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Comes Trial Transcript 01-Dec-2006

Comes Homepage ] [ Transcripts ] [ Exhibits by Date ] [ Exhibits by Number ] [ Audio/Video ]


Original [TXT file] for this trial transcript.

Jump to actual transcript start (after cover pages).

Summary of all available Comes Trial Transcripts done as HTML:
2006, Dec: 01, 04, 06, 07, 08, 11, 12, 13, 14, 15, 18, 19, 20, 21,
2007, Jan: 04, 05, 08, 09, 10, 11, 12, 16, 17, 18, 19, 22, 23, 24, 25, 29, 30, 31,
2007, Feb: 01, 02, 05, 06, 07, 08, 09,

Table of exhibits used in current transcript with a link to each page where they are discussed:

Exhibits Page
103 2680,
109 2687,
125 2688,
1332 2717,
135 2690,
143 2695,
151 2750,
169 2694,
184 2677,
185 2681,
21 2682,
222 2691,
274 2725,
276 2724, 2741,
280 2699,
283 2730,
302 2716,
3193 2731,
3228 2687,
338 2705,
34A 2683,
353 2718,
37 2679,
379 2710,
381 2738, 2743,
382 2751,
409 2707,
410 2708,
411 2743,
425 2753,
4393 2717,
4459 2693,
484 2708,
485 2708,
500 2754,
5126 2733,
5134 2736,
52 2722,
520 2712,
5332 2754,
5387 2731, 2734,
539 2709,
563 2701,
567 2700,
570 2700,
5800 2599,
617 2755,
6324 2599,
638 2747,
647 2709,
682 2697,
710 2710,
7400 2600,
7461 2753,
7587 2759,
847 2756,
851 2756,

2566

IN THE IOWA DISTRICT COURT FOR POLK COUNTY
-----------------------------------------------
JOE COMES; RILEY PAINT, )
INC., an Iowa Corporation;)
SKEFFINGTON'S FORMAL )
WEAR OF IOWA, INC., an ) NO. CL82311
Iowa Corporation; and )
PATRICIA ANNE LARSEN; )
) TRANSCRIPT OF
Plaintiffs, ) PROCEEDINGS
) VOLUME X
vs. )
)
MICROSOFT CORPORATION, )
a Washington Corporation ,)
)
Defendant. )
-----------------------------------------------

The above-entitled matter came on for trial before the Honorable Scott D. Rosenberg and a jury commencing at 8:30 a.m., December 1, 2006, in Room 302 of the Polk County Courthouse, Des Moines, Iowa.

HUNEY-VAUGHN COURT REPORTERS, LTD.
[Address]
Des Moines, Iowa 50309
[Phone]

2567

A P P E A R A N C E S

Plaintiffs by:
ROXANNE BARTON CONLIN
Attorney at Law
Roxanne Conlin & Associates, PC
[Address]
Des Moines, Iowa 50309
[Phone]

RICHARD M. HAGSTROM
Attorney at Law
Zelle, Hofmann, Voelbel,
Mason & Gette, LLP
[Address]
Minneapolis, Minnesota 55415
[Phone]

RORBERT J. GRALEWSKI, JR.
Attorney at Law
Gergosian & Gralewski
[Address]
San Diego, California 92101
[Phone]

Defendant by:
DAVID B. TULCHIN
SHARON L. NELLES
JOSEPH E. NEUHAUS
Attorneys at Law
Sullivan & Cromwell, LLP
[Address]
New York, New York 10004-2498
[Phone]

ROBERT A. ROSENFELD
Attorney at Law
Heller Ehrman, LLP
[Address]
San Francisco, California 94104
[Phone]

2568

BRENT B. GREEN
Attorney at Law
Duncan, Green, Brown &
Langeness, PC
[Address]
Des Moines, Iowa 50309
[Phone]

RICHARD J. WALLIS
Attorney at Law
Microsoft Corporation
One Microsoft Way
Redmond, California 98052
[Phone]

2569

THE COURT: Good morning, Ladies and Gentlemen of the jury.

We will proceed with the remainder of the instructions. There's not that many left.

However, at the end of that, I am going to take a short recess to allow the parties to have a few moments to prepare before opening statements, and also there's a few matters of law I have to take up with them prior to that, so I thought we'd just get this done first, take a short break, and then have them come back for opening, all right.

We're at page -- duplicate page numbers, but you want the last 66, all right. It would be paragraph 352.

The technology agreement further provides that any other Internet browsers bundled in the Mac OS system software sold by Apple shall be placed in folders in the software as released.

In other words, Apple may not position icons for non-Microsoft browsing software on the desktop of new Macintosh PC systems or Mac OS upgrades.

Moreover, the agreement states that

2570

Apple will not be proactive or initiate actions to encourage users to swap out Internet Explorer for Macintosh. Both Apple and Microsoft read this term to prohibit Apple from promoting non-Microsoft browsing software.

The agreement even states that Apple will encourage its employees to use Microsoft Internet Explorer for Macintosh for all Apple-sponsored events and will not promote another browser to its employees.

Pursuant to this provision, Apple's management has instructed the firm's employees to not use Navigator in demonstrations at trade shows and other public events.

Also, with regard to the promotion of browser technology, the agreement requires Apple to display the Internet Explorer logo on all Apple-controlled web pages where any browser logo is displayed.

Finally, the agreement grants Microsoft the right of first refusal to supply the default browsing software for any new operating system product that Apple develops during the term of the agreement.

355. Apple increased its distribution

2571

and promotion of Internet Explorer not because of a conviction that the quality of Microsoft's product was superior to Navigator's or that consumer demand for it was greater, but rather because of the in terrorem effect of the prospect of the loss of Mac Office.

To be blunt, Microsoft threatened to refuse to sell a profitable product to Apple, a product in whose development Microsoft had invested substantial resources and which was virtually ready for shipment.

Not only would this ploy have wasted sunk costs and sacrificed substantial profit, it also would have damaged Microsoft's goodwill among Apple's customers, whom Microsoft had led to expect a new version of Mac Office.

The predominant reason Microsoft was prepared to make this sacrifice, and the sole reason that it required Apple to make Internet Explorer its default browser and restricted Apple's freedom to feature and promote non-Microsoft browsing software was to protect the applications barrier to entry.

More specifically, the requirements and restrictions relating to browsing software

2572

were intended to raise Internet Explorer's usage share to lower Navigator's share, and more broadly, to demonstrate to important observers, including consumer developers, industry participants, and investors that Navigator's success had crested.

Had Microsoft's only interest in developing the Mac OS version of Internet Explorer been to enable organizational customers using multiple PC operating system products to standardize on one user interface for web browsing, Microsoft would not have extracted from Apple the commitment to make Internet Explorer the default browser or imposed restrictions on its use and promotion of Navigator.

356. Microsoft understands that PC users tend to use the browsing software that comes preinstalled on their machines, particularly when conspicuous means of easy access appear on the PC desktop.

By guaranteeing that Internet Explorer is the default browsing software on the Mac OS, by relegating Navigator to less favorable placement, by requiring Navigator's exclusion

2573

from the default installation of the Mac OS 8.5 upgrade, and by otherwise limiting Apple's promotion of Navigator, Microsoft has ensured that most users of the Mac OS will use Internet Explorer and not Navigator.

Although the number of Mac OS users is very small compared to the Windows installed base, the Mac OS is nevertheless the most important consumer oriented operating system product next to Windows.

Navigator needed high usage share among Mac OS users if it was ever to enable the development of a substantial body of cross-platform software not dependent on Windows.

By extracting from Apple terms that significantly diminish the usage of Navigator on the Mac OS, Microsoft severely sabotaged Navigator's potential to weaken the applications barrier to entry.

357. The cumulative effect of the stratagems described above was to ensure that the easiest and most intuitive paths that users could take to the web would lead to Internet Explorer, the gate controlled by Microsoft.

2574

Microsoft did not actually prevent users from obtaining and using Navigator, although it tried to do as much in June 1995, but Microsoft did make it significantly less convenient for them to do so.

Once Internet Explorer was seen as providing roughly the same browsing experience as Navigator, relatively few PC users showed any inclination to expend the effort required to obtain and install Navigator.

Netscape could still carpet-bomb the population with CD-ROMS and make Navigator available for downloading. In reality, however, few new users (ones not merely upgrading from an old version of Navigator to a new one) had any incentive to install, much less download and install, software to replicate a function for which OEMs and IAPs were already placing perfectly adequate browsing software at their disposal.

The fact that Netscape was forced to distribute tens of millions of copies of Navigator through high-cost carpet-bombing in order to obtain a relatively small number of new users only discloses the extent of

2575

Microsoft's success in excluding Navigator from the channels that lead most effectively to browser usage.

360. According to estimates that Microsoft executives cited to support their testimony in this trial, and those on which Microsoft relied in the course of its business planning, the shares of all browser usage enjoyed by Navigator and Internet Explorer changed dramatically in favor of Internet Explorer after Microsoft began its campaign to protect the applications barrier to entry.

These estimates show that Navigator's share fell from above 80 percent in January 1996 to 55 percent in 1997 and that Internet Explorer's share rose from around 5 percent to 36 percent over the same period.

In April 1998, Microsoft relied on measurements for internal planning purposes that placed Internet Explorer's share of all browser usage above 45 percent. These figures are broadly consistent with the ones AOL relied on in evaluating its acquisition of Netscape.

AOL determined that Navigator's share had fallen from around 80 percent at the end of

2576

1996 to the mid-50 percent range in July 1998 and that Internet Explorer's share had climbed to between 45 and 50 percent of the domestic market by late 1998.

372. In summary, the estimates on which Microsoft and AOL relied and the measurements made by AdKnowledge and the University of Illinois provide an adequate basis for two findings.

First, from early 1996 to the late summer of 1998, Navigator's share of all browser usage fell from above 70 percent to around 50 percent, while Internet Explorer's share rose from about 5 percent to around 50 percent.

Second, by 1998, Navigator's share of incremental browser usage had fallen below 40 percent while Internet Explorer's share had risen above 60 percent.

All signs point to the fact that Internet Explorer's share has continued to rise and Navigator's has continued to decline since the last -- late summer of 1998.

It is safe to conclude, then, that Internet Explorer's share of all browser usage

2577

now exceeds 50 percent and that Navigator's share has fallen below that mark.

376. Including Internet Explorer with Windows at no additional charge likely helped the usage share of Microsoft's browsing software. It did not, however, prevent OEMs from meeting demand for Navigator which remained higher than demand for Internet Explorer well into 1998.

Moreover, bundling Internet Explorer with Windows had no effect on the distribution and promotion of browsing software by IAPs or through any of the other channels that Microsoft sought to preempt by other means.

Had Microsoft not offered distribution licenses for Internet Explorer and other things of great value to other firms at no charge, had it not prevented OEMs from removing the prominent means of accessing Internet Explorer and limited their ability to feature Navigator, and had Microsoft not taken all the other measures it used to maximize Internet Explorer's usage share at Navigator's expense, its browsing software would not have weaned such a large amount of usage share from

2578

Navigator, much less overtaken Navigator in three years.

377. In late 1995 and early 1996, Navigator seemed well on its way to becoming the standard software for browsing the web. Within three years, however, Microsoft had successfully denied Navigator that status and had thereby forestalled a serious potential threat to the applications barrier to entry.

Indeed Microsoft's Kumar Mehta felt comfortable expressing to Brad Chase in February 1998 his personal opinion that "the browser battle is close to over."

Mehta continued, "We set out on this mission two years ago to not let Netscape dictate standards and control of the browser APIs. All evidence today says they don't.

394. In a further effort intended to increase the incompatibility between Java applications written for its Windows JVM and other Windows JVMs, and to increase the difficulty of porting Java applications from the Windows environment to other platforms, Microsoft designed its Java developer tools to encourage developers to write their Java

2579

applications using certain key words and compiler directives that could only be executed properly by Microsoft's version of the Java runtime environment for Windows.

Microsoft encouraged developers to use these extensions by shipping its developer tools with the extensions enabled by default and by failing to warn developers that their use would result in applications that might not run properly with any runtime environment other than Microsoft's and that would be difficult, and perhaps impossible, to port to JVMs running on other platforms.

This action comported with suggestion that Microsoft Thomas Reardon made to his colleagues in November 1996: "We should just quietly grow j (Microsoft's developer tools) share and assume that people will take more advantage of our classes without ever realizing that they are building win32-only Java apps.

Microsoft refused to alter its developer tools until November 1998, when a Court ordered it to disable its key words and compiler directives by default and to warn developers that using Microsoft's Java

2580

extensions would likely cause incompatibilities with non-Microsoft runtime environments.

396. Determined to induce developers to write Java applications that relied on its version of the runtime environment for Windows rather than on Sun-compliant ones, Microsoft made a large investment of engineering resources to develop high-performance Windows JVM.

This made Microsoft's version of the runtime environment attractive on its -- on its technical merits. To hinder Sun and Netscape from improving the quality of Windows JVM shipped with Navigator, Microsoft pressured Intel, which was developing a high-performance Windows compatible JVM, to not share its work with either Sun or Netscape, much less allow Netscape to bundle the Intel JVM with Navigator.

Gates was himself involved in this effort. During the August 2, 1995 meeting at which he urged Intel to halt IAL's development of platform-level software, Gates also announced that Intel's cooperation with Sun and Netscape to develop a Java runtime environment

2581

for systems running on Intel's microprocessors was one of the issues threatening to undermine cooperation between Intel and Microsoft.

By the spring of 1996, Intel had developed a JVM designed to run well on Intel-based systems while complying with Sun's cross-platform standards.

Microsoft executives approached Intel in April of that year and urged that Intel not take any steps toward allowing Netscape to ship this JVM with Navigator.

397. By bundling its versions of the Windows JVM with every copy of Internet Explorer and expending some of its surplus money power -- sorry -- surplus monopoly power to maximize the usage of Internet Explorer at Navigator's expense, Microsoft endowed its Java runtime environment with the unique attribute of guaranteed, enduring ubiquity across the enormous Windows-installed base.

As one internal Microsoft presentation from January 1997 put it, the company's response to cross-platform Java entailed "increased IE share integration with Windows."

Partly as a result of the damage that

2582

Microsoft's efforts against Navigator inflicted on Netscape's business, Netscape decided in 1998 that it could no longer afford to do the engineering work necessary to continue bundling up-to-date JVMs with Navigator.

Consequently, it announced that starting with Version 5.0, Navigator would cease to be a distribution vehicle for JVMs compliant with Sun's standards.

400. Recognizing ISVs as a channel through which Java runtime environments that complied with Sun's standards could find their way onto Windows PC systems, Microsoft induced ISVs to distribute Microsoft's version instead of a Sun-compliant one.

First, Microsoft made its JVM available to ISVs separately from Internet Explorer so that those uninterested in bundling browsing software could nevertheless bundle Microsoft's JVM.

Microsoft's David Cole revealed the motivation for this step in a message he wrote to Jim Allchin in July 1997: "We've agreed that we must allow ISVs to redistribute the Java VM standalone without IE. ISVs that do

2583

this are bound into Windows because that's the only place the VM works, and it keeps them away from Sun's APIs."

401. Microsoft took the further step of offering valuable things to ISVs that agreed to use Microsoft's Java implementation.

Specifically, in the first wave agreements that it signed with dozens of ISVs in 1997 and 1998, Microsoft conditioned early Windows 98 and Windows NT betas, other technical information, and the right to use certain Microsoft seals of approval on the agreement of those ISVs to use Microsoft's version of the Windows JVM as the default.

Microsoft and the ISVs all read this requirement to obligate the ISVs to ensure that their Java applications were compatible with Microsoft's version of the Windows JVM.

The only effective way to ensure compatibility with Microsoft's JVM was to use Microsoft's Java developer tools, which in turn meant using Microsoft's methods for making native calls and (unless the developers were especially wary and sophisticated) Microsoft's other Java extensions.

2584

Thus, a very large percentage of the Java applications that the first wave ISVs wrote would run only on Microsoft's version of the Windows JVM.

With that in mind, the first wave ISVs would not have any reason to distribute with their Java applications any JVM other than Microsoft's.

So in exchange for costly technical support and other blandishments, Microsoft induced dozens of important ISVs to make their Java applications reliant on Windows-specific technologies and to refrain from distributing to Windows users JVMs that complied with Sun's standards.

The record contains no evidence that the relevant provision in the first wave agreements had any purpose other than to maximize the difficulty of porting Java applications between Windows and other platforms.

Microsoft remained free to hold the first wave ISVs to this provision until a Court enjoined its enforcement in November 1998.

402. In addition to the first wave

2585

agreements, Microsoft entered an agreement with at least one ISV that explicitly required it to redistribute Microsoft's JVM to the exclusion of any other and to rely upon Microsoft's native methods to the exclusion of any other methods. Such agreements were also prohibited by the November 1998 injunction.

404. As discussed above, Microsoft's effort to lock developers into its Windows-specific Java implementation included actions designed to discourage developers from taking advantage of Java class libraries such as RMI.

Microsoft went further than that, however. In pursuit of its goal of minimizing the portability of Java applications, Microsoft took steps to thwart the very creation of cross-platform Java interfaces.

The incorporation of greater functionality into the Java class libraries would have increased the portability of the applications that relied on them while simultaneously encouraging developers to use Sun-compliant implementations of Java.

In one instance of this effort to

2586

stunt the growth of the Java class libraries, Microsoft used threats to withhold Windows operating system support from Intel's microprocessors and offers to include Intel technology in Windows in order to induce Intel to stop aiding Sun in the development of Java classes that would support innovative multimedia functionality.

405. In November 1995, Microsoft's Paul Maritz told a senior Intel executive that Intel's optimization of its multimedia software for Sun's Java standards was inimical to Microsoft as Microsoft's support for non-Intel microprocessors would be to Intel.

