- right before the time DRI 5 announces DR-DOS. 6 And Microsoft helps its new version of 7 Windows along at this time by giving OEMs a 8 price break if they licensed both the monopoly 9 operating system and Windows GUI together. 10 I mentioned Stephanie Reichel before. 11 She's the OEM account manager who deals with 12 Mr. Lieven and Vobis, and she will tell you 13 that she informed three of her OEM accounts 14 IPC, Actebis and Peacock that the price of 15 Windows alone would be higher than the price of 16 Windows and DOS combined. A practice designed 17 solely to exclude DR-DOS. 18 Now think about that. 19 Other Microsoft employees make similar 20 offers. Buy the two products together. And 21 then, of course, you're not going to be buying 22 DR-DOS. And we will sell those two products to 23 you for less than we will sell you Windows 24 alone. 25 And the underlying idea is if you buy 2746 1 Windows alone, then you can also -- you'd also 2 have a need for an operating system; and it 3 might not be MS-DOS, it might be DR-DOS. 4 Vobis, major seller in Europe, 5 actually one of the major sellers of DR-DOS in 6 the world. 7 He starts using, when it first comes 8 out, 3.31 is the first DR-DOS product, he 9 starts loading that immediately, and he loads 10 that and then he loads DR-DOS 5.0. 11 Beginning in 1989, Microsoft tries to 12 get Vobis to drop DR-DOS and becomes 13 increasingly alarmed as other OEMs look at what 14 -- you know, Vobis is being successful by 15 offering DR-DOS and Microsoft fears that that 16 will be inspirational to other OEMs. 17 Microsoft's concern about Vobis 18 loading DR-DOS extends to the highest levels of 19 Microsoft. 20 Steve Ballmer tells Brad Chase on the 21 day that Brad Chase becomes the MS 5.0 product 22 manager to eat, sleep, and drink Vobis until 23 Vobis -- until DRI is out of the account. 24 Mr. Lieven, stubborn. He is not -- he 25 refuses to cave in. And he'll tell you one of 2747 1 the reasons is he wanted to offer his customers 2 a choice, and he believed that DR-DOS was a 3 better product. 4 Finally, Mr. Kempin himself, the head 5 of worldwide OEM sales, meets with Mr. Lieven, 6 and he reports that meeting in a March 26, 1991 7 memo that he sends to other Microsoft 8 executives. And this is Plaintiffs' Exhibit 9 638. 10 Interestingly enough, Amstrad and 11 other German companies have been noticing 12 Vobis' success and its DRI bundling. 13 Lieven himself mentioned to us that he 14 could influence DRI in their product 15 development, et cetera. I took the opportunity 16 to negotiate in Germany, sign our offer as is. 17 This is an agreed-upon package deal or if you 18 change any component, we will too. 19 Second option. Scratch the DOS 20 clause, pay $35 for Windows instead of 15. You 21 have until 4-1-91 to consider. The proposal 22 showed impact. 23 In my judgment, they will hurt if they 24 do not ship WIN, and paying $35 for it is out 25 of the question. 2748 1 Kempin tells Lieven it will cost more 2 to license Windows alone than it will to 3 license MS-DOS and Windows together, and two 4 days later Mr. Lieven, who needs to have WIN, 5 signs the license for MS-DOS. 6 Microsoft -- this is not over yet. 7 Microsoft, however, just has not made him stop 8 shipping DR-DOS. 9 At the time he signs the MS-DOS 5.0 10 license agreement, he's still got copies of 11 DR-DOS. DR-DOS does its licensing a bit 12 different, and they have holograms that 13 Mr. Lieven has, and I think he has quite a 14 number of them left. So he goes on because 15 he's already paid for those holograms. He's 16 already paid for those DR-DOS holograms. 17 And so he -- he goes on shipping 18 DR-DOS to his customers after he signs this 19 agreement. This agreement doesn't say you 20 can't ship it. It just says you got to pay. 21 So Microsoft invites him to come to 22 Redmond, Washington, to headquarters, and 23 during the visit, Mr. Kempin offers to pay 24 Mr. Lieven between 50,000 and $100,000 in cash 25 to stop selling DR-DOS. 2749 1 Stephanie Reichel, the Vobis account 2 manager, testifies that both Bill Gates and 3 Steve Ballmer were aware of the cash payment. 4 Lieven accepts it. Microsoft funnels that 5 money through a marketing fund, disguising the 6 cash payment. 7 And the idea is to keep Mr. Lieven 8 from shipping any DR-DOS. 9 So what's happened here is Microsoft 10 has, one, a new per processor agreement from 11 Vobis worth about $18 million for MS-DOS and 12 Windows preloaded on 400,000 Vobis computers. 