It was not until 1997, though, that Microsoft prevailed upon Intel to not support Sun's development of Java classes that would have allowed developers to include certain multimedia features in their Java applications without sacrificing portability.

406. In February 1997, one of Intel's competitors called AMD, solicited support from Microsoft for its 3DX technology, which provided sophisticated multimedia support for games.

2587

Microsoft's Allchin asked Gates whether Microsoft should support 3DX despite the fact that Intel would oppose it. Gates responded: "If Intel has a real problem with us supporting this, then they will have to stop supporting Java Multimedia the way they are. I would gladly give up supporting this if they would back off from their work on Java which is terrible for Intel."

Near the end of March Allchin sent another message to Gates and Maritz. In it he wrote, "I am positive that we must do a direct attack on Sun (and probably Oracle)... Between ourselves and our partners, we can certainly hurt their (certainly Sun's revenue) base.... We need to get Intel to help us. Today, they are not."

Two months later, Eric Engstrom, a Microsoft executive with the responsibility for multimedia development, wrote to his superiors that one of Microsoft's goals was getting "Intel to stop helping Sun create Java Multimedia APIs, especially ones that run well (i.e. native implementations) on Windows.

Engstrom proposed achieving this goal

2588

by offering Intel the following deal: Microsoft would incorporate into the Windows API set any multimedia interfaces that Intel agreed to not help Sun incorporate into the Java class libraries.

Engstrom's efforts apparently bore fruit, for he testified at trial that Intel's IAL subsequently stopped helping Sun to develop class libraries that offered cutting-edge multimedia support.

407. Had Microsoft not been committed to protecting and enhancing the applications barrier to entry, it might still have developed a high-performance JVM and enabled Java developers to call upon Windows APIs.

Absent this commitment, though, Microsoft would not have taken efforts to maximize the difficulty of porting Java applications written to its implementation and to drastically limit the ability of developers to write Java applications that would run in both Microsoft's version of the Windows runtime environment and versions complying with Sun's standards.

Nor would Microsoft have endeavored to

2589

limit Navigator's usage share to induce ISVs to neither use nor distribute non-Microsoft Java technologies, and to impede the expansion of the Java class libraries, had it not been determined to discourage developers from writing applications that would be easy to port between Windows and other platforms.

Microsoft's dedication to the goal of protecting the applications barrier to entry is highlighted by the fact that its efforts to create incompatibility between its JVM and others resulted in fewer applications being able to run on Windows than otherwise would have.

Microsoft felt it was worth obstructing the development of Windows-compatible applications where those applications would have been easy to port to other platforms.

It is not clear whether, absent Microsoft's interference, Sun's Java efforts would by now have facilitated porting between Windows and other platforms enough to weaken the applications barrier to entry.

What is clear, however, is that

2590

Microsoft had succeeded in greatly impeding Java's progress to that end with a series of actions whose sole purpose and effect were to do precisely that.

409. To the detriment of consumers, however, Microsoft has done much more than develop innovative browsing software of commendable quality and offer it bundled with Windows at no additional charge.

As has been shown, Microsoft also engaged in a concerted series of actions designed to protect the applications barrier to entry, and hence its monopoly power from a variety of middleware threats, including Netscape's web browser and Sun's implementation of Java.

Many of these actions have harmed consumers in ways that are immediate and easily discernible. They have also caused less direct, but nevertheless serious and far-reaching, consumer harm by distorting competition.

410. By refusing to offer those OEMs who requested it a version of Windows without web browsing software, and by preventing OEMs

2591

from removing Internet Explorer -- or even the most obvious means of invoking it -- prior to shipment, Microsoft forced OEMs to ignore consumer demand for a browserless version of Windows.

The same actions forced OEMs either to ignore consumer preferences for Navigator or to give them a Hobson's choice of both browser products at the cost of increased confusion, degraded system performance, and restricted memory.

By ensuring that Internet Explorer would launch in certain circumstances in Windows 98 even if Navigator were set as the default, and even if the consumer had removed all conspicuous means of invoking Internet Explorer, Microsoft created confusion and frustration for consumers and increased technical support costs for business customers.

Those Windows purchasers who did not want browsing software -- businesses, or parents and teachers, for example, concerned with the potential for irresponsible web browsing on PC systems -- not only had to undertake the effort necessary to remove the

2592

visible means of invoking Internet Explorer and then contend with the fact that Internet Explorer would nevertheless launch it in -- launch in certain cases.

They also had to (assuming they needed new, nonbrowsing features not available in earlier versions of Windows) content themselves with a PC system that ran slower and provided less available memory than if the newest version of Windows came without browsing software.

By constraining the freedom of OEMs to implement certain software programs in the Windows boot sequence, Microsoft foreclosed an opportunity for OEMs to make Windows PC systems less confusing and more user-friendly, as consumers desired.

By taking the actions listed above and by enticing firms into exclusivity arrangements with valuable inducements that only Microsoft could offer and that the forms reasonably believed they could not do without, Microsoft forced those consumers who otherwise would have elected Navigator as their browser to either pay a substantial price (in the forms of

2593

downloading installation, confusion, degraded system performance, and diminished memory capacity) or content themselves with Internet Explorer.

Finally, by pressuring Intel to drop the development of platform-level NSP software, and otherwise to cut back on its software development efforts, Microsoft deprived consumers of software innovation that they very well may have found valuable had the innovation been allowed to reach the marketplace.

None of these actions had pro-competitive justifications.

411. Many of the tactics that Microsoft has employed have also harmed consumers indirectly by unjustifiably distorting competition.

The actions that Microsoft took against Navigator hobbled a form of innovation that had shown the potential to depress the applications barrier to entry sufficiently to enable other firms to compete effectively against Microsoft in the market for Intel-compatible PC operating systems.

That competition would have conduced

2594

to consumer choice and -- that competition would have conduced to consumer choice and nurtured innovation.

The campaign against Navigator also retarded widespread acceptance of Sun's Java implementation.

This campaign, together with actions that Microsoft took with the sole purpose of making it difficult for developers to write Java applications with technologies that would allow them to be ported between Windows and other platforms, impeded another form of innovation that bore the potential to diminish the applications barrier to entry.

There is insufficient evidence to find that, absent Microsoft's actions, Navigator and Java already would have ignited genuine competition in the market for Intel-compatible PC operating systems.

It is clear, however, that Microsoft has retarded, and perhaps altogether extinguished, the process by which these two middleware technologies could have facilitated the introduction of competition into an important market.

2595

412. Most harmful of all is the message that Microsoft's actions have conveyed to every enterprise with the potential to innovate in the computer industry.

Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insist on pursuing initiatives that could intensify competition against one of Microsoft's core products.

Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft.

The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest.

Ladies and gentlemen, we'll take a short break. Remember the admonition previously given.

We'll come get you as soon as we can. Leave your notebooks there.

(The following record was made out of.

2596

the presence of the jury.)

THE COURT: You may be seated.

Stand by and I'll get my papers for this next part.

There were two matters that I believe needed to be cleared up before the opening statements. One was request by the Plaintiffs and a resistance by the Defendant that the Plaintiffs mentioned spoliation, or evidence regarding spoliation in the opening statement; is that correct?

MS. CONLIN: That's correct, Your Honor.

THE COURT: Any further record on that before the Court rules?

MR. TULCHIN: No, Your Honor.

We've submitted some papers, and I think that we've said what we needed to.

THE COURT: Ma'am?

MS. CONLIN: No, Your Honor, nothing further.

THE COURT: In denying Plaintiffs' motion for spoliation instruction, which the Court did for the preliminary instructions, and stating that the Court find that there has been

2597

no showing by substantial evidence of the facts necessary to justify such a destruction, the Court simply meant that the evidence set forth by Ms. Conlin in support of her motion for spoliation instruction was insufficient evidence for the Court to make a threshold determination.

And that the four requirements for the instruction on spoliation have been met, and consequently, that a preliminary instruction on spoliation should not be given.

The evidence advanced by counsel in support of her motion consisted of exhibits and deposition or other testimony from differing sources, cases, and proceedings.

It remains to be seen, if at all, if all or any of the supporting documentation would be admissible or admitted at trial in this matter.

It is best that the Court not view the supporting proffered evidence in a vacuum, but rather in the context of trial with an opportunity for any objections by Defendant on evidentiary grounds, opportunity for cross-examination of witness, and opportunity

2598

for cross-designations of prior depositions or testimony.

The Court relied on the Hartsfield case in stating that there must be substantial evidence to show the evidence was in existence; that such evidence was in the possession of or under the control of the party charged with destroying the evidence, the evidence would have been admissible at trial and the party responsible for the destruction of the evidence did so intentionally.

These factual elements have not been met. This is what the Court stated in its prior ruling regarding the instruction.

It is not at this time clear by substantial evidence that these elements described above would have been met based upon that evidence in a vacuum.

During the trial, however, the evidence may demonstrate differently. Whether the full requirements for spoliation have been met in this case will be determined based on evidence and witnesses' testimony at trial.

Therefore, Plaintiffs may be permitted to discuss evidence in their opening that will

2599

be presented at trial in regard to this issue.

Anything further?

MS. CONLIN: No, Your Honor.

THE COURT: May I have that second pile, please?

Court was also requested by Plaintiffs to -- yesterday, with the Defendant present, to give as soon as possible a ruling on three exhibits which the Plaintiffs wish to use during their opening statement.

One was Exhibit 6324; is that correct?

MS. CONLIN: 6324.

THE COURT: Correct.

MS. CONLIN: Yes, Your Honor.

THE COURT: Court's ruling on 6324, the first paragraph of the document is admissible. The rest is not admissible, and the ruling of the Special Master sustained as to the remainder of the document.

Plaintiffs' Exhibit 5800 was the second one; is that right?

MS. CONLIN: I hope so, Your Honor.

MR. HAGSTROM: Yes, Your Honor.

THE COURT: First paragraph of page 1 is admissible; the rest is not admissible.

2600

Therefore, the Special Master's ruling on the rest of it is sustained.

And the last one I have, I was told by counsel, was Exhibit 7400.

MR. HAGSTROM: Yes, Your Honor.

THE COURT: You're shaking your head affirmatively back there.

Second and third paragraphs of that exhibit are inadmissible; the rest is admissible.

With that, are you ready for opening statements?

MS. CONLIN: Yes, Your Honor.

THE COURT: We will bring the jurors in, please.

MS. CONLIN: Your Honor, may I ask one thing? If my voice -- how often can I take a little rest?

THE COURT: Whenever you need. Just tell me.

Same for Defendant. Whenever you need a break, just turn to me and say.

MR. TULCHIN: Your Honor, would it be okay just to take a two-minute break right now?

THE COURT: Sure. You want to do

2601

that?

MR. TULCHIN: Before the jury comes in.

(A recess was taken.)

(The following record was made in the

presence of the jury.)

THE COURT: Members of the jury, at this time you are going to hear opening statements. As I stated to you earlier, opening statements are not evidence. They merely are an outline of what each party believes the evidence will show in the case.

They are important in that they give some order to what is going to be presented, so for that reason you should pay close attention to them, but remember it is not evidence.

At this time are Plaintiffs ready to proceed?

MS. CONLIN: Yes, Your Honor.

THE COURT: You may proceed.

MS. CONLIN: Your Honor, may it please the Court, counsel, members of the jury.

Let me see if I can step over the cords.

Good morning. We've been waiting a

2602

very long time to get to this part of the proceedings.

I want to begin by reintroducing the people who are here in court. You met Mr. Hagstrom. He and I are the lead counsel for members of the class. Angela Dennis is a legal assistant on my staff, and this is Pat Larsen. She is one of the class representatives.

Mr. Tulchin and Mr. Rosenfeld and Mr. Green and Ms. Nelles are lawyers on behalf of Microsoft. Mr. Wallis is the -- one of the in-house corporate counsel.

The rules say that companies should compete as vigorously as they can, do everything they can to win, make the best, the most innovative, the most creative products, get the best sales force, and try to win on the merits.

But the rules also say you have to compete fairly; and if you don't, you have to be held accountable for the damage that you do to the competitive process and to the free market and to consumers.

For the higher prices and the loss of

2603

innovation and the lack of choice that inevitably results when fair and free competition do not occur.

The rules also say that monopoly's cannot abuse their power.

You can't take your monopoly product and combine it with a nonmonopoly product and sell them together to make the nonmonopoly product a monopoly product.

You cannot freeze out competitors and punish or retaliate against people who cooperate with your competitors; and if you do, you will be held accountable for the higher prices, the lack of innovation, the lack of choice that you caused by those unlawful acts.

Microsoft did all that and more.

It isn't illegal to be successful. We applaud that. It isn't illegal to grow your company from little to huge. That's the American dream. It isn't illegal to be tough. It isn't illegal to be ruthless. It isn't illegal to be aggressive. It isn't illegal to become or remain a monopoly, as long as you don't break the rules to do that.

Microsoft did break the rules.

2604

What the law requires of Microsoft is exactly what the law requires of all companies, compete fair and square.

Microsoft did not.

I'm going to start -- you all have very different experiences with respect to computers. Some of you are very experienced users, and some of you are not.

Most of you will not know the lingo of the computer industry. You will by the time this is over. But right now, I'm going to start by giving you some of the basics that you will need to understand what's going on in this courtroom.

Let's start with some terms, the first of which is operating system.

An operating system is a software program that manages the hardware and software resources of the computer. It's the most basic part of the software.

It does tasks such as controlling and allocating computer memory, prioritizing the tasks that the computer does, controlling input, controlling output, facilitating networking and managing files, operating system

2605

Windows, MS-DOS. Those are two types of operating systems that we'll be dealing with.

Applications. They are the programs that help you accomplish tasks. They are the things that do things with the computer.

The applications program at issue in Comes versus Microsoft are the spreadsheet and word processing software.

A spreadsheet is an application commonly used for budgets, forecasting, and other finance-related tasks. Organizes your data.

The relationship between the cells are defined by a formula, and when you make a change in one cell, it updates all the other cells. That's the spreadsheet.

Here the spreadsheet at issue is Excel.

The word processor, that's the other application at issue in this case is -- it's what you use to write letters with. It manipulates text-based documents.

It's the electronic equivalent of a pen and paper -- usually -- and an eraser, and usually most include dictionaries and other

2606

things like that.

Middleware. When Judge Rosenberg was reading to you from the findings of fact, he talked to you about middleware, and three of the type of middleware that he talked to you about were Netscape Navigator, which is a browser; RealNetworks Streaming Media, RealNetworks Player, it's the streaming media; and Java, which is a group of technologies invented by Sun. The inventor, actually Mr. James Gosling, will be one of the witnesses before you.

Those middleware technologies sit between the operating system and the applications. They're in the middle. That's why they're called middleware.

And they can work cross-platform. They don't care what operating system they're on. That, of course, is one of the things that made them a danger to Microsoft's monopoly.

Another term that you will hear a lot of is OEM, original equipment manufacturer. Those are the computer makers. That's Gateway, Dell, Compaq, OEMs.

There are two main channels that

2607

people get their software from. The first is the OEM channel preloaded on the computer; and the second is what's called the finished goods channel.

Part of that is retail; Comp USA, Wal-Mart, wherever you get software in a retail store. And the other is called volume purchasing.

I want to take a look at the computer screen with you just to name the things that you see.

What you see when you look at your computer screen is the GUI, the Graphical User Interface.

I bet not too many of you had heard about GUI, at the least this kind of GUI, until you got here.

The little things that you see, those are the icons, and the -- you do not see the operating system when you look. You see the interface, the GUI.

The icons are what you press to activate the application.

The browser on this, and most, is the Internet Explorer.

2608

Can we show that, Darin?

I didn't introduce Darin Buchbinder, who is a technician, who is able to do magic things. But not as fast as I can talk.

I'm going to try to talk a little bit more slowly than I ordinarily would, both for Darin and for the court reporter.

Word processor, that would be Word right there. And then the spreadsheet is Excel. Those are the -- that's your GUI.

Let's look at the Microsoft home page. We're going to a website, and this is what -- you press your browser, you go to the home page. Usually you go to some URL.

The URL is that address up at the top that starts usually with www. URL.

And then the tool bar is right at the top. That's your tool bar. You can't see that very well.

But those are the little things that give you options in terms of what functions you want to perform on that website.

I know a lot about your views on technology and Microsoft and Bill Gates from your questionnaires, and thank you very much

2609

for filling out the questionnaires, and for your patience in answering my questions and those of the Microsoft attorneys.

One of the things that I know about most of you is that you have positive views about Microsoft and about Mr. Gates, and this presents a bit of a problem for me.

We've sued Microsoft, and I am going to be saying some not very nice things about Bill Gates, based on the things that he has said in Microsoft documents and the things that he has done.

I think that some of what I will have to tell you will be difficult for you to accept. All I ask is that you keep an open mind, that you listen, that you look.

I'm going to be in the course of this opening statement showing you a lot of documents, a lot of Microsoft internal documents.

I am going to show you what happened rather than just telling you, and most of what I will be showing you are from the documents that were created by Microsoft's high-level executives in the course of their business.

2610

When I show you the documents, I will only be reading portions of it, a sentence, a paragraph usually at the most; the portions that I think are relevant and things that I think you should know at the outset.

You will have the whole document at the end of the process, and you'll be able to review all the quotes in context.

I will name the number for you of each exhibit that I show you. Every exhibit has an assigned number. They do not go in any particular order, so if you are interested in looking at the document, you may wish to make a note about it and then look at it several months from now when you have the opportunity to do that.

Microsoft may wish to read you other portions of the documents, same documents, different documents that they think would be relevant to your determination.

The same is true of depositions. I'm going to be showing you some short clips from the depositions of some of the witnesses. Short clips in the case of those that I show you, you will hear perhaps not the whole

2611

deposition, but more of the deposition during the course of the evidence.

You've also seen some of what we call demonstrative evidence.

Demonstrative evidence is not going to come to you. You won't have -- those little pictures I showed you at the beginning, you will not have those. Those are only meant to give you a visual representation of some of the concepts. So those will not be going with you into the jury room.

Let me begin by summarizing for you what we will prove.

Judge Rosenberg gave you instructions of the law. He is the only person in the courtroom who says what the law is. The rest of us may summarize it, but obviously the law as provided to you by the Court is what you will rely on.

We will prove that Microsoft unlawfully monopolized the world market for personal computer operating systems. We will prove that Microsoft unlawfully monopolized the world market for word processing, and we will prove that Microsoft unlawfully monopolized the

2612

world market for spreadsheet applications software.

There are three basic things that we will prove, three overriding, overarching things that we will be spending our time proving.

The first issue is we will prove that Microsoft broke Iowa's Competition Law in several ways that fall into two main categories.

We were talking about this yesterday. You probably have been subjected to the world's record longest preliminary jury instructions, and a record we expect to stand for a very long time. So you may not have memorized all of them yet.

So I'm going to go back to the two that define the liability concepts in this lawsuit.

The first is Instruction Number 5.

As I said, we, the classes say, that Microsoft broke Iowa's Competition Law in two main ways, the first of which is defined for you by your Instruction Number 5.

We say basically that Microsoft used

2613

its monopoly power to exclude competition and control prices.

And the Court defined that for you as any company that acquires, maintains, or uses monopoly power over any part of trade or commerce for the purpose of excluding competition or controlling, fixing, or maintaining prices violates the Iowa Competition Law.

And then he told you the four things under there that are the elements of that anticompetitive claim.

First, that Microsoft had monopoly power in the relevant product market, and you will recall that for the operating system market between the years 1995 and 1999, that has already been proven.

The second is that Microsoft willfully acquired or maintained that power through conduct designed to exclude competition or through anticompetitive conduct.

And then the third is that what Microsoft did that broke the law harmed Iowa consumers, Iowa class members.

And four, that Iowa class members

2614

suffered damages resulting from the injury. That's our first main claim.

By shorthand, we're going to call that the monopolization claim.

The second main claim is set out for you in Instruction No. 10, and that is that Microsoft agreed with others to restrain trade and to harm competition.

The title of that instruction is Contract, Combination, or Conspiracy.

And basically that means we say that Microsoft agreed directly, or indirectly, with other people or entities to accomplish wrongful acts.

A conspiracy is an agreement by two or more persons to accomplish some unlawful purpose or to accomplish a lawful purpose by unlawful means.

And I'm not going -- this one -- this instruction is very, very long. I'm just going to tell you the four things again and the things that are important to remember.

First, we will show that Microsoft entered into a combination -- a conspiracy combination or agreement, or otherwise

2615

collaborated with one or more persons or companies to restrict trade or prevent competition.

We have to show, and we will show, that either that the purpose or the effect of the conspiracy agreement, and so on, was to harm competition in any of the personal computer software markets involved in the case. That's the three; operating systems, word processing, spreadsheet. Any of those three markets.

We also say that some of the combinations were imposed on the other party. We don't have to show that the other party voluntarily entered into any kind of a written agreement.

What we have to show is that there was -- that there was a combination or conspiracy, but we don't have to show that the other party was voluntarily a member.

Let me give you just an example. An OEM who agreed to a type of license we're going to talk about called per processor would be potentially a part of the conspiracy, even though they were not necessarily participating

2616

in the wrongful conduct.

So what the Court says to you is because the Plaintiffs allege that the combinations between Microsoft and others may have been imposed or coerced by Microsoft, they, meaning the class members, do not have to show that any party who was coerced by Microsoft shared Microsoft's goal to prevent or exclude competition.

The third thing is that Microsoft committed one or more exclusionary acts -- that's sort of the overt act requirement -- that had the purpose or effect of unreasonably restraining competition.

And fourth, we must show, and we will show, that the Plaintiffs were injured by the restraint of trade.

So first we will show that Microsoft broke the law. And remember that. That's already been shown for the period 1995 through 1999 in one market, one of the three; in the operating system market. That's already been proven.

Second issue is did Microsoft's wrongful conduct harm Iowa class members.

2617

There's your two.

As I talk with you, I will focus on Microsoft's acts against competitors. Microsoft didn't come into Iowa and slap a higher price tag on computer software.

What Microsoft did was act to destroy competition by destroying competitors. And not one or two competitors, dozens.

Any company who threatened their monopoly power, and by destroying competition, they harmed Iowa class members.

How did they do it? Though the facts can be complicated, the overall concepts are simple.

Microsoft used two illegal choke holds, one on input and one on output.

Input is the sockets. Sockets are in the operating system. I'm going to talk about that in a minute. And output is the distribution channels.

In Instruction 4, the Judge told you about the purpose of Iowa's Competition Law.

He told you that the Iowa Competition Law presumes that competition in a free market will result in better goods and services,

2618

including better quality, better service, better safety, better durability, all at lower prices.

So if Microsoft destroyed Iowans' opportunity to have competition in a free market, then Iowans were deprived of those better goods that would have been better quality and have had better security, and Iowans paid higher prices than the lower prices that competition brings.

Issue 3. What amount of money based on reasonable estimates will compensate Iowa class members for overcharges and for security problems?

Class members were harmed in two ways. They paid too much for Microsoft's monopoly products. The monopoly overcharge.

A couple of things to know. You will have these as a part of the experts' testimony, but the number of licenses here in Iowa for Windows, the number of licenses in Iowa, we believe the evidence will show, are 5,148,614. That's for the operating system.

For Office, which is the office productivity suite that includes Word and

2619

Excel, the number of licenses 1,838,308.

For Excel, the spreadsheet, 21,304, and for Word, free standing by itself, 445,435.

When you add that up, it's about seven and a half million total licenses over the entire class period.

I also wanted to mention to you the average overcharge. And again, keep in mind that this is the average over the class period and over the period of time -- over the class period and over the entire class.

The average overcharge for the operating system is $42.49. For Office it's $56.94, for Excel $56.51, and for Word $10.55.

Now, again, in the early part of the class period, you know, the prices were a bit lower, and then they raised over the course of time. So this again, for the entire 12 years and one month, approximately, of the class period.

The second type of -- that's harm one, the overcharge.

To prove harm one, we will use three economic methods.

You will recall in our voir dire, we

2620

talked a little bit about economic methodologies and the two -- the three types of -- the three ways, the three economic models that will be used to show you what the competitive world would have looked like absent Microsoft's anticompetitive conduct are these three.

I'm not going to explain them to you. That is Mr. Hagstrom's duty and responsibility. I'm just going to tell you what they are.

The profit margin method, the rate of return method, and the price premium method.

That's harm one, the overcharge.

Then the second harm that we say Microsoft caused Iowa class members, we say that Microsoft by joining the browser with the operating system, the conduct that Judge Rosenberg spoke with you about in the findings of fact, by putting those two things together, Microsoft increased the security risks that people have in using their computers.

By that anticompetitive act, they raised the security vulnerabilities, and because of that, consumers, class members had to spend a lot of time doing things to protect

2621

their data, downloading patches, and making sure that they had as much safety as they could get.

That's the second harm that we say that Microsoft's anticompetitive conduct caused Iowa class members.

Here are some things to know.

The market for computer software is worldwide. That means that things that happen around the world, not just in the United States, but in Germany and Korea, and things -- other places all affect the market in the United States.

You may wonder, you know, why is Roxanne talking to us and showing us documents from Germany and England and Korea. And there is a two-part answer.

Answer one is what they did everywhere affects us here in Iowa, worldwide market. And two is Microsoft did business the same way everywhere.

The second thing to know is that every computer must have an operating system. If it doesn't have an operating system, it isn't going to do anything. Must have an operating

2622

system; essential part of any computer.

The third thing is that the way that most people get their operating systems is with their computer when they buy it, preloaded, it's already there, and it's almost certain that the operating system that is already there will be the Microsoft operating system, not because class members chose it, but because the OEM, the computer manufacturer, has a contract with Microsoft that virtually requires that they put a Microsoft operating system into the computer that class members bought.

Not because class members wanted it, but because Microsoft has a contract with the computer maker.

The fourth thing to know is what makes a computer attractive to purchasers is not what operating system is on it, but what applications will it run.

The word -- what word processors, what spreadsheets, what games, what applications that helps you trace your ancestors or keep track of collections, or whatever interests you have. It's the applications that matter.

And the more applications that can run

2623

on a particular operating system, the more attractive that operating system is.

Judge Rosenberg talked to you about the applications barrier to entry. Sometimes I call that the ABTE just to make more acronyms for you.

But the applications barrier to entry is what protects Microsoft's monopoly product. The more applications, the more attractive.

We'll talk about that some more.

Five, what Microsoft did to its competitors is what hurts consumers because it harms the competitive process.

I'm not going to go to Instruction 8, but it is Instruction 8 that talks about that.

If Microsoft uses illegal tactics to destroy competitors, class members ultimately pay the cost both in terms of higher prices and less security.

Please remember that the tactics do not have to be illegal by themselves if they have the effect of achieving or maintaining monopoly power.

Instruction 8 gives you guidance on all of those factors.

2624

Some of the things that I'm going to talk with you about happened long ago, sometimes ten years ago or 15 years ago, sometimes longer. But what happened long ago in the market for computer software affects us today.

For example, one of the first things I want to talk about is a company called Digital Research, Incorporated, a company that created an operating system that competed with Microsoft's MS-DOS from the late '80s until it was withdrawn from the market in 1994.

I will tell you why it was withdrawn later, but if it had survived, Microsoft would have had competition. And you will see from the documents that when Microsoft did have competition, they lowered their prices.

So if DRI -- if DR-DOS, which was the name of the product that DRI created, if they had survived, Microsoft would have had competition, and consumers would have had all the benefits that competition brings.

One unusual factor, one unusual feature of this case is that the Judge has already found that Microsoft violated the

2625

antitrust laws of Iowa.

And, of course, in your deliberations, as Judge Rosenberg told you, you must accept those findings of fact. Those issues are decided.

Is that fair? Yes, because Microsoft already went to trial on those issues. They presented witnesses, they presented documents, and they lost. So Microsoft had its chance, and the Judge says they broke the law.

We still have to prove that Microsoft's breaking of the law caused harm to Iowa class members and the amount of the damages.

I'm going to go over with you also some of the -- Judge Rosenberg read you a list of acronyms. Oh, my goodness, there are so many acronyms, so many acronyms in this case.

I have a red notebook that has about a hundred pages of acronyms in it. I'm going to need to remember to bring it.

We are not going to go over all of them. We will try to supply what those things mean as we go along, but here is a list of some that we'll be using quite a bit.

2626

I'm going to come back to API. Application Program Interface is so important that it deserves more than a one-sentence definition.

Applications we've talked about. Chicago, Microsoft named it's -- had code names for its products, and the code name internal to Microsoft for Windows 95 was Chicago.

You will hear other city names, but Chicago Windows 95 is one that you'll hear right off so we thought you needed to know code names.

Cost of doing business or cost of goods sold -- I'm sorry, cost of goods sold, COGS, C-O-G-S.

I mentioned DR-DOS. That is an operating system called DR-DOS, and it was manufactured by DRI, Digital Research, Incorporated.

FTC, Federal Trade Commission.

FUD, it's used as a noun and a verb, and it means fear, uncertainty, and doubt.

GUI, we talked about.

ISV. And ISV or ISVs are independent software vendors. ISVs, we'll just hear that

2627

all the time. Those are the people who write the applications outside of Microsoft. Independent software vendors write applications.

MDA is a market development agreement that is an agreement between Microsoft and usually an OEM.

We'll talk -- Dr. Noll will talk about that. Dr. Noll is a professor at Stanford who has been studying issues of antitrust for many, many years, decades, and who will be here to give you the benefit of his experience.

And one of the things he's going to talk about are the anticompetitive effects of the market development agreements.

Middleware, we've talked about that.

And Microsoft is obvious, and MS-DOS, that's Microsoft's first operating system.

NDA, I'm sure some of you have heard that particular acronym before. That is a nondisclosure agreement.

When companies need to share information confidential to one of them, they ask the recipient of the information to sign an NDA, promising that the information that is

2628

provided will be kept secret, NDA.

OEM we've talked about.

OS we've talked about.

OS/2. OS/2 was a competing operating system. It was initially developed jointly by IBM and Microsoft, and ultimately marketed by IBM.

The joint marketing agreement between IBM and Microsoft was entered into in 1985, and we will talk about that later.

Peripherals, printers, mouse, keyboard. Those are the peripherals.

PPB, prepaid balances. That is a part of a Microsoft contract with the OEMs with the computer manufacturers that we believe had an anticompetitive effect and had an anticompetitive purpose.

PC, personal computers.

PM, that is usually -- usually this means presentation manager. Presentation manager was the GUI, the Graphical User Interface for OS/2, IBM's competing operating system.

IBM's competing operating system didn't have the Windows GUI, it had a separate

2629

GUI called presentation manager, which was developed for it, and as I said, which competed with Microsoft products.

And I put ubiquitous down here not because I didn't think -- it's a word that I had heard before, but it is a word used in the documents and used by the witnesses quite a bit, and it simply means everywhere, just everywhere.

I want to return now to these APIs and talk with you for a while about them.

The APIs in this piece of demonstrative graphics are the little -- the little things sticking up, okay, and what -- lots of different items, pieces of software can expose APIs, meaning that the ISVs, the independent software developers can see them and use them.

And what ISVs use the APIs for is to do the functions needed to be done by the software they're developing.

They need to be able -- an API set is what the ISVs develop to.

Let me try another analogy. Think of a house, okay. And the APIs are the doors into

2630

the house. The house is the operating system, and the APIs are the way you get into the operating system to get it to do what you want it to do.

Microsoft doesn't want any other company to expose APIs that ISVs, the independent software developers, the people who write the software, the applications, could write to.

And why does that matter? Because it is the APIs, it is these little levers that protect the applications barrier to entry and that protect Microsoft's monopoly.

Other APIs, other API sets could serve as a platform for the ISVs to develop on and that -- that's what worried Microsoft about Netscape and Java and Real. They expose APIs.

One of the things that I wanted to mention also before we begin, I know you think we've already begun, but really, not yet.

Version numbers. Microsoft and all other -- not all other -- many software vendors name their products, and then to distinguish one from the other, they give them a version number.

2631

There's Windows 1.0 and Windows 2.0. Then between the big versions like 1.0 and 2.0, there are smaller versions like Windows 3.11, okay.

Before Windows 4.0, there was Windows 3.0, Windows 3.1, Windows 3.11. Sometimes to distinguish between the major releases like Windows 3.0 and Windows 4.0 they call it like Windows 3x, meaning any version of Windows 3.0 or Windows 3.

I know that this may seem confusing. It certainly has been occasionally quite confusing to me.

And in fact, try to keep firmly in mind the -- particularly in the beginning when Windows was only the Graphical User Interface and MS-DOS was the operating system, it's sometimes difficult to keep straight -- because they're coming out at around the same time and the same people are sometimes in charge of them and working on them.

So I'll try to remind you which is which, and you may be better at telling the difference than -- keeping that straight than I have been.

2632

Let me tell you how I'm going to approach the task of guiding you through the evidence and telling you about Microsoft's conduct, about the people, the products, the companies over this long period of time.

The first thing I'm going to talk about are the basics of the case, the class members, the class period representatives, and so on.

I'm going to give you a very brief history of computing.

I'm going to talk about the categories of Microsoft's anticompetitive acts, then the stories of the competitors Microsoft committed those acts against, then some of the Court procedure and the details that may be helpful for you to know.

Then some of the things we believe that Microsoft's evidence will be trying to prove, and then I'm going to sit down.

Mr. Hagstrom will then talk to you about the two remaining major issues, and that is causation and damages.

Microsoft's anticompetitive conduct caused harm to Iowa class members and the

2633

nature and extent of that harm in two areas, the overcharge and the security problems. This will take a few days.

I'm not going to commit as to how many days because, as you have seen, it's a little unpredictable. Legal issues come up, things happen that sometimes we get a late start in the morning or -- after the lunch hour, but this is the only time that I will have to talk with you directly for the next several months.

I hope to put the actions of Microsoft in context and to give you a basic understanding of the things Microsoft has done and sort of set them into a framework for you to use as you view the evidence.

Please, I ask you to be patient with me and give me a chance to walk you through these events and how they impacted the market and how they impacted Iowa class members.

The class representatives. Joe Comes, he thought he could be here today, but he could not. He is a Des Moines resident, he and his wife Jill live here in Des Moines with their daughter Jackie. He is the person who started the original lawsuit back in the year 2000.

2634

He will be a witness. He is a small business owner here.

Pat Larsen, Pat is here. Pat is a retired -- is retired from Eaton Corporation up in Spencer, Iowa. She started -- she worked there 22 years. She started as a factory worker on the floor, and when she retired she was a manufacturing product supervisor.

Those are the two individual people.

There are also two small businesses, two businesses. Riley Paint is a paint manufacturing business down in Burlington. Sam Jennison, or other officer of the company, will be the representative of the Riley Paint Company.

And the other business, which is the one most of you knew about or rented tuxes from, that is a -- that's a family business. It has five locations around Iowa. Mary Jo Harty is the president, and either she or another representative of Skeffington's will occasionally be present.

And those are the four class representatives, two individuals, two businesses.

2635

And they -- these four entities, two people and the two businesses, represent people who are not here.

We do not know how many individuals and businesses are class members. What we know is how many licenses. That's what we can figure out.

If you think about it, you will see how that's true.

One person with one computer might have three licenses. People replace their computers and they get more licenses.

We can't tell you -- we know it's hundreds of thousands, or we think it's hundreds of thousands of individuals and businesses. A big business would have thousands and thousands of licenses.

So we don't know numbers of entities, but we do know numbers of licenses, and that is what I told you, seven and a half million total, roughly, licenses for all of the products involved.