13 You'll see the contracts. They're not so easy 14 to read. 15 And Vobis has further agreed to bundle 16 25,000 copies of Windows for work groups, the 17 different Windows. And this is long before 18 that product was launched. 19 So in less than a year, Vobis turns 20 around from selling about 50/50, 50 percent 21 DR-DOS, 50 percent MS-DOS, to selling 100 22 percent MS-DOS. 23 You know, I'm not sure he said 100 24 percent. 90 percent, 95 -- most. 25 When Vobis renegotiates its MS-DOS 2750 1 license after DR-DOS is dead, Microsoft nearly 2 doubles the price. 3 All right, FUD. 4 Compatibility, as we've discussed, is 5 an essential requirement of competing operating 6 systems. And it's market perceptions that 7 matter so much, you know, what does -- how does 8 the market perceive the product, and Microsoft 9 is aware of the potency of a FUD campaign. 10 When closing a license with Acer in 11 September 1989, Jeremy Butler, who is the 12 senior vice president of international 13 business, plays the FUD card to great effect 14 against DRI. 15 This is Plaintiffs' Exhibit 151. He 16 says, "It only takes a couple of reports about 17 noncompatibility to give the kiss of death to a 18 PC. We've seen that on the hardware side as 19 well as on the operating system side." 20 So even though prior to DR-DOS 5.0, 21 Mr. Chestnut will tell you he disagrees with 22 taking a little thing and blowing it up into a 23 big thing to create FUD. 24 And he's the guy who pulls together 25 FUD sheets. These are FUD sheets to distribute 2751 1 to the field on DR-DOS. 2 In September 1990, in Plaintiffs' 3 Exhibit 382, this is E-mails that Mr. Chestnut 4 is sending to the field. 5 "The following is a summary of 6 compatibility problems that we have verified 7 with DR-DOS 5.0 based on internal testing and 8 results from an outside test lab. This is a 9 technical summary of confirmed problems with 10 DR-DOS 5.0. This information is being provided 11 to assist in disproving DRI's claims that 12 DR-DOS 5.0 is 100 percent compatible with 13 MS-DOS. It is, however, very confidential 14 information and should be provided to customers 15 only under nondisclosure." 16 I want to show you what Kempin says 17 back. Okay. Love, try to get it into 18 publications as soon as possible. That's one 19 of the reasons I said to you earlier that they 20 know that these nondisclosures aren't -- 21 Mr. Kempin is saying okay, get it out there. 22 Microsoft account managers are 23 directed to share what they claim are serious 24 problems with OEMs considering a switch to 25 DR-DOS. 2752 1 And so Chestnut hires an outside 2 testing lab, and he says to beat DR-DOS to 3 death, and much to Microsoft's dismay, they 4 find it to be nearly perfectly compatible with 5 important products including Windows 3.0. And 6 that's the biggy, does it work with Windows 7 3.0. 8 Microsoft keeps secret the independent 9 test that confirm DR-DOS's compatibility. 10 Now they do some of their own tests. 11 And I will tell you that DRI can't recreate 12 what Microsoft says it's done, and there are 13 some that are easily patched. I'll tell you in 14 a minute why that didn't happen. It didn't 15 happen in a timely fashion. 16 Mr. Kempin admits that as of April 17 1991, DR-DOS is a far superior product to 18 MS-DOS for the proceeding nine months. 19 As the launch of MS-DOS finally 20 approaches, Microsoft realizes they're going to 21 have to continue their FUD campaign, and a guy 22 named Sergio Pineda takes over from Chestnut. 23 Chestnut moves on, and Mr. Pineda 24 becomes the MS-DOS product manager, and in May 25 of 1991 he circulates to all OEM account 2753 1 managers a thing that he calls the DOS 2 connection. 3 And here is the theme of the campaign 4 in Exhibit 7461. 5 "Any degree of incompatibility is 6 enough to create fear, uncertainty and doubt 7 among end users when it comes time to buy new 8 systems. This suggests that PC OEMs will take 9 on a big risk if they ship DR-DOS with their 10 systems." 11 And then Waggener Edstrom advises on 12 October 15, 1990, in Exhibit 425, "Over the 13 next couple months, Katherine and I are going 14 to be in touch with a lot of editors regarding 15 MS-DOS 5.0. We'll basically be covering all 16 the key editors. We recommend that we 17 informally plant the bug of FUD in their ears." 18 And then she gives some examples. 