What do the class members do? They pay attention to what's going on. They at least scan the pleadings that we send them

2636

hoping to get some clue from the legal terminology what's happening.

They talk to us as their lawyers. They answered the interrogatories and request for production of documents that Judge Rosenberg told you about.

They sat for their depositions where Microsoft lawyers could ask them questions, and they provided answers.

They recognize and accept the responsibility that they have to represent all of the individuals and businesses who are not present here in Court.

These folks are just regular people. They won't be able to tell you what Microsoft did to break the law. They haven't looked at the millions of documents. They're not technical experts.

They don't know a thing about the source code. They just know what most people know about Microsoft and its products and its activities.

I guess that's probably not true anymore because they have looked at the pleadings and had their depositions taken and

2637

the like, but they will be here as much as they can and when they can.

There are two classes.

I'm going to show you, but not read to you, the definitions of the classes. This is the operating systems software class.

It names the products that are covered, the operating system products. It names and it gives the class period and indicates that you have to be -- you have to be at the time of the purchase, you have to reside in or be incorporated in Iowa and to not be buying the operating system to resell it to somebody else.

The second Microsoft applications software class is indirect purchasers of the applications that we've talked about, either by themselves or within the office suites.

Let's look at the products involved.

This is a list of the operating systems, the products that Microsoft has provided, and also a list of the applications.

Two are not -- two that we know about are not on the applications list. Word, Excel, and Office, of course, are probably familiar to

2638

you, but there's a product called -- or was a product called Home Essentials that also included applications, as well as Works. Microsoft Works at some point have also either included Word or Excel or both.

The time period is from May of 1994 until June 30 of 2006, 12 years and one month.

And remember, the government case that Judge Rosenberg told you about covers only a part of this period. It also is only for the operating systems.

So the whole class period, there's a year before the government case started and then there are years after.

The government case covers '95 through '99, '94 before and '99 -- some part of '99 to June of 2006. Those are not covered by the government case. And only operating systems, not applications covered by the government case.

We talked about the two channels preinstalled or the finished good channels.

Let me talk a little bit about the history of computers.

I'm going to start in 1974 at a place

2639

called Xerox Palo Alto Research Center. Xerox Parc, P-a-r-k -- P-a-r-c.

It was an R and D facility, and it was legendary for developing some of the technology that's used together, including a thing called the Alto high-tech -- or high-end workstation.

Keep in mind that -- I really do expect that you will see me fall down at some point. Don't worry, I'll get right back up.

The computers were huge. You know, they were kept in cooled rooms. They were enormously expensive. And this Xerox Parc developed a much smaller version, and it featured the first Windows style operating system.

It had -- it had a GUI, complete with icons and pull-down menus and other niceties that wouldn't appear on the market for almost a decade.

In January of 1975, there's a magazine called Popular Electronics. It announced the world's first minicomputer kit, and it said world's first minicomputer kit to rival commercial models, meaning, you know, the huge room size things. Was called the Altair 8800,

2640

the Altair -- it was a build-it-yourself computer. It cost $500. It was available from a company called Mits, M-i-t-s, down in Albuquerque, New Mexico.

It was a sensation. Orders flooded in from everywhere. Enthusiasts, hobbyists just went crazy.

Now, let me tell you that it didn't do anything. I mean, it just sat there and blinked. But it was so unique, so remarkable just sitting there blinking that it was terribly popular.

In 1979 a company called VisiCorp publishes a spreadsheet for Apple.

This is moving -- I'm not going to fill in the details. There will be witnesses who will talk to you about this.

But this -- they created a spreadsheet. The first what is called a killer app. And a killer app is an application that is -- does such a useful thing that it drives the sales of computer.

And so this VisiCalc was the first commercial spreadsheet for many computers, or personal computers, and businesses became,

2641

then, interested in buying small computers as opposed to the big room-sized ones.

IBM, the producer of most of the big room-size computers, took notice, and by 1980, it's planning to enter this new field, desktop personal computers.

This is a new industry growing.

Bill Gates is born in 1955. He's the middle child of three. His dad is a lawyer. His mom is a homemaker and volunteer. And by junior high he discovers computers.

He and his friend Paul Allen worked together to develop computer languages. How do you talk to that box? How do you make it actually do something besides sit there and blink?

And he and Mr. Allen found ways to communicate with the computer in words rather than numbers binary code, zeros and ones, words.

When he's 18 he goes off to Harvard. Mr. Allen goes to Washington State. And they write to Mits, the company that manufactured the Altair 8800, and say that they have a version of Basic, which is a computer language

2642

-- they don't -- but when Mits expresses interest in what they say they have, they get it. They develop it.

Mr. Gates borrows from the deck programming language. Mits buys the programming language. Mr. Gates drops out of Harvard, and he and Allen move to Albuquerque and found Microsoft in mid-1975. In the beginning it's a partnership between Paul Allen and Bill Gates.

At around this same period in 1976, Digital Research, Incorporated, is founded, and it is founded to develop the operating systems.

DRI's founder is a man named Gary Kildall. He has a Ph.D. in computer science. And in 1973, he develops an operating system called CP/M. That is -- that means control program for microprocessors. And it's one of the very first operating systems for these minicomputers. It becomes very quickly the standard operating system for 8-bit computers.

I was going to tell you about a bit -- I was going to tell you all kinds of things about a bit, but let me not do that.

Let me just tell you that a bit is the

2643

smallest unit of storage used in computing -- the computers went from 8 bits to 16 to 32, and now we're on our way to 64, and this is sort of geometric progression.

Microsoft's initial focus is on these programming languages, the language -- languages used to write the applications. And, of course, to use the computer language, you have to have an underlying operating system, and Microsoft chooses the then standard CP/M operating system.

Gates visits Gary Kildall, the head of DRI, in November of 1977 and obtains a license for using CP/M.

In July 1980, July of 1980, IBM comes calling to Microsoft and asks Microsoft if they want to develop -- if they're willing to develop compatible 16-bit versions of its popular language programs, okay.

They've got them for 8 bit and now IBM's going to develop a personal computer, and they come to Gates and Allen and they say, will you develop languages for a 16 -- a larger, more powerful, 16-bit computer. And they agree. But IBM still needs an operating

2644

system. Languages won't do it any good unless the operating system is there.

IBM goes to Kildall at DRI. There are some legends about this. But somehow the deal isn't done. So IBM goes back to Gates.

By April of 1980, there's a guy named Tim Paterson. He works for Seattle Computing, and he has developed an operating system. It is basically a clone of the CP/M, the DRI CP/M operating system.

And let me say a moment about clones. Clones are not bad. What it means is a different product which mirrors the function of the original.

All PCs are clones of the original IBM PC. And Paterson's clone is of DRI's CP/M.

He calls it QDOS. That means quick and dirty operating system. That's what it means.

He was a cleaver guy. Anyway, he develops this quick and dirty QDOS, and on -- in January of 1981, Microsoft licenses Mr. Patterson's QDOS for $25,000 and then sublicenses it to IBM for use in their -- what's going to be their new PC.

2645

It's not a matter of public knowledge yet. So Microsoft for -- licenses the QDOS for $25,000 originally and buys QDOS outright for another $50,000 and also in 1981.

So Microsoft has QDOS for about -- for exactly $75,000 and MS-DOS, Microsoft's operating system, is a clone of QDOS, which is a clone of CP/M, which was developed by DRI.

And according to the three people who work on MS-DOS, one of whom is Chris Peters, from a programmer's point of view, MS-DOS 1.0 was a clone of CP/M.

Then Microsoft gives IBM a royalty free license for MS-DOS, but Microsoft retains the ownership rights of MS-DOS so it can -- it retains the ownership rights and the right to license it to all of the IBM clones which are about to come onto the market.

Then you'll hear about PC-DOS. MS-DOS and PC-DOS are virtually identical; MS-DOS is the Microsoft product. PC-DOS is also based on the Microsoft MS-DOS, but is the operating system in the IBM or in the original IBM computers.

The links from CP/M to QDOS to MS-DOS

2646

are well recognized, and our technical expert, a man named Andrew Schulman, will explain to you what those links are.

So Microsoft gets into the operating system business with Mr. Patterson's product for about $75,000, and IBM then releases its PC with the MS-DOS operating system loaded in it.

I want to return to the GUI, the user interface.

During the '80s and early '90s, the way that people talked to their computer was by typing in commands. I think you've heard a little bit about that the character based interface.

Persuading my secretary to leave the character-based interface was very difficult because people who knew how to do it really knew how to do it, and changing was difficult.

You type in characters and numbers. If you get one wrong, then your computer won't do what you want it to do.

She didn't get them wrong, but it was a very slow and difficult thing for most people to learn, but then Apple commercializes the Xerox Parc GUI with the little icons, and so

2647

instead of typing commands, all you did, you had your mouse and you clicked on the icon, and your computer would do what you wanted it to do; most of the time.

And here is the first Apple GUI with the icons. It was revolutionary.

Using your mouse you point and click. This -- of course, this Apple is great for the world of Apple computer users, but there is no Graphical User Interface for the world of IBM PCs and IBM clones; you know, Compaq, Gateway, so on.

Microsoft comes out with an imitation of the GUI and calls it Windows -- this is a screen shot of Windows version -- actually, that says 1.01, and it comes out in 1985. And that is the Windows GUI.

For up until 1995, you buy -- you can buy the Windows GUI separately from Microsoft's MS-DOS operating system. Two separate products, the GUI and the operating system.

For a while Windows is pretty crude and most people prefer to stick with a character-based -- the character user interface that allows you to communicate by typing.

2648

But Microsoft improves Windows, and by the beginning of the 1990s on the PC; and, you know, the PC is different than the Apple, not in the same market. Microsoft improves it, and by the early '90s the Windows is the dominant GUI on personal computers.

I want to stop for a moment and make sure that I tell you as clearly as I can that Iowa class members are not here to criticize Microsoft for the popularity of its Windows GUI.

If Microsoft had simply sold a good, quality Graphical User Interface product at a reasonable price, we'd be here applauding -- well, actually we wouldn't even be here, but we would be applauding Microsoft rather than suing it.

The reason for this lawsuit is that Microsoft is not satisfied with the results of lawful competition. We are here because Microsoft abuses its dominance in the Windows GUI and in the operating system and in the word processing and spreadsheet applications market to eliminate competition in those markets.

I said I would return to sockets and

2649

plugs, and here we are again.

All right. Microsoft -- this is Microsoft's operating system, MS-DOS, sitting under the GUI Windows. Those are the sockets. Those are -- what Microsoft internally calls the sockets is the operating system.

The plugs are the various software applications that need to connect with the socket.

I want to talk about something that's familiar to all of us, and that is assume -- the evidence will include testimony from Roger Noll who I told you about. He's an antitrust economist from Stanford University; has devoted years to analyzing the harmful effects that certain practices have on competition and on consumers, and he will use Microsoft's own description of the operating system and applications as sockets and plugs to help you decide if competition and consumers are hurt by Microsoft's practices of interfering with the connections between Microsoft's monopoly sockets and the GUI and competitors' plugs.

Suppose, for example, that here's this Xcel Energy Corporation, and it supplies all

2650

the electrical power in a particular area. It also makes toasters and washing machines and other kind of things.

But let's stick with the toasters and blenders. We've got toasters and blenders there.

To compete, all other toaster manufacturers would have to know how to plug in to -- how to use -- how to get access to the electricity that Xcel has.

The Westinghouse toaster has to have information in order to make its plug fit into the socket that will get its electricity from the Xcel company. If it doesn't know how to plug into the socket, it won't have any electricity, and it won't toast your toast.

So it needs information how do we make our plug, so it plugs into your socket so we can get your electricity and Xcel has all the electricity. They can't get electricity but from Xcel.

What if Xcel won't tell it or the energy company Xcel won't tell it everything it needs to know? Or what if Xcel tells it things that aren't true?

2651

Professor Noll will explain why it's necessary to both competition and lower prices that Xcel not use its monopoly power over electricity to give its own toasters an advantage.

So its own toasters are the only toasters who can plug in properly to the sockets. Otherwise toast -- other toaster companies, Westinghouse, Black & Decker, and so on could never have their products work.

At this trial we'll prove that Microsoft's monopoly over Windows was like the power company's monopoly over electricity. Other software companies could not compete unless they could plug into Microsoft's sockets.

And so this analogy, while not perfect, is very like what's happened here.

Part of what Microsoft did was use its monopoly power over the operating system to leverage monopolies in applications, Word, Excel, Office. And they did that by denying important information to other companies so their plugs would not fit properly into the sockets.

2652

In a very real sense, we are going to be going behind Microsoft's corporate walls and down their corridors and into the offices of their executives to see hundreds, even thousands, of these internal documents authored by its top executives from Bill Gates on down.

Where did we get all of these documents? They were provided under the discovery process.

Judge Rosenberg talked to you about interrogatories. We can ask questions; tell us. They can ask questions of us. We can say give us all of the documents that you have that bear on a particular issue, and they're required to make a reasonable search and provide them. We used those discovery processes; we got documents from other cases.

We will also hear testimony from witnesses, either from the witness stand, and I've already talked to you a little bit about depositions, both by video and ones that we're going to read to you.

You will hear all of these strange words, all of these strange acronyms. I'll do everything that I can to explain them once or

2653

twice or three times, or however many times it occurs to me to do so.

As you hear all of this strange language and see it all in the documents, we'll explain as they come up. We'll try to explain.

Some of them I still haven't figured out with all of the documents. There's one I was looking at last night, and I thought um, I looked in my red notebook and it wasn't there. We're going to try to find that out before I talk to you about it.

Now let me talk to you about Microsoft's illegal tactics, the things that Microsoft does that destroy competition. What are the illegal tactics that restrict competition and harm consumers?

We have created some icons for you. These are graphical representations. They are among the things that you will not have in the jury room. They're only for the purpose of identifying and helping you to remember what these tactics are.

I will talk about what they mean as we go along, but here are these graphical icons and representations. Here are the things we

2654

say Microsoft did to destroy competition.

One of the things were exclusionary contract terms.

Microsoft entered into contracts with OEMs that for all practical purposes prevented other operating systems from competing.

Tying and bundling, putting products together in a way that leveraged the monopoly power and the operating system into other markets.

Buying out the competition. You'll hear stories a couple of times about Microsoft just saying, you know, you're competing with us, stop that, we'll buy you.

Dishonoring contracts. I think that's self-explanatory. You enter into a contract, you're supposed to keep your word. If you don't, in the case of Microsoft when it -- its anticompetitive; it constitutes an illegal tactic.

Vaporware, that may be something that you've not heard about. That's when you announce a product that isn't going to come or -- either isn't going to come at all or isn't going to come very soon for the purpose of

2655

freezing the market for the purpose of stopping a competitor.

FUD. Fear, uncertainty, and doubt. That's not like telling people my competitor's product -- buy my product, not my competitor's, because mine is better, and here's what's wrong with the competitor.

Truthful information, that's not FUD. FUD is something else, and I'll tell you what it is.

The beta black list, I guess we haven't even talked about betas. But some of you, I'm sure, are aware that before a product is released generally to the market, it's tested; and usually by the people who are going to use it, the businesses, the consumers who are going to use it. Called a -- the product goes out to some group of people for the purpose of seeing whether or not it's going to work. And that's called a beta.

And Microsoft had a black list that said certain companies trying to plug into their sockets could not have their betas to make their products competitive with Microsoft's products, okay.

2656

I don't think I said that exactly right.

The beta -- Microsoft would not let people have their betas if they made products that competed with Microsoft, not with a product that was in the beta, but with other products.

You have to have the beta if you're going to -- you've got to have the socket if you're going to plug into it. You've got to know whether your product is compatible with the socket with the operating system.

Technical sabotage, that means you can see the plugs don't fit. There's -- the wires don't go. And that means Microsoft did things on purpose to make other people's products not work with their monopoly operating system.

Undocumented APIs. We talked about the APIs and the -- some of them Microsoft doesn't tell other people about. They keep them secret.

The DOS Windows merge, that's Windows 95, when they bolted the operating system and the GUI together, we say they did that in order to kill DRI, to kill DR-DOS, and OS/2.

2657

Dividing the market. You will hear evidence that Microsoft, when it has a competitor, rather than competing fair and square, would make proposals.

You've already heard about the Netscape proposal. You'll hear others. You know, I'll take -- Microsoft generally would say, in effect, I'll take the big share of the market and you can have the little share.

As you might suspect, competitors didn't want the little share; they wanted their fair share.

The deception and misinformation, I'm sure that's very self-explanatory.

Technology espionage, I think that's self-explanatory.

Unqual treatment, you understand that.

And threats and intimidation.

These kinds of tactics were part of Microsoft's formula to destroy competition.

I'm going to talk to you about the following Microsoft -- these are the competitors we're going to talk about. These are not all of them. These are all of them I'm going to talk about.

2658

Digital Research, Incorporated, which I've said that's Gary Kildall's group CP/M, from which QDOS came, from which MS-DOS came, that's Digital Research.

You will hear from -- actually, you're going to hear from the guy who wrote DR-DOS. He's coming from England to talk to you about how he wrote it and what it did and why it died.

The story I tell you about DR-DOS will be the longest because it is in that story that I'm going to define terms and talk with you about the tactics. So that will be the longest, I promise, and then they'll get shorter.

GO. GO was the developer of a notebook computer. I'm going to show that to you. A little tablet that a man named Jerry Kaplan thought of in 1987, and that was released to the market in 1991.

You wrote it -- remember, you were asked the question did you ever have one of those. You wrote on it with electronic ink. Now I'm talking a long time ago. We'll talk about that.

2659

IBM had the operating system called OS/2.

Then I'm going to talk again to you about the findings of fact and try to sort them into some categories. Microsoft's actions against Netscape, against Intel, against Sun's Java, against RealNetworks. Sort of go through them in a way that is, I hope, helpful to you.

Then we're going to talk about the applications software, Word and Excel, about RealNetworks, about another operating system called the BeOS. It was a multimedia operating system. And then Linux, which is -- you heard a little bit about Linux in the findings of fact, the free software, the open-source software model.

And then I'm going to talk about Acer. Acer was an OEM, an international OEM, usually in the top ten, and I'm going to try to fit in together, all of the pieces of the stories into the Acer story as kind of a summary.

These are, as I said, not all of the companies, but we think that these are representative of what Microsoft did.

It has taken me many years to

2660

understand this material. I have had periods of intense frustration, and I ask you to listen carefully. And I think for you, as some of you may get this right off, but those of you who do not, I just don't want you to think you'll not get it because you will, because I did.

It's -- I kept going, and pretty soon I got the pieces together. I could understand what they were talking about. I think for some of you that will be easier, and for some of you it will be not.

For most of us the technical aspects are difficult, and what makes it harder is the sheer volume; the sheer volume of companies, the sheer volume of people, the sheer volume of products, and the long time period. And the sheer volume of illegal actions which appear to be separate, but which we will show you are all intertwined.

I really wrestled with how best to present this information to you in a way that would make sense. I thought about organizing them chronologically, but Microsoft often had several competitors under attack at the same time, so we would be going back and forth.

2661

You know, we'd be going with what happened to DRI and then what happened to OS/2 and what happened to Lotus, and that seemed too confusing to me.

Then I thought about organizing them by illegal tactic. You know, by those icons that I showed you. But that has the same problem. You know, they're going back and forth, and different people are involved.

So I don't think there is any perfect approach, but by organizing by company it seems to me likely to be the clearest.

I will point out wherever it seems necessary what envelope the tactics go in, and on some of the documents you will see an icon. Let me make it absolutely clear to you the icon wasn't on there when it was sent out to other people.

We have applied the icon, and it won't be on the document when you get the document. It's only for your assistance in sorting out what tactic we believe that that document shows.

Just because -- and I will try to watch you to see whether or not it seems that I

2662

am helping you to understand or whether I'm putting you to sleep.

Then I'll drop something or -- just because I organize this by competitor does not mean that the issue is what the competitors did or didn't do or how well their products worked.

The issue is what did Microsoft do to restrain trade and to eliminate these competitors, and therefore competition, and therefore harm Iowa class members.

Keep your eye on the ball, and the ball is Microsoft's anticompetitive tactics.

Before we begin the stories, I want to show you an old E-mail because so many of the documents are E-mail. I wanted to be sure that you understood how to read these things.

At the top you will see Nathan M. -- from, I know it's very clear to all of you. But these are called in Microsoft E-mail aliases, and Nathan M. is Nathan Myhrvold.

In the beginning it was the first name -- Microsoft was very little. It was the first name of the person and their last initial. That was the E-mail alias.

I also want to show you two dates --

2663

Bill Gates, Bill G. is Bill Gates. You will see him referred to as Bill G. often. And Steve B., Steve Ballmer. So that's how you read those -- Paul M. is Paul Maritz, and Peter N. is Peter Neupert, I think. Subject: Do we have a future? And two dates.

This is -- I don't know how to work this out, but if you see at the top, the top date is Friday, June 10, 1988.

Can you see that? Yes.

And the bottom date is March 9, 1992.

So there are a number of documents like that that have two, you know, quite divergent dates, and the only way that -- we don't know which one is the correct one, except by the context of the E-mail and sometimes by who is there at the time.

Pretty soon that all gets straightened out and there's just going to be one date, one date on the documents, but at the beginning that's not so.

You'll also hear us talking about Bates numbers, see -- exhibit numbers and Bates numbers. The X521273, that is a Bates number. It is a document control number.

2664

In cases like this where a large number of documents are going to be produced, a number is applied by the producer so that we can all keep track, so there's some way of keeping track of them.

This happens to have two Bates numbers. You'll see them with six Bates numbers. You'll see a lot of numbers. You'll also see a lot of exhibit numbers.

This is the one that counts. It says Comes versus Microsoft. That is the exhibit number that counts.

But, Darin, can we go back to that handwritten one at the bottom?

That's also an exhibit number. We have to leave those on. Those are deposition exhibit numbers, and when the depositions are read to you or when you hear them, those are the numbers that you'll be seeing and hearing.

The exhibit numbers that matter will have either Comes versus Microsoft, or just so you don't get confused they may also say Gordon versus Microsoft. Most of them will say Comes versus Microsoft.

Let's change to 1332 just -- now look,

2665

look there's real names on there. It goes back and forth. Depends on, I think, the E-mail system in use. But that one is a lot easier.

What I wanted to show you on this, though, is the redaction.

There will be big holes in some of your E-mails, and as the Judge told you, don't be concerned about that. Some material is not relevant. It's not -- it went to a lawyer so that's not something that is a part of what you may consider, so we just take it off.

What I've learned over the course of time in trying cases, that anything that you don't get, you want to know why. So there you go.

There was something else. Oh, including another E-mail.

Sometimes it is very difficult to tell what came from whom, but this I wanted to -- this is a usual way.

You see where it says from Joachim Kempin to Brad Silverberg? That E-mail was sent -- you see the little hash marks along the side? That means that that was enclosed in the E-mail from Brad Silverberg back to Mr. Kempin

2666

and to Mr. Ballmer and Gates and Brad Chase.

That's an enclosed E-mail, but you'll see a lot of that. Sometimes there are little carats, little arrows, and usually you can see what's enclosed E-mail and what came from the original person.

Also, ordinarily you read these back to front. In other words, the first E-mail is at the back page, and then the next, and the next, and the last E-mail is at the very front.

As you look at these hundreds of E-mails, please remember what the Court told you in Instruction 23, and that is that Microsoft is a corporation and can only act through its officers, its employees, and its agents, and the action of those people, Microsoft's officers and employees and agents, as long as they're within the scope of the employment, are the actions of the corporation.

Your Honor, I have finished my introductory remark. I'm ready to begin DRI, but perhaps we should take a break.

THE COURT: This is the time I told you we'd break, at 11 o'clock.

Remember the admonition previously

2667

given. You'll be in recess for lunch until 12. You may go, of course, wherever you wish. You have to leave your notebooks here, please.

Remember the admonition.

If you'll gather back in the jury lounge at 12, we'll begin as soon as we can.

See you then.

(A recess was taken from 11 a.m.

to 12 p.m.)

THE COURT: Ms. Conlin, you may continue with your opening.

MS. CONLIN: Thank you, Your Honor.

The Judge has put a microphone here just in case I'm not speaking loud enough, and we all expect that I will knock it off.

All right. DRI. First competitor story.

As I told you, DR-DOS is a competing operating system. It was developed in 1988 and withdrawn in December of 1994.

I'm going to outline evidence about Microsoft and DR-DOS.

The evidence will prove that Microsoft did not compete fair and square, and it did not beat DR-DOS on the merits of its products.

2668

It destroyed DR-DOS by illegal acts, illegal anticompetitive acts. It maintained its monopolies by breaking Iowa's Competition Law.

I'm going to talk first about the things that we will prove.

That's a little outline. It's four pages long, just FYI. And the first part goes real fast, and then it slows down a bit.

Exclusionary licensing tactics. Microsoft says it offers three types of licenses.

One is a per copy license. You pay for each copy as you use it.

The second is called a per system license. These are the licenses that Microsoft has with the OEMs.

The second kind is a per system license, and that is, you pay Microsoft for every computer of a particular model. Compaq, Presario, Acer, every model.

It doesn't matter whether the Microsoft operating system is on the computer or not, the license is by system.

Until the early 1990s, this was the

2669

equivalent of a per processor license, and that is the license where you pay Microsoft, the OEM pays Microsoft for every single computer shipped out of the company with a particular kind of processor.

Processor is the CPU. We're going to talk about that in a minute.

And again, doesn't matter whether or not Microsoft's operating system is on the computer.

The license requires that the OEM pay Microsoft.

The types of predatory conduct that Microsoft engaged in in connection with contracts also happen to fall into three categories.

The first is the per processor license where the OEM must pay Microsoft for every computer with a particular kind of CPU. That's the processor.

The CPUs that started out with an 8088, and then moved through various -- usually there is -- there are only a couple in effect.

By that I mean at the same time when computer makers are making computers, they're

2670

-- they often are using a high-end Intel processor or Intel-compatible processor and a low end.

So these per processor licenses means that an OEM could only ship a competing operating system if they were willing to pay twice for the Microsoft operating system, not on the computer and for the competing operating system on the computer.

The OEM has to pay the maker of the competing system, for example, DRI, and it still has to pay Microsoft.

The second type of predatory conduct in connection with Microsoft exclusionary licenses is the minimum commitment.

The OEM has to pay for its estimated number of licenses on a quarterly basis, whether they sell all those computers or not.

They estimate we're going to sell 100,000 computers in a year. They pay quarterly. They pay for 25,000 every quarter. If they don't sell $25,000 -- or 25,000 a quarter, they still pay. That's the minimum commitment.

If they sell fewer than they estimate,

2671

Microsoft can keep the money. Those are called prepaid balances. I have mentioned PPDs, prepaid balances.

And the OEM forfeits that balance, unless they renew their contract with Microsoft.

The third type of predatory conduct in connection with exclusionary licenses is the long-term contracts.

After DRI comes along, Microsoft's licenses -- it started out to be a year long, and they got to be two years, then three years, and even four years.

So during that time, when a per processor license, if an OEM wants to ship a competing product, they'll be paying twice.

Second type of predatory conduct towards DRI is the tying. Combining by contract, by pricing, the Windows monopoly product, a GUI, with a DOS monopoly product and operating system, or vice versa.

To prevent consumers from using DR-DOS with Windows, Microsoft began tying the two together. You'll see reference to the WIN DOS combo license. And charging prohibitively high

2672

prices to any OEM that wanted to buy Windows alone; that wanted to take the GUI and use it with DR-DOS.

You will see from the evidence that Microsoft charged more for Windows alone than for Windows and the operating system together.

Third type of illegal conduct is vaporware. Announcing products that just don't exist to stall the market.

For example, within a week of DRI's announcement of their product, DR-DOS 5.0, Microsoft announced plans to ship its MS-DOS 5.0 within four months.

And Microsoft's executives circled the globe and talked about MS-DOS 5.0 and deterred purchasers from trying out DR-DOS.

The product did not come out -- okay, this is in April, May, of 1990. The product MS-DOS 5.0 did not come out until June of 1991.

First promised in September, then to the end of the year. Then kind of moved out in increments. All the while OEMs are waiting for the Microsoft product.

And when it came out, it didn't even include all the features that Microsoft had

2673

promised and that DR-DOS 5.0 had in April, May, June of 1990.

FUD. That is the next -- the fourth illegal tactic. Fear, uncertainty and doubt.

Microsoft's FUD strategy was to portray DR-DOS as full of bugs, full of technical glitches, and incompatible with Windows, the GUI, which, of course, translates the commands to the pictures on the screen.

Neither charge was remotely truthful, and Microsoft knew it, and I will tell you how they knew it.

Microsoft's own documents reveal the predatory intent behind these spurious charges, which was convince customers that DR-DOS was too risky a venture. You know, don't try it, it might be incompatible.

And also the idea was to keep the market, keep OEMs from taking a risk with a product that might be incompatible.

Betas, we've just talked about. That is the prerelease version, goes out to some people to check it to try it out, see how it's going to work.

I told you about the beta black list.

2674

DRI was put on the beta black list for Windows 3.1, the GUI product.

DR-DOS is an operating system at -- in June of 1991, DR-DOS -- DRI merges with Novell. So Novell, another computer manufacturer -- software manufacturer, also gets put on the beta black list.

And I will tell you that companies who do business with DRI stand on a stage with DRI, promote DRI, put DRI products in their catalogs, they get on the beta black list.

They can't get their hands on the betas that they need to make their products compatible with Microsoft's monopoly operating system.

The next tactic, illegal tactic is technical sabotage.

I'm going to talk to you about four types -- four things they have named.

First one is a verify DOS. The second one is called the AARD code, A-A-R-D, named after its developer Aaron Reynolds.

And that is a type of technical sabotage which existed in the Christmas beta of Windows 3.1.

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When you put your GUI, your Windows 3.1 beta onto a computer that used the DR-DOS operating system, a warning message came up. That's the AARD code.

This is stronger than the typical FUD, which is words. But Microsoft engaged in affirmative action to create the strong appearance of incompatibility when -- and then marketed that apparent incompatibility against DRI.

The third technical incompatibility is called Bambi. I just was so surprised to learn they named it after Bambi.

And the fourth is the nested task flag.

Microsoft also uses an illegal tactic of threats and intimidation against anybody who consorts with DRI.

And the next illegal tactic is the DOS Windows merge, which became Windows 95, Chicago.

In 1993 Microsoft begins to preannounce the development of a new product that is supposedly an integrated Windows operating system and which will simply

2676

eliminate the need for any DOS on the machine.

Microsoft can eliminate all the competition in the operating system market by simply incorporating DOS, the operating system, into Windows.

In other words, Microsoft can use its uncontested monopoly in the operating system to swallow the DOS market in one gulp.

It's released in August of 1995, and this is a type of tying and bundling.

There is a secret to Microsoft's Windows 95. And what Microsoft describes as an integrated product is in fact simply the operating system with Windows bolted to it.

DOS is still in there. You can still get to it and -- but for Windows 95, DR-DOS could have survived as an independent product. There would have been competition in the operating system market.

Competition; there would have been choice, there would have been innovation, and there would have been lower prices.

I'm going to do this in time order starting with what I call the stagnation of a standard. That's from 1981 to 1989.

2677

As I indicated to you, by 1985 MS-DOS is the standard operating system for personal computers. It has a huge installed base.

The vast majority of -- this is 1985. The vast majority of PC users use MS-DOS.

With monopoly comes complacency, comes stagnation.

In November of 1989 Gates told his DOS developers, in Exhibit 184, while DOS continues to be our most important and most profitable product, over the last four years we have done very little with it technically.

He admits in this document that Microsoft has abandoned product innovation and has put little or no effort into improving MS-DOS.

It's a monopoly product. People aren't going to go anyplace else. So there's no reason to move the product forward.

From April of 1987 to May 1990, that's the advent of DR-DOS.

Dick Williams, who you will hear from by deposition, takes the helm of DRI in January of 1987.

Some OEMs are not very happy with

2678

MS-DOS and with Microsoft's control of the whole operating system market.

Within 30 days of taking control of DRI, Williams begins development of DR-DOS.

John Constant, who is an engineer, and he's in Hungerford, England, begins development of DR-DOS. And he uses as the base an existing DRI product called concurrent DOS.

Contrary to Microsoft's public statements at the time, he does no reverse engineering of MS-DOS. He uses as his base a DRI product.

The first product is called DR-DOS 3.31, and it launches in May of 1988.

I've got to move back just a little.

In April 1997, at the spring COMDEX, the industry's -- you may have heard about it or read about it. This COMDEX occurs in Las Vegas, and all of the people interested in computer software; not all of them, certainly, but that's the primary meeting place for computer people.

Microsoft and IBM in April of 1987 announce this joint development agreement, JDA, where they are going to produce OS/2, an

2679

operating system, that will be the successor to the DOS standard, and available by year's end they say on IBM's new PS2 systems, and this comes to be known as the DOS is dead announcement.

Microsoft and IBM begin the development process for OS/2.

IBM then takes the laboring ore with some of the MS-DOS product. They do most of Version 3.3 and virtually all of MS-DOS 4.0 totally on their own.

And, you know, the product, MS-DOS, has become so unimportant that there is no beta testing at all of MS-DOS 4.0 or the MS-DOS 4.01.

Bill Gates concedes this point in the memorandum to his executive staff in October, 1988. This is Plaintiffs' Exhibit 37.

DOS 4 is a mess to discuss. Bugs, too big, strange shell interface. Who wrote it? DOS 4 has a terrible reputation.

Now, remember, this is the one that IBM did on their own. But it's going out under Microsoft's name, so Microsoft bears responsibility, and its reputation is at stake.

2680

What forces Microsoft to recognize its error in writing a premature obituary for the DOS standard is simple. DR-DOS. And particularly the innovations that DR-DOS comes up with in DR-DOS 5 and DR-DOS 6.

DR-DOS is better, faster, cheaper than MS-DOS, according to many people, including some within Microsoft, and it is fully compatible with applications that run on MS-DOS, including Windows.

Microsoft's own internal evaluations confirm that DR-DOS is a strong competitor to MS-DOS.

In April 1989, internal report entitled DOS and Windows Monthly Summary, which is Plaintiffs' Exhibit 103 -- this is April of 1989, says, "Initial consensus from DOS program management is that DRI has a product which competes very favorably against MS-DOS."

Even Bill Gates views DR-DOS as a serious competitive threat.

On December 1, 1989, in a letter to a guy named Jim Cannavino. Mr. Cannavino is at IBM.

And remember, they've got this joint

2681

development agreement going on at this time.

Mr. Cannavino is a VP and general manager of IBM personal systems.

Gates in this letter makes the case for taking -- for Microsoft taking back control of MS-DOS. He says in Exhibit 185, "DOS remains the backbone, though, of both of our software businesses. It is under extreme attack by high-quality clones like DR-DOS."

This is Mr. Gates admitting that DR-DOS is a high quality product.

Monopoly maintenance begins with an effort by Microsoft to purchase DRI.

Initially rather than deal with the threat of competition, Microsoft attempts to pay off DRI to just go out of the DOS business.

In December 1988, Steve Ballmer and Dick Williams, Dick Williams the president of DRI, go to a conference in England, and Ballmer speaks privately with Williams.

Ballmer proposes that DRI sell MS-DOS as their product instead of DR-DOS and that each company license the other's company -- the other's product.

DRI is not interested, not interested

2682

in a long-term relationship with Microsoft, and so offers DR-DOS technology for a very high fee, 30, 40 million -- I can't remember for sure -- and expected Microsoft to refuse, and Microsoft did refuse to pay so much cash, and they just went their separate ways.