19 Have you heard about problems with 20 DR-DOS? That security feature is a neat idea 21 and, gosh, such a feature would be great, but 22 it's just too easily circumvented. 23 Gee, it's unfortunate that DR-DOS 24 can't be loaded high all the time; MS-DOS 5.0 25 can." We'll do this very tactfully she says. 2754 1 And if Digital Research came to 2 Microsoft for help making DR-DOS work with 3 Windows, would Microsoft help them? Maybe not? 4 In line with this, Pineda -- I hope 5 I'm pronouncing his name close to correctly -- 6 specifically focuses the FUD attack on future 7 versions of Windows. 8 Now, we know DR-DOS 5.0 is compatible 9 with the then existing Windows. 10 So they got to move on. In 11 Plaintiffs' Exhibit 500, he says, "How should 12 we sell against DRI? For OEMs committed to 13 shipping Windows, only we can ensure 100 14 percent compatibility with future versions of 15 DOS and Windows." 16 Now, at this time Microsoft has in 17 hand a report from that outside testing lab 18 that tested DR-DOS with Windows and found the 19 two compatible. 20 And you'll have that whole technical 21 testing -- they did it twice. In the first one 22 -- we're talking about the first one. 23 Steve Ballmer -- this is Exhibit 5332, 24 Mr. Ballmer asks on July 31, 1991, is DR in 25 compatible with Windows in any mode in any way? 2755 1 And Mr. Pineda answers the next day, repeating 2 Mr. Ballmer's question, but typing it better. 3 Is DR-DOS incompatible with Windows in any mode 4 in any way? And his answer is in an Info World 5 article dated 5-27-91. 6 Info World found DR-DOS memory manager 7 is not compatible with Windows enhanced mode. 8 However, NSTL tested DR-DOS with Windows and 9 found the two compatible. 10 NSTL is there -- it's a lab they hired 11 to beat DR-DOS to death. And of course 12 Microsoft does not publicize what NSTL has 13 found. 14 Here's 617. This is the NSTL, 15 National Software Testing Laboratory's contract 16 to test DR-DOS. It is Exhibit 617. 17 They're supposed to test DOS -- DR-DOS 18 with networking software, a memory manager -- I 19 think that's -- I don't want to mislead you. I 20 believe that is an -- those are E-mails, not 21 the actual testing -- not the contract. 22 It's what they're saying they want 23 NSTL to do. To test DR-DOS with networking 24 software a memory manager, DOS and WIN apps and 25 anything else you can think of that might raise 2756 1 some degree of incompatibility. 2 So NS -- NTSL knows what its 3 assignment is, find some problems. 4 In July of 1991, Silverberg outlines 5 the FUD plan to fellow executives. 6 He says in Exhibit 851, "We are 7 engaged in a FUD campaign to let the press know 8 about some of the bugs. We'll provide info a 9 few bugs at a time to stretch it out." 10 Brad Chase, whose group product 11 manager for MS-DOS 5.0, states by E-mail, "The 12 purpose of a slow leak campaign is to short" -- 13 this is Exhibit 847 -- "to short-circuit Novell 14 DOS before it gets off the ground and to make 15 it hard for customers or OEMs (IBM) to consider 16 DR-DOS seriously." 17 Let me stop for a moment. Novell DOS 18 is DR-DOS. I mentioned to you there was the 19 merger in 1991. So they're talking about -- 20 and this E-mail is sent right about at the time 21 that DRI and Novell merge. 22 Back to NSTL and their massive efforts 23 to find problems with DR-DOS. They test 34 24 applications on DR-DOS 5.0. 25 Of those, they report 29 worked 2757 1 without problems in a variety of networked and 2 stand alone environments. 3 They report that the remaining five 4 applications fail. Here is something that you 5 really need to understand. 6 They tested -- MS-DOS has the same or 7 even greater incompatibilities with some of the 8 same products which would make you wonder if 9 it's the other product, but -- or if it's 10 MS-DOS. 11 Mr. Schulman, who will be coming, who 12 is our technical -- one of our technical 13 experts, will talk to you about the tests that 14 were done with MS-DOS that showed major 15 incompatibilities. 