So the buying doesn't work, and so they begin technical sabotage.

At around this same time, Gates directs his development staff to identify ways that a Microsoft application can break DR-DOS.

On September 22, 1988 --

I hope you can see this better than I can. Can you?

Let me read it to you. I've gotten a magnifying glass to look at some of these. Some of these are old documents. They've been faxed, they've been messed with, and they weren't all that good to begin with.

This is Plaintiffs' Exhibit 21. Again Mr. Gates writing on September 22, 1988.

"You never sent me a response on the question of what things an app would do that would make it run with MS-DOS and not run with DR-DOS. Is there any version check or API that

2683

they fail to have? Is there features they have that might get in our way? I am not looking for something they can't get around. I am looking for something that their current binary fails on." Binary source code.

In other words, what can an application do to check to see if it's running on MS-DOS or DR-DOS, and if it's running on DR-DOS, fail, break, stop.

He goes on to say, "This is a fairly urgent question for me, and I have received nothing."

He's clearly saying he wants Microsoft applications not to run if they're loaded on DR-DOS.

Gates receives a reply that day from Phil Barrett, and he is a guy who runs Windows development at Microsoft. His title is development group manager.

What he learns from Mr. Barrett on that day is that DR-DOS approaches nearly perfect compatibility.

In Plaintiffs' Exhibit 34A, he identifies three differences.

"Here follow the three differences

2684

between DR and MS-DOS that Aaron has been able to find so far. Except for these differences, the two OSs behave similarly, including undocumented calls."

Even Reynolds -- this is Aaron Reynolds, who is one of Microsoft's software developers, can only find three differences between these two operating systems in all the hundreds of APIs that exist, all the hundreds of calls. And that includes even those that Microsoft keeps secret beyond documented ones, which we'll talk about later.

He goes on to say, Mr. Barrett goes on to say, "The bottom line is that given Aaron's current findings, an application can identify DR-DOS.

"However, most apps usually have no business making the calls that will let them decide which DOS, MS or DR, they are running on."

Truer words were never spoken. There is simply no legitimate reason for an app to do this, and this is Barrett's attempt to put up a stop sign to prevent this kind of conduct.

It's ignored.

2685

Next comes the warning messages. As I told you, the market for software is worldwide, and so I'm going to talk to you a little bit about Korea.

DRI is making in roads in Korea where a lot of computers are produced.

Early on they considered DR-DOS favorably.

Here's what happens. Microsoft sends people to Korea, and in open-forum seminar they tell OEMs, representatives of OEMs, that DR-DOS is a copy of MS-DOS, and anybody that uses the product will be sued by Microsoft. Needless to say, kind of discourages people from buying DR-DOS.

Gates also decides that Microsoft products should test whether DR-DOS is running despite Mr. Barrett's reservations that I told you about.

First, his idea is to crash it, make it stop, but then he changes focus and wants to warn the user about using DR-DOS instead of MS-DOS.

And he writes on February 8, 1989, in a memo to his executive staff about DR-DOS.

2686

That's a little bit better.

"I want to make sure we get the message implemented in all of our products. Languages are important, Windows is important, applications are important. How can we spread the message about getting this done, including the localized versions? I guess we have to localize the message. Russ, please let me know what your action plan for this is."

Localized version is one that speaks the language of a locality. And Russ is Russ Warner, who is at that time in charge of MS-DOS.

The message they're talking about, and that goes into Microsoft products, warns people that they are running what Microsoft calls an untested DOS. In other words, not Microsoft DOS, not MS-DOS.

Within three months Microsoft products are shipping with the DOS clone check.

Mr. Schulman will talk to you about that. The code is verify DOS.

And in May 1989, Mark Chestnut, who is Microsoft's -- I'm going to give you the titles.

2687

The titles change. They have different meanings at different times, but I thought you should at least know that the people who are talking are people who have roles to play, significant roles to play in the production of these products.

Mr. Chestnut is Microsoft MS-DOS product manager. And he confirms in May of 1989 that this warning has been implemented.

DRI competitive response. This is Plaintiffs' Exhibit 109.

The first Microsoft product with the nontested DOS warning code, QuickPascal, was released.

Tom Reeve and Cindy Kasen in have committed to implementing it in all new MS application and language releases from this point forward, including international.

And the warning is not a bit subtle. This is Plaintiffs' Exhibit 3228.

The warning says, "Microsoft QuickPascal has been tested for use only with MS-DOS and PC-DOS operating systems."

PC-DOS is the IBM one.

"Your use of this product with another

2688

operating system may void valuable warranty protection provided by Microsoft on QuickPascal."

By August of 1989 the warning is implemented in foreign versions of Windows, as evidenced by this message, by the Microsoft Korean subsidiary. This is Plaintiffs' Exhibit 125.

I'm going to read it to you just as it's there, written by a person for whom English is not his first language.

He says, "Bill Gates ordered to all application business units to include checking routines of operating environments, and if it is Microsoft DOS, nothing will happen. But if it is non-MS-DOS, such as DR-DOS, application will display messages saying that, quote, this application has been developed and tested for Microsoft MS-DOS.

Since you use different environment, this application may not work correctly."

The question from MS-CH -- that's the Microsoft Korean subsidiary -- is, "How to check the DOS is MS-DOS or clone. MS-CH wants to include such routine in Hangeul Windows so

2689

that Hangeul Windows can run only Hanguel MS-DOS. Could you tell me to whom I can ask to resolve this problem?"

Other language products, such as Microsoft QuickC, Programmers Workbench, and 6.0 setup have similar messages.

And it makes DOS -- DR-DOS users wonder what kind of a risk are they taking not using MS-DOS, and that, of course, is what Microsoft wants.

This is Microsoft's first type of FUD against DR-DOS.

Exclusionary licenses. Despite Microsoft's action, DRI does make headway, significant headway, into several substantial Microsoft accounts.

And Gates thinks how to protect Microsoft's DOS monopoly and the emerging power of its Windows GUI.

On May 18, 1989, Gates writes his executive staff addressing operating system strategy.

He says, "The DOS gold mine is shrinking and our costs are soaring, primarily due to low prices, IBM share, and DR-DOS.

2690

Making Windows a strong product benefits our gold mine.

"I believe people underestimate the impact DR-DOS has had on us in terms of pricing."

On August 6, in an E-mail directed only to Mr. Ballmer, who is then his -- then. And for a long time, his top lieutenant, Gates writes in Plaintiffs' Exhibit 135, "DOS being fairly cloned has had a dramatic impact on our pricing for DOS. I wonder if we would have it around 30 to 40 percent higher if it wasn't cloned. I bet we would."

So this is Bill Gates admitting in an internal document to Steve Ballmer what the effect of competition is on Microsoft's profits. We'd have it 30 to 40 percent higher if it was not for DR-DOS.

This is good for consumers, including Iowa consumers.

Joachim Kempin, whose name I am hopefully now pronouncing correctly, is someone who you'll hear quite a bit about. He is the worldwide director of OEM sales for Microsoft. He is the person in charge of selling to the

2691

computer manufacturers, the OEMs.

He knows that despite Microsoft's lack of innovation, Microsoft's DOS monopoly permits it to maintain a steady price, notwithstanding a rapid decline in the price of other components of the personal computer.

Microsoft not only wants to exclude DR-DOS and the lower prices that DR-DOS and competition entails, Microsoft is searching for a way to maintain higher prices, even though it's, as Mr. Gates says, they're not doing much to improve the product.

On February 9, 1990, Kempin tells us that DOS monopoly prices are bucking the trend of other computer components.

This is Plaintiffs' Exhibit 222.

Can you do anything about that, Darin? Is there any way to make that a bit bigger or clearer?

I'm not sure that helps.

Here is what he says: "OEM manufacturers are increasingly sensitive to added costs. OEMs are pressuring us more and more to accept the fact that operating system software needs to follow their economy of scale

2692

model, expressed in percentage of SRP per. Today we are asking for two to three times as much money for MS-DOS as we did five years ago."

Let me explain what he's saying there. Expressed in percentage is clear. SRP, suggested retail price. Per means per unit per computer. And he says, "...expressed in percentage of SRP per. To date we are asking for two to three times as much money for MS-DOS as we did five years ago."

In five years, Microsoft has increased its price -- the price it sells MS-DOS to OEMs by two to three times, according to the guy who knows for sure, because he's in charge of selling MS-DOS to OEMs.

Let me talk about tying.

Before obtaining monopoly power in the GUI market with Windows, Microsoft sort of threatened and intimidates OEMs into accepting licenses that exclude DR-DOS.

One thing they offer is very low bundled prices for MS-DOS and Windows together.

DR-DOS is identified early as a threat in the Vobis account. Vobis was the largest

2693

OEM, the largest computer manufacturer in Germany. Maybe in Europe.

Theo Lieven is its CEO. We expect Mr. Lieven to come to trial from Germany and tell you about how Microsoft drove DRI out of his company.

The Microsoft OEM status report, you'll see lots of these. Microsoft does status reports on a monthly basis and covers the whole world and says what's going on.

In November of 1980 -- and they're done to and for Mr. Kempin.

Here is Exhibit 4459. It is the November 1989 status report.

Here is what it says: "Also, they are interested in having Windows 3 on their computer systems as soon as the product is released. At this time we still offer DOS and Windows on per system level. If there is any danger, we will offer the DOS-WIN combo license." Two together.

In this report Microsoft admits that it is contractually tying the two product together.

Microsoft also uses another method of

2694

tying by giving OEMs more favorable minimum commitment packages for DOS and Windows combined as opposed to Windows alone.

When closing a license with Acer -- Acer International is one of the -- usually one of the top ten OEMs in the country.

When closing a license with Acer in November 1989 where DR-DOS is a threat, Jeff Lum, L-u-m, who is the international VP of Microsoft, proposes crediting some prepaid monies on MS-DOS.

PPDs are also known as UPBs.

They owe money -- Microsoft got some of Acer's money on the Microsoft MS-DOS contract. What they're doing here is saying to Acer, we will give you -- we will credit some of the money that you owe for MS-DOS on Windows, okay, to the new Windows contract. This is Plaintiffs' Exhibit 169.

"If we want to attract them using UPBs, we could apply some of the UPB to the new Windows license that is about to be signed, which has a totally separate minimum commitment" -- he says "min commit schedule."

After -- as I mentioned earlier, in

2695

the beginning Windows 1.0 and Windows 2.0, not much of a product.

Along comes Windows 3.0, and they've -- you know, third generation, it's much better. And once it launches and starts to become popular, what was once a carat becomes a great big stick. We are at DR-DOS on the rise.

As I said, even though -- even despite all of this, DR-DOS does show strong growth, especially in the OEM channel DRI's management reports for the fiscal year ending August 31, 1989 -- this is Exhibit 143.

General purpose operating systems revenue grew 43 percent from 1988. This included significant growth through OEM channels, 62 percent over 1988, attributable primarily to DR-DOS.

The company expects a minimum growth rate of 24 percent in 1990 as new functionality is provided with DR-DOS and it gains even more widespread OEM acceptance worldwide.

So now we are to May 1990, July 1990. This is -- during this time DR-DOS 5.0 is released, and this is when the real competition begins.

2696

By the late 1980s, PC users' two biggest complaints are, first, not enough memory. Those of you who were using computers in this time probably remember the very serious problems we had running applications. They'd hit the memory limit and down everything would go.

And second, limitations on hard disk size. The problem lays in the operating system's inability to take advantage of increased memory size and increasingly large disk size.

Despite the fact that users have been complaining about these problems for years, Microsoft gives no indication that it is interested in solving them.

In June 1990 -- remember this date -- June 1990, DR-DOS provides advanced features that mitigate these problems, not suggesting to you that they're solved, but DR-DOS provides a way for people to get access to more memory, and it includes numerous other improvements as well.

It's just a tremendous breakthrough. Not only does the product include the memory

2697

management features that Mr. Constant will tell you about, it has expanded disk drive capabilities, and it features innovative things like online help, the ability to sort file directory listings in a number of ways, a file transfer utility, and a very easy-to-use setup program, you know, how you get the -- how you install the product.

MS-DOS does not provide any of these features in June 1990.

When DR-DOS 5.0 ships in the United States, comparable features in MS-DOS do not appear until June of 1991, a year later.

When DR-DOS comes out, it receives praise and endorsement from everywhere, including from within Microsoft itself.

On April 15, 1991, Phil Barrett -- Phil Barrett, head of the department that is in charge of MS-DOS, receives the following review from one of his subordinates. This is Plaintiffs' Exhibit 682.

"Last Thursday you asked me for a user's view of DR-DOS 5.0. When I worked for David Wiese's brother Ira, I used DR-DOS 5.0 with a huge number of apps. I found it

2698

incredibly superior to MS-DOS 3.31 and IBM-DOS 4.01."

Those are the products on the market at the time DR-DOS 5.0 comes out.

"1. DOS compatibility. The most important reason to use any version of DOS is to run DOS apps. DR-DOS 5.0 runs every DOS app I know. DR-DOS 5.0 works successfully with Windows 2.11, WIN 386, 2.11 again, and Windows 3.0 and 3.0A.

And here is the reviewer's conclusion. "DR-DOS is vastly superior to MS PC-DOS 3.31 and 4.01. It is about as good as MS-DOS 5.0. Both have nearly identical features, 386 UMB memory" -- UMB means upper memory block -- "upper memory management, command history, help included in utilities, format optional installation, high compatibility with existing DOS apps. I don't see any real cutting-edge advantage of one over the other."

Now, this is April 15, 1991, so Mr. -- this guy whose name is Percy T. has access to the -- by this time to the beta of MS-DOS 5.0, but it is not yet released to the public, 5.0 is, and it's almost a year after DR-DOS comes

2699

on the market.

And this guy, Percy T., is well qualified to make this assessment. That's why Phil Barrett, who is in charge of the department, asks him to do it, and he will tell you, he, Barrett, will tell you by deposition that's why he asked him to do it.

Monopoly maintenance. Microsoft knows it is facing a legitimate and credible threat, and it simply declares war.

In May 1990, Microsoft's executive staff attends an annual executive staff retreat, and they clearly discuss monopoly maintenance.

This is Plaintiffs' Exhibit 280, and it says, "Desktop" -- you can see that. "On the desktop, we have a strategic win today (monopoly). We must keep the desktop."

And this was not some random thought. It is a presentation by, among others, John Shirley, the outgoing CEO and president of Microsoft; Brad Silverberg, whose name you will hear a lot, he's an incoming executive from Borland taking charge of MS-DOS and Windows, made to, among others, Bill Gates and Steve

2700

Ballmer.

The focus is still on defending and extending the DOS market monopoly a year later, and this would be in 1991.

Then Microsoft's president is a guy named Mike Hallman, and he gathers a collection of E-mails from all of his executives listing their top ten priorities.

And the obsession over monopoly power is just a little bit startling.

This is Plaintiffs' Exhibit 567. It's from a guy named Rick Macintosh, and he is in MS sales for North America.

He says, "Keep and expand the system franchise. Identify the minimum acceptable DOS penetration, i.e., 95 percent, and absolutely attain it and keep it."

Exhibit 570 is from Scott Oki. You will hear from him by deposition. He's senior VP for sales and marketing.

He says, "Maintain control of the desktop systems platform. DOS is still the gold mine. It is the cash cow that allows us to invest in other potential cash cow businesses."

2701

And then Silverberg, in an Exhibit 563, who is the vice president of personal systems group says, "Protect and expand the system franchise so that Windows is the dominant standard. Windows needs to own both stand-alone machines, as well as client connected desktops."

Now let's talk about the exclusionary licenses.

The most effective tactic Microsoft uses in defeating any operating system competitor is these exclusionary licensing tactics with the OEMs. And the three ways that they exclude other operating systems, not just DR-DOS, but also OS/2.

During this '90-'91 period, Microsoft -- Microsoft licenses do not say right out you can only load MS-DOS. They utilize a collection of devices to create the same effect; per processor licenses, minimum commitments, long terms.

Exclusionary licenses are the key to Microsoft's defeat of both DR-DOS and OS/2. It is another competing -- Microsoft sort of creates a wall of these per processor licenses.

2702

You'll hear Microsoft say that these licenses did not cover all OEMs and that DRI and IBM could compete for OEMs that were covered when the licenses expired. Then they made the licenses longer.

And besides that, they have these prepaid balances that you can only get back if you renew your license, and then if all else fails, you got FUD and vaporware and all of these other tactics.

The processor of a computer is also called the chip, and it -- or the CPU. It really is the computer.

All the other parts, the monitor, the keyboard, even the memory, are peripherals, just peripherals that work with the computer. What the processor does is process.

It processes instructions. Instructions are loaded into memory, and the processor is told where in the memory to start reading from.

It reads an instruction and carries it out and then moves onto the next one.

And, of course, it does it a lot faster than I'm talking.

2703

The instructions are simple. This is a basic item, like move or add.

The important CPU family in this case is, of course, the Intel and the Intel-compatible processors because that's what most PCs use. All PCs use either the Intel processor or an Intel-compatible processor.

The first processor is 8086, then 8088, then 80286, which led to 80386. And I'm telling you these numbers because you will see them.

You'll see talk in the documents about a 286. That's the number of the processor. Or a 386.

Again, the number of a processor. Then after 486 you get the Pentium.

At any given time there's a high end and a low end usually on the market.

Under per processor licenses, an OEM has to pay to Microsoft a royalty, a license fee on every single machine with that processor that ships out the door, no matter what's on it.

The per processor license means that an OEM could only ship a competing operating

2704

system by paying twice.

The OEM pays Microsoft, and -- you know, this is the OEM who wants to ship DR-DOS, pays Microsoft, pays DRI.

Microsoft's licenses also require the OEM to make large minimum commitments with up-front payments.

Microsoft's pricing structure rewards OEMs for -- that make sort of overoptimistic predictions about what they're going to sell. So OEMs regularly have these very large prepaid balances.

And when their licenses expire, they have paid Microsoft hundreds of thousands, sometimes millions of dollars, for licenses that have not shipped on any computer. And, of course, they don't get that back unless they renew their license.

And then Microsoft is willing to give them some of the money that they've already paid for licenses that have not shipped. They credit those sometimes at their discretion on a new per processor license.

The stranglehold on OEMs is tightened by the -- by extending the terms. Longer and

2705

longer and longer licenses -- license terms.

Microsoft's own documents show that the reason for these tactics is to cut out, cut off, block out DR-DOS.

OEMs simply cannot afford to license DR-DOS even if they think it's a superior product, even if they think it's something their customers would want to buy.

85 percent of folks at this time get their operating system with their computer. It comes on the computer when you buy it.

The per processor license is the most effective weapon in Microsoft's arsenal against DR-DOS.

When competition for accounts increases after DR-DOS 5.0 hits the market, Jeff Lum, we've heard of him before, he is the group manager for North America OEM sales. Directs his sales team -- this is July 23, 1990.

Comes -- DR-DOS 5.0 is released in the United States about June of 1990.

This is Plaintiffs' Exhibit 338. And he is directing all of his sales team.

"All DOS 5.0 amendments need to be

2706

finalized. Push for all processors if you don't have it for DOS today, or else add 15 percent for per machine basis."

Okay. So sign the per processor license or pay 15 percent more for your operating systems for every computer.

Chestnut, Mark Chestnut, testifies that in many -- in the many months leading up to the launch of MS-DOS 5.0, the repeated objective is to have the per processor DOS 5 licenses for any OEM account that was in the business of manufacturing desktop PCs.

You won't believe this, but I have apparently skipped some of this, so I will make it up as I go along.

I'm sure Darin knows that I've skipped.

There's a woman named Stephanie Reichel, and she's over in Germany, and she works on the Vobis account, okay. And she is the Microsoft representative to the Vobis account.

Mr. Lieven is pretty resistant, to say the least, to the idea of the per processor license. He wants to offer his customers a

2707

choice, and he likes DR-DOS. He thinks it's a superior operating system.

So Ms. Reichel -- Mr. Chestnut, Mark Chestnut says that in the many months leading up to the launch of MS-DOS 5.0, everybody's supposed to get these per processor licenses, and Stephanie Reichel says this is an order that comes directly from Kempin, the head of worldwide OEM sales.

Repeated entries in Microsoft's OEM status reports reveal starkly the awareness that why we're doing this, folks, is to get DR-DOS.

Here are just a few of the entries. And I'm telling you, there are dozens and dozens of these, and the reason that I think it's important for you to realize this is because Microsoft's going to have other excuses for these licenses.

I want you to remember that when they're talking to each other, when they're writing their reports, there's one reason mentioned for per processor licenses.

Here is Exhibit 409 from October of 1990.

2708

Opus agreement has finally been signed by Redmond. Opus is an OEM; Redmond is Microsoft.

Another DRI prospect bites the dust with a per processor DOS agreement.

Exhibit 410. This has to do with Hyundai Electronics, Inc., called HEI.

"DRI is still alive. We are pushing them to sign the amendment on processor based license. This will block out DR once signed."

Here is Exhibit 484 from December 10 of 1990.

"Congratulations are in order for John, DRI killer, McLaughlan (no, he isn't having another baby) who signed a $2.5 million agreement with Acbek (Sun Moon Star). The agreement licenses DOS 5 per processor on a worldwide basis for three years (they will be replacing DR-DOS which they currently ship outside the United States."

Here is Plaintiffs' Exhibit 485 from December 11 1990.

This is about an OEM called Trigem.

Their new license agreement is per 86/286/386 -- the three processor numbers --

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processor system license for DOS 3, 4, and 5. "No more DR-DOS from Trigem."

Here is Plaintiffs' Exhibit 539. Again a month or so later from HEI.

DRI visited Hyundai executives and the pricing issue was raised again. "The new license is a per processor deal which allowed us to completely kick out DRI."

Here is Plaintiffs' Exhibit 647 from March 31, 1991.

Liuski, which has been an MS-DOS PP -- that means packaged product -- customer for several years now at a run rate of approximately 25,000 to 27,000 per year has signed a license for MS-DOS 4.01 and 5.0.

The per processor license is a one-year license at a one-year minimum of 18,000 units per year at a royalty rate of $35.

On the surface, this would seem like a decrease in revenues. They currently pay $50 for MS-DOS PP, packaged product.

Remember there are COGS, cost of goods sold, in the $50. The reason for the conversation -- that's what it really says. The reason -- yes, the reason for the

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conversation -- I think that must mean conversion.

"The reason for the conversion to royalty is to retain their loyalty to MS-DOS. They were seriously considering DRI product, thus we needed to be more aggressive."

You see a lowering of the price there because of competition.

Exhibit 710, March 1991.

Budgetron is the one account in Canada where DRI's presence was very strong. Budgetron's market is strictly the low end VAR, value-added reseller or dealer, who would endure DRI DOS for a lower-priced machine. This new contract guarantees MS-DOS on every processor manufactured and shipped by Budgetron there for excluding DRI.

Ron Hosogi during this time frame is director of OEM sales -- and he's not Kempin. Kempin is above him.

He states Microsoft's licensing attacked succinctly, in Plaintiffs' Exhibit 379. "We are forcing them not ship any DRI machines."

Indeed, Microsoft makes getting a per

2711

processor license the top priority, top priority even sacrificing income to get it. Why? So after driving competitors out of the market, they can charge higher prices than in a free market.

Microsoft insists that OEMs were free to depart from the per processor license and that price differentials between the two license types per processor per system were minimal.

That's just not so. Microsoft is well aware also of the price points and margin pressure that OEMs feel.

OEMs work on a very small margin. You'll hear that from lots of people. And Microsoft obviously knows that a dollar or two is very important to OEMs because when they come out with their incentives -- when they come out with their -- I thought that was the furnace again.

When they come out with their incentives, they vary -- you know, an incentive can be 50 cents a machine -- by Microsoft, what Microsoft pays in this market development fund, up to 5.50.

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So what I'm saying to you is, Microsoft may poo-poo the idea that a dollar a buck is important to OEMs, but they know that's not true. A dollar per unit is very meaningful in a small margin business, and Microsoft knows that.

OEM executives and developers say that even if the price differentials were slight, they'd still have to go with per processor.

Indeed, Microsoft itself emphasizes these price differentials in its negotiations with OEMs.

We have a surprising lack of price sheets, you know, the price -- the negotiations for price in our documents. We just do not find very many, you know, of these price quotes from Microsoft.

But here is a letter to AST -- that's an OEM -- dated September 14, 1990.

This is Plaintiffs' Exhibit 520. The letter is from Jeff Daniels. He's the -- he's an OEM account manager.

Did I tell you -- it's September 14, 1990.

He says, "Microsoft has a per

2713

processor price, per system price, and a per copy price. Our per processor price has the lowest royalty rate. This agreement is based on paying royalties for every processor shipped. MS-DOS does not have to ship out with every system.

Per processor agreements list all processors in the back of the licenses from 8086, 8088, to 80486."

Then you see he lists the prices for 100,000, 250,000 and 500,000. This is the number of PCs sold in a year.

Now, under the per processor license, if you sign up for 100,000, you pay $24 per unit. If you sign up for the per system, you pay $37 per unit. That's a $13 a unit difference.

The per copy, $45. So that's an $8 difference.

When you get out -- and it runs about the same. Between per processor, every processor you pay for to per system in this price quote is $13 at 250. It's $7.50 if you buy 500,000 -- if you license 500,000 a year.

That's a lot more than a dollar or two

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a system. That's a big, big difference for the OEMs, and it holds true across the board in this price quote that we found.

Microsoft is even more aggressive when the OEM -- when they know that the OEM is trying to get some wiggle room, so they can load some DR-DOS.

Here's one. Commodore Business Machines is very interested in DR-DOS. Microsoft knows that.

On September 26, 1990, Commodore receives the following letter from the Microsoft account manager.

"If you were to take your consumer machines to DRI, this is what would happen. Your DOS contract would go from a per processor agreement to a per copy agreement when it expires at the end of January.

If you choose to take your consumer business to DRI, your unit volume decreases 75 percent, and you no longer have a per processor agreement. Therefore, your new price on all DOS products will jump to $30 per copy."

When you see this exhibit, it is 402, you will see that he then offers Commodore a

2715

per processor license for $6, $6 per machine for the computer that accounts for most of their business.

This is a low end computer so there is a difference between those two. $30 minus 6 is $24. Not the 1 or $2 that Microsoft says.

You can see DRI's predicament and the power of Microsoft's economic coercion.

The presence of DR-DOS in the marketplace makes Microsoft compete on features and price as we see from Microsoft's own internal documents, but ultimately rather than that kind of fair competition, please understand fair competition, fine. This is not fair.

When they cannot win on fair competition on features on price, they resort to unfair and illegal tactics like these exclusionary contract terms.

The minimum commitments again directed toward excluding competition. The OEM pays at one per unit rate, you know, for 100,000 and a lesser one for 250,000.

As I've told you, they have to pay whether it ships or not, and if their shipment

2716

falls short, Microsoft keeps the money, but you pay less money, obviously, if you say you're going to buy more.

That component is a volume pricing component. The per processor is not a volume license. We'll talk about that.

But Microsoft gives the money back, the money that they get on these minimum commitments, or credits the money to the next contract. Microsoft manipulates minimum commitments to its advantage.

Here is an Exhibit 302, which is a discussion of prepaid balances from the worldwide OEM in the fourth quarter of 1990.

And it contains the following admission. "Prepaid balances have become a byproduct of the way we conduct our OEM business. They are well-understood by our OEMs. They also have definite benefits tying customers to us. We can use prepaid balances to encourage OEMs to license more of our system products, increase our market penetration, and create opportunities for increased sales of our application products."

You see here what they're talking

2717

about is taking the prepaid balance they get from the OEM and crediting that on the purchase of applications, and of course it has the advantage of also blocking out DRI.

As with per processor licenses, Microsoft's OEM status reports reveal that Microsoft is using those minimum commitments to block out DRI.

Plaintiffs' Exhibit 4393 from Hyundai Electronics, says, "The DRI threat still lives, especially in the export section which needs a low-priced DOS for XTs to be shipped to the Eastern Block. We will maintain and utilize HEI's UPB situation to keep out DRI."

UPB, PPB, those are the prepaid balances.

Here is Plaintiffs Exhibit 1332. "Will sign WIN and DOS per processor license this Friday. This will include all of Compuadd's notebooks (386sx up) which they had never licensed for WIN. The only concession we had to make was to let them recoup $500,000."

This is 500 they paid for stuff they didn't ship prepaid this quarter.

OEMs know the truth. Theo Lieven of

2718

Vobis will tell you that Microsoft was quite flexible in permitting recoupment because then they knew the customer would make a new contract with them. If the customer walked away, they would forfeit all that minimum commitment.

And then finally, the third tactic is increased license duration.

By 1990, the standard license goes from one year to two years during the push for 5.0, the one that comes out in June of 1991, but they start licensing clear back in a year earlier. Microsoft increases the average license duration to three years.

Microsoft's price guidelines indicate a one dollar discount for an OEM agreeing to add that year on, and a one dollar penalty. So $2 difference between two years and three years in terms of license agreement.

I'm sorry, between one year and two year.

Microsoft understands the blocking effect this has against DR-DOS.

Here is Plaintiffs' Exhibit 353 for an OEM called Printaform. "The new contract is

2719

for a three-year term so that we don't have to worry about low-end competition. This will be the first OEM in Mexico bundling Windows 3.0 on its system, and we eliminated DRI's chances with Printaform for at least three years."

Robert Frankenberg, a name that you will hear, was the CEO of Hewlett-Packard during this time frame, and he addresses this whole issue of long-term contracts.

He says HP was offered a four-year contract and just felt they had no choice. But even a big OEM like HP has got to have the operating system. So they agreed to the four -- a four-year per processor contract every HP machine to get the best price for -- from Microsoft.

In his deposition, Mr. Lieven draws an act analogy. Here's what he says --

(Whereupon the following video was played.)

MR. LIEVEN: When you -- when you -- when you -- today decide to buy your milk for the next three years from one supplier to make prepayments. You'll never go to another grocery -- or to another store to have a look.

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MS. CONLIN: I don't know if you heard what he said, but when he comes, we'll make him slow down a little bit.

He says when you go -- when you agree to buy your milk for three years from the same supplier and you make a payment, you just don't ever go to another grocery store to have a look. You got all your milk.

These powerful anticompetitive license terms to OEMs present an almost insurmountable barrier to any competitor, and certainly to DRI.

Okay. Let's talk about vaporware.

Could we take just a few moments, Your Honor? I know we're close to the end, but if we could just maybe have a little stand up and I could have a little -- or do you want me to just press on?

THE COURT: Do you want a break?

MS. CONLIN: I was thinking maybe just to stand up for a second.

THE COURT: Why don't we take a brief recess. Ten minutes okay?

MS. CONLIN: Oh, it's only after one. See, I'm thinking it's after two.

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I'm having such a good time, Your Honor.

THE COURT: Why don't we take a ten-minute recess.

Remember the admonition previously given.

(The following record was made out of.

the presence of the jury.)

MR. TULCHIN: If I may, Your Honor, of course during Ms. Conlin's opening, I'm doing everything I can to not interrupt.

There was at least one document used -- I thought there was one. I'm being told now we better double-check.

I thought there was a document used that was not in evidence because during the Special Master process an objection was sustained as to it.

But I apologize for taking your time. I'm told we better double-check to make sure this is right.

THE COURT: Okay.

MR. TULCHIN: Thank you, Your Honor.

(A recess was taken from 1:18 p.m.

to 1:33 p.m.)

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(The following record was made in

the presence of the jury.)

THE COURT: Sorry about that. You may continue.

MS. CONLIN: Thank you, Your Honor.

Vaporware. Beginning with DR-DOS 5.0, Microsoft makes preemptive preannouncements of MS-DOS long before the next version is going to be available. These announcements are false, they're misleading, and this is the practice commonly known as vaporware.

The point of vaporware is to freeze the market so users don't buy the competitor's real product but wait for a product that may or may not ever appear.

Microsoft understands vaporware very well. On January 5, Nathan Myhrvold confesses to what Microsoft had done with its original Windows clear back in Windows 1.0.

Here's what he says in Plaintiffs' Exhibit 52. And as I said, he's talking about the original Windows.

Microsoft preannounced Windows, signed up the major OEMs, and showed a demo to freeze the market and prevent VisiOn from gaining any

2723

momentum. It sure worked. VisiOn died, VisiCorp died, and DOS kept on chugging.

With that context, on April 23, 1990, April 23, 1990, at a conference in England called the which conference, w-h-i-c-h, with a question mark after it. DRI announces DR-DOS 5.0. DR-DOS 5.0 simply catches Microsoft flatfooted.

Until DR-DOS is released, Microsoft does not, does not intend to release a new DOS in 1990.

Mark Chestnut, who is the product manager for MS-DOS 5.0, says that as of November 1989, the plan was to release only a 4.1 upgrade in 1990.

Do we have Mr. Chestnut speaking.

(Whereupon the following videotape was

played.)

MR. CHESTNUT: As I said, I didn't have any expectation that we would have a 5.0 product shipping in '90 after shipping a 4.1 product in '90 at that point.

MS. CONLIN: So Microsoft -- keep in mind also, Microsoft has just taken back DOS development from IBM and four months prior to

2724

the announcement of DR-DOS 5.0.

Now, not actually having any product doesn't stop Microsoft. It goes right ahead and preannounces MS 5.0 to influential trade press. And trade press is like PC World and Info World, Computer World.

And succeeds in having articles about MS-DOS 5.0 -- doesn't ship till a year later, but on April 30, one week after DR-DOS is announced in England, out comes articles in influential trade press about MS-DOS 5.0.

Mr. Chestnut, Mark Chestnut summarizes what he's done to make that happen in a memo to Microsoft executives on May 2, 1990, titled DR-DOS 5.0 competitive analysis, and one of the entries is competitive response to DR-DOS 5.0. This is Plaintiffs' Exhibit 276.

On the PR side, he says, "We have begun an aggressive leak campaign for MS-DOS 5.0. The goal is to build in anticipation for MS-DOS 5.0 and diffuse potential excitement momentum from DR-DOS 5.0 announcement.

At this point, we are telling the press that a major new release from Microsoft is coming this year which will provide

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significant memory relief and other important features."

This was picked up by the major weeklies in the U.S. and was the page 1 story in PC Week on 4-30. See attached articles.

Mr. Chestnut is real busy following the DRI April 1990 announcement. By April 30, this is the day where we have the page 1 story Chestnut meets with two OEMs, Tandon and AST, to predisclose MS-DOS 5.0 and its supposed availability in September of 1990, three, four months later and he's also interested in finding out what DR-DOS's features are.

Here's a summary of the Tandon meeting from Plaintiffs Exhibit 274.

He says, "We dismissed the engineering and support people and discussed DRI. At first, they were very hesitant to divulge any competitive information but after asking a few roundabout questions we were able to find out that DRI has been very aggressive in trying to sell Tandon DRI DOS," he says, "and had been there recently with a full presentation and demonstration. Peter and Eric" -- these are the Tandon guys in the unit -- "assured us that

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our DOS 5.0 product was, quote, as good as DRI's current version, but according to Peter we still had some work to do in the following areas in order to be competitive."

And he mentions three.

CPU management. They advised us to take a close look at concurrent DOS because DRI is leveraging that technology in their product.

Concurrent DOS is a DRI product.

Second, memory management. DRI appears to be way ahead of Microsoft in this area.

And three is compatibility. DRI claims to work much better with existing applications than our current product is, Windows 386.