16 And he'll also help us to understand 17 that nothing about what Microsoft is doing with 18 respect to DR-DOS helps consumers, helps Iowa 19 class members at all. And that's not what it's 20 supposed to do. 21 Finally, we've talked about the 22 exclusionary contracts, the warning, FUD 23 vaporware, but Microsoft can't keep DRI at bay 24 forever with these tactics. They got to get a 25 product on the market, so they do. 2758 1 MS-DOS 5.0, which has no significant 2 feature advantage over DR-DOS 5.0, just comes 3 much later -- as they near the release to 4 manufacturing, the RTM date, internal 5 development records indicate that Microsoft 6 knows it's going to be shipping a product with 7 major bugs. Severe bugs. 8 That is already very, very late. They 9 go ahead and ship it. 10 Now, one of the things that was 11 surprising to me was -- to learn that all 12 software has bugs, and every time you ship a 13 piece of software, you have to make a tradeoff. 14 How bad are the bugs? How often will 15 they appear? If we try to fix them, will it 16 make some other worse bug. So all software has 17 bugs, but the software, this software is -- has 18 got what Microsoft internally I think maybe the 19 whole computer industry calls show stopping 20 bugs. Bad bugs. 21 Putting a software product into the 22 market with show stopping bugs is not 23 anticompetitive. 24 What -- I tell you this show because 25 they're out there talking about what a terrible 2759 1 product DR-DOS is and how people should not use 2 it, and they ship into the market a product 3 that destroys people's data. And I'm not 4 guessing about this. This is Microsoft's 5 internal document. 6 June 11, 1991, within one week -- this 7 June 11, 1991, is when Microsoft ships finally 8 MS-DOS 5.0, and within a week, Microsoft 9 product support services crying out for 10 additional support, they just got a flood of 11 bug reports. 12 And this is Plaintiffs' Exhibit 7587, 13 and here's what this says, "We're currently 14 hearing from numerous callers, approximately 15 150 a day, who are experiencing severe 16 incompatibilities with MS-DOS 5.0 to the point 17 that PSS, product support services, is unable 18 to get the operating system to work 19 successfully on their machines. 20 "Problems range from occasional hangs 21 to total lockups of their machines that require 22 the removal of hard drives in order to boot 23 from a floppy. In these cases the uninstall 24 does not allow them to return to the previous 25 version of DOS and they can ultimately lose all 2760 1 information from the hard drive." 2 This is a very, very bad thing, and of 3 course it has nothing to do with DR-DOS. 4 DR-DOS is not on these machines. This is 5 MS-DOS crashing and taking the data with it. 6 By August 3, 1991, Microsoft decides 7 to do what they call a silent release of DOS 8 5.0. It's going to be called DOS, MS-DOS 5.0 9 small a, to address some of the data corrupting 10 bugs in DOS 5. 11 The silent release means they're just 12 going to put it out there and not tell people, 13 not announce that it's going out there. 14 They put it into the market and then 15 there are -- they place the silent release into 16 the marketplace without ever acknowledging that 17 users are in fact being harmed by MS-DOS 5.0, 18 and all the while they keep up the steady drum 19 beat of FUD against DR-DOS. 20 Your Honor, I've got -- I'm about to 21 start a whole new series of years, so perhaps 22 this would be, if the Court doesn't mind, a 23 couple of minutes early. 24 THE COURT: Not at all. 25 Ladies and Gentlemen of the jury, 2761 1 we'll adjourn for the weekend. 2 Remember the admonition previously 3 given to you. 4 We'll reconvene 8:30 a.m. on Monday. 5 That's December 4; is that right? Hope so. 6 So we'll see you then, and have a good 7 weekend and drive safely. You're excused. 8 All rise. Leave your notebooks here, 9 we'll lock them up. 10 (Proceedings adjourned at 2:30 p.m.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2762 1 CERTIFICATE TO TRANSCRIPT 2 The undersigned, Official Court 3 Reporters in and for the Fifth Judicial 4 District of Iowa, which embraces the County of 5 Polk, hereby certifies: 6 That she acted as such reporter in the 7 above-entitled cause in the District Court of 8 Iowa, for Polk County, before the Judge stated 9 in the title page attached to this transcript, 10 and took down in shorthand the proceedings had 11 at said time and place. 12 That the foregoing pages of typed 13 written matter is a full, true and complete 14 transcript of said shorthand notes so taken by 15 her in said cause, and that said transcript 16 contains all of the proceedings had at the 17 times therein shown. 18 Dated at Des Moines, Iowa, this 19 day of , 2006. 20 21 22 ______________________________ Certified Shorthand Reporter(s) 23 24 25