Now, keep in mind that what is happening here is Tandon is comparing the existing DR-DOS 5.0 product with a nonexistent MS-DOS 5.0 product and still finds the MS-DOS product -- pretend product is not as good as the existing DR-DOS product.

By May 4 -- April 23, DRI announces DR-DOS 5.0. April 30, trade press on MS-DOS 5.0.

2727

By May 4, Mr. Chestnut has prepared a DR-DOS backgrounder that goes out to the entire OEM sales force of Microsoft, and it has a feature comparison between the nonexistent MS-DOS 5.0 and the existing DR-DOS 5.0.

OEM sales also receives a DOS 5 -- an MS-DOS 5 PowerPoint slides and speaking points, and this talks about the product in detail and promises availability in August or September of 1990. This is May 4.

Then Chestnut circles the globe. He meets with OEMs in Korea, Taiwan, England France, Italy, and the Netherlands. Lots and lots of people hear about MS-DOS 5.0, and they hear that it's going to be out by September of 1990.

Chestnut admits that his presentations and promised delivery date would certainly prompt OEMs to rely on them. Of course, that's what he wants them to do and cause them to postpone any decision to move to DR-DOS.

He admits that if he had told them the truth that MS-DOS would not be available until June of 1991. He says I'm sure they would have been less excited. Let's look at what

2728

Mr. Chestnut said in his testimony.

(Whereupon the following videotape was

played.)

QUESTIONING ATTORNEY: Was part of the -- it said you were successful in gaining OEM enthusiasm. Was part of the enthusiasm that you were gaining for the fact that it was going to be shipping to them in September 1990? That that was their belief?

MR. CHESTNUT: I'm sure some of the enthusiasm was based on the fact that it was a relatively near term release.

QUESTIONING ATTORNEY: And the fact that it was being disclosed as a relatively near term release was at least, in part, what made your seminary successful in defusing the threat from DRI's new release, correct?

MR. CHESTNUT: It would be reasonable to probably assume that.

QUESTIONING ATTORNEY: I don't want to just assume it. I mean but do you think that?

MR. CHESTNUT: I don't know. I honestly don't know. I mean, it certainly would have been less well received if we had said, oh, it was going to ship in 1992, are you

2729

excited or what, you know. They probably wouldn't be very excited.

QUESTIONING ATTORNEY: What if you had said it was going to ship in June of 1991, it being June of 1990 when you were talking with them?

MR. CHESTNUT: At the time I had no reason to state that because that wasn't the schedule.

QUESTIONING ATTORNEY: Well, of course, that wasn't the schedule, but do you think they would have been more or less excited about the product if you had been there saying that this will ship to you in June 1991?

MR. CHESTNUT: Had I said that, I'm sure they would have been less excited.

MS. CONLIN: Of course that's true, and that's why Microsoft sends Chestnut around the world, to tell them to expect MS-DOS 5.0 in September, in three or four months.

The directive also goes forth from Joachim Kempin to the entire domestic and international sales force, fog the marketplace with MS-DOS 5.0 vaporware.

On May 14, 1990, and this is the day

2730

that DRI announces -- formally announces DR-DOS in the United States, Kempin writes in Plaintiffs' Exhibit 283, "They are trying to put the heat on us. We are distributing to you a comparison between MS-DOS 5.0 and their version. Inform your customers as discussed and keep them at bay."

There is a comparison chart that you will see done in May of 1990 comparing DR-DOS 5.0 with MS-DOS 5.0 MS-DOS 5.0 does not exist.

When Microsoft tells you that its own internal schedules reflect the truth of the preemptive announcements its executives are making, look at the internal records Microsoft's own internal records that show that such schedules don't reflect reality and Microsoft knows it.

Let me shift for a moment to Windows 3.0. That ships in May of 1990. Just right around the time when DR-DOS 5.0 is coming out. And just as Microsoft begins its vaporware announcements about MS-DOS 5.0.

After Microsoft releases a product, they often do what's called a postmortem, and they go through -- this is a particularly --

2731

it's a lengthy report, and they go through, you know, what went right, what went wrong, and what could have been better, and that sort of thing.

The Windows 3.0 postmortem contained the following remarkable admissions here -- this is Plaintiffs' 3193. Plaintiffs' Exhibit 3193.

Under schedule, it says, "Set by Bill G. before feature definitions are outlined. Problem motivating people to achieve fake ship dates."

And then down a little further, "lying to people on the team about schedules. Morale hit to the team."

The MS-DOS 5.0 postmortem report, and this is written by a guy named Mike Dreyfus. He is a software engineer. It all reveals the fake schedule for MS-DOS 5.0. This is Exhibit 5387.

"Some individuals produced estimates that represented best-case scenarios rather than realistic ones and then were surprised to see their best-case guesses show up on schedule charts."

2732

On April 17, 1990, Microsoft's preeminent DOS architect, he's a guy named Gordon Letwin, he calls a guy named Glenn Stephens in Hungerford, England.

Mr. Stephens is the head of DRI development April 17, 1990, Mr. Letwin from Microsoft calls Mr. Stephens in England who is DRI's head of development.

And he wants to recruit Mr. Stephens to come to Microsoft, and he talks with Mr. Stephens about Mr. Stephens joining Microsoft for about an hour, and Mr. Stephens we hope will testify by video, but is this the one we don't have a video for? I'm sorry, that we don't have the video for you. We'll get it.

But this is what he says about that conversation with Mr. Letwin of Microsoft.

"Stephens testifies my impression was they weren't working on anything. Actually, one of the things they were asking for me to work on, if I went over there, was a file system. Since that is a core component of the DOS operating system to not already have an engineer assigned to that tells me there's nobody working on it."

2733

So Stephens concludes from the conversation with the person directly involved in the production of MS-DOS that as of April 17, 1990, Microsoft has nothing much going on with respect to MS-DOS.

Now they do get a rough beta into the field in about June 15. Microsoft knows that it's not a completed product. It doesn't have the features to compete with DR-DOS 5.0, and they still have lots of things to add.

At an MS-DOS 5.0 plan overview given to IBM on June 15, Eric Straub, who is one of the key developers for MS-DOS, discloses in Plaintiffs Exhibit 5126 that they have currently under consideration -- and this is for MS-DOS 5.0 -- upper memory block support in EMM 386, a task switcher called winoldapp and a file transfer utility.

Now, these are major features. This is not a line code, these are major features that take considerable time to develop and test. They're complicated, they're advanced features, and Microsoft doesn't have them yet.

Back to the Microsoft postmortem report for MS-DOS 5.0 Microsoft admits that it

2734

is scrambling to identify and create features that match DR-DOS 5.0 already out.

This is Plaintiffs' Exhibit 5387 again.

"One of the most important stimulants for adding features was competitive pressure from DR-DOS 5.0 which we first learned of in the spring of 1990. The DR-DOS feature set led us -- led us to add UMB support, task swapping, and undelete.

"Unfortunately, it took us some time to revise our schedules to match the changing product. We adjusted the schedule outward in small increments and the end dates lost clarity and credibility inside and outside the team."

After Microsoft released Windows 3.1, they transferred Phil Barrett over to look at the MS-DOS 5.0.

His assessment of the team plan is not very kind.

(Whereupon the following videotape was

played.)

MR. BARRETT: The schedules have not been really well thought through. There was a lot of engineering work that had to be done.

2735

Testing, test plans. There's no beta test plan. There was just a lot of stuff that needed to be done. A lot of activities that needed to be completed in order to ship a product had not even been completed and not even been started at that point.

MS. CONLIN: I don't know why that didn't move, but I hope that you heard what he said, which is, when he gets over there in May of 1990, they don't have a beta test plan, they don't have features, they're just a lot of activities that needed to be completed in order to ship a product hadn't been begun.

The ship date moves from the original promise date to a new promise delivery date which is now -- goes from September to the end of 1990.

In mid summer the trade press begins to report this new sort of end of the year date, but Microsoft does keep telling the world to expect MS-DOS 5.0 before the end of the year 1990.

And Chestnut says he's the source for these stories that say to the OEMs and other members of the trade, expect MS-DOS 5.0 by the

2736

end of the year.

On July 24, 1990, Silverberg, Brad Silverberg submits his DOS 5.0 plan edition since 6-90 and reveals a list of new features still being added.

And at that point, this is July 24, 1990 at that point, the shipment two OEMs is -- begins to be listed as TBD, to be determined.

By the end of August, 1990, Microsoft knows that its tactics are working and indeed OEMs are licensing MS-DOS 5.0. Ten months before its release.

Chestnut does a self-evaluation in his performance review for the period ending June 15, 1990, and here's what -- this is Plaintiffs' Exhibit 5134.

Here's what he says, "During this evaluation, I discovered early on DRI's plans for DR-DOS 5.0 and implemented a competitive response plan which included (1) contacting all major resellers in the U.S. and informing them early on about our product plans for DOS 5 RUP."

We think that means retail upgrade.

"(2) Getting the word out to OEMs

2737

earlier than planned about our plans for DOS 5 I met with a number of OEMs personally and provided a presentation script to the domestic and international OEM sales group. By the end of March, virtually all of our OEMs worldwide were informed about DOS 5 which diffused DRI's ability to capitalize on a window of opportunity with these OEMs."

Skipping 3 and going to 4. Taiwan visit and OEM seminar in June. "Two days before DRI's seminar there to announce DR-DOS 5.0" --

This isn't very complete, but he goes over there and has a seminar, and he plans it -- gets it on board two days before DRI's long planned seminar to announce DR-DOS 5.0. So he's there two days ahead of that.

By the fall of 1990, Microsoft has locked up computer makers worldwide in per processor licenses for a product that does not -- that is not shippable or shipping, and that won't be shipped until June of 1991.

By September, however, Microsoft's PR people are trying to keep a lid on these false dates, and by this time, Microsoft has admitted

2738

that the product that they told OEMs in June would ship by September has now moved to the end of the year.

But internally they know the end of the year isn't likely either. This is from their outside PR group called Waggener Edstrom, and it's Plaintiffs' Exhibit 381, and it says, "What to acknowledge about MS-DOS 5.0.

"With MS-DOS 5.0, we have already acknowledged a great deal more than we had with Microsoft Windows."

And these are the things. "Will ship by the end of the year (could be proven incorrect) and has additional planned features not in the first beta release."

And then, "What we shouldn't say in order to provide flexibility and some measure of deniability -- we shouldn't say when the product will ship."

This is dated September 11, the month Chestnut tells people originally in his round-the-world visits the product's going to be out.

Now, even the end of the year promise is raising a lot of suspicions in the press and

2739

media investigators are concerned about the truthfulness of what Microsoft is telling them, and one of them is a guy named Paul Sherer of PC Week.

And he begins pressing for interviews, and then on October 17, nineteen -- October 17, 1990, he gets through to Mark Chestnut and Chestnut talks to him.

This is an internal Microsoft E-mail from Chestnut to his superiors and others in Microsoft after he talks to the press. Paul Sherer, here's what he says.

"I'm afraid that this guy is going to write that we are being open about the DOS 5 beta because we are trying to preempt DR-DOS 5 sales. I tried real hard to present a different point of view, but I don't think he bought it. I'm concerned that this article may make us look bad. Can you guys follow up and see if we need to do some damage control? This was the toughest interview I've done. I felt like Richard Nixon giving his I am not a crook speech."

Sherer doesn't buy Chestnut's I am not a crook speech, and there is an article.

2740

And then on November 5, 1990, PC Week reprints a letter by Brad Silverberg.

Let me go back just for a moment.

After Chestnut talks to Sherer, Sherer puts an article in that says basically they're announcing this product in order to -- they are announcing MS-DOS to freeze DR-DOS, and then Brad Silverberg, who is in charge of the MS-DOS development, VP writes a letter to PC Week to respond to PC Week's article that they get from Chestnut. They don't get it from Chestnut, they interview him for it. Here's what Mr. Silverberg says in his letter.

"This is in response to your October 22 story alleging that Microsoft released information about the upcoming Microsoft MS-DOS Version 5.0 in an attempt to create fear, uncertainty, and doubt regarding DRI's DR-DOS 5.0. The feature enhancements of MS-DOS Version 5.0 were decided and developed long before we heard about DR-DOS 5.0. There will be some similar features."

As for the timing of the leaks, it was not an orchestrated Microsoft plan, nor did the leaks come from Microsoft. In the past, users

2741

expressed frustration when we neither acknowledged that a new product was in development nor gave a sense of our direction for the release. Thus, to serve our customers better, we decided to be more forthcoming about Version 5.0.

Now I've already showed you the evidence that directly contradicts what Mr. Silverberg tells the world in his letter to the editor on October 22.

First of all, he says Microsoft does not add features as a result of DR-DOS. Well, they did, and they say they did.

This is the 5387 Mr. Dreyfus. One of the most important stimulants for adding features was competitive pressure from DR-DOS.

Number two, Microsoft does in fact, and remember Chestnut's aggressive leak campaign? That's what they're doing. He, Chestnut, is contacting the press. When Silverberg says there was no orchestrated Microsoft plan, that is plainly false based on Microsoft's own internal documents, some of which you have already seen.

Exhibit 276 is the Chestnut document.

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On the PR side we have now begun an aggressive leak campaign. The goal is to build anticipation for MS-DOS 5.0 and diffuse potential excitement for -- from the DR-DOS announcement.

So that's the second point in Silverberg's letter that is just flat out false. And then Microsoft discloses MS-DOS 5.0 plans to preempt DR-DOS not to serve its customers better, and Mark Chestnut will admit that.

On October 1, 1990, five months after Microsoft begins its campaign of vaporware against DR-DOS Nathan Myhrvold -- Mr. Myhrvold you'll hear -- there are two Myhrvolds, Cameron and Nathan.

Nathan is sort of a technology guru, and you'll hear about Cameron later in connection with ISVs. He's sort of the head of what Microsoft calls evangelists.

But this is Nathan, and he's the -- he is the -- here, I'll give you his title. The VP of advanced technology and business development group.

He sends the following memo to the

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Microsoft executive staff. He's the one who I showed you his memo earlier about how Microsoft used vaporware to defeat vision. And here, he's now talking about how Microsoft could use preannouncement to crush the demand for a different competitive product.

This is Plaintiffs' Exhibit 411.

He says, "The purpose of announcing early like this is to freeze the market at the OEM and ISV levels in this respect it is just like the original Windows announcement. This time we have a lot better development team so the time between announce and ship will be a lot smaller. Nevertheless, we need to get our message out there."

And Microsoft conducted dozens of briefings with reporters under NDAs, nondisclosure agreements, but Microsoft acknowledges that these NDAs with the press are just illusions.

Here is Plaintiffs' Exhibit 381 on September 11, 1990, which recommends -- we recommend we acknowledge the frustration NDAs can entail and allow them, meaning the trade press, to write stories prior to the product

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announcement based on information already rumored in the weeklies and by beta testers.

I'll tell you how rumors get started in a little bit.

I'm going to talk a little more about the NDAs later.

Let's move to tying.

As an aside, Microsoft also makes a significant change in Windows with the 3.0 product.

In the past, if you got a game and it needed a part of Windows to run the Windows run team -- runtime, the game ISV, the game developer could ship the Windows runtime with the game.

In Windows 3.0, Windows had to be resident on the machine. No more shipping with games. You had to have Windows 3.0 on the machine to use the Windows GUI with any app.

And, of course, this opens a huge new market for Windows as a stand-alone application. And, of course, nothing anticompetitive about that. But now if a user wants to play a game and wants to use Windows, they've got to buy Windows.

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Windows in 1990 is also a separate product, a separate application running on top of DOS. And it launches in May of 1990, right before Microsoft -- right before the time DRI announces DR-DOS.

And Microsoft helps its new version of Windows along at this time by giving OEMs a price break if they licensed both the monopoly operating system and Windows GUI together.

I mentioned Stephanie Reichel before. She's the OEM account manager who deals with Mr. Lieven and Vobis, and she will tell you that she informed three of her OEM accounts IPC, Actebis and Peacock that the price of Windows alone would be higher than the price of Windows and DOS combined. A practice designed solely to exclude DR-DOS.

Now think about that.

Other Microsoft employees make similar offers. Buy the two products together. And then, of course, you're not going to be buying DR-DOS. And we will sell those two products to you for less than we will sell you Windows alone.

And the underlying idea is if you buy

2746

Windows alone, then you can also -- you'd also have a need for an operating system; and it might not be MS-DOS, it might be DR-DOS.

Vobis, major seller in Europe, actually one of the major sellers of DR-DOS in the world.

He starts using, when it first comes out, 3.31 is the first DR-DOS product, he starts loading that immediately, and he loads that and then he loads DR-DOS 5.0.

Beginning in 1989, Microsoft tries to get Vobis to drop DR-DOS and becomes increasingly alarmed as other OEMs look at what -- you know, Vobis is being successful by offering DR-DOS and Microsoft fears that that will be inspirational to other OEMs.

Microsoft's concern about Vobis loading DR-DOS extends to the highest levels of Microsoft.

Steve Ballmer tells Brad Chase on the day that Brad Chase becomes the MS 5.0 product manager to eat, sleep, and drink Vobis until Vobis -- until DRI is out of the account.

Mr. Lieven, stubborn. He is not -- he refuses to cave in. And he'll tell you one of

2747

the reasons is he wanted to offer his customers a choice, and he believed that DR-DOS was a better product.

Finally, Mr. Kempin himself, the head of worldwide OEM sales, meets with Mr. Lieven, and he reports that meeting in a March 26, 1991 memo that he sends to other Microsoft executives. And this is Plaintiffs' Exhibit 638.

Interestingly enough, Amstrad and other German companies have been noticing Vobis' success and its DRI bundling.

Lieven himself mentioned to us that he could influence DRI in their product development, et cetera. I took the opportunity to negotiate in Germany, sign our offer as is. This is an agreed-upon package deal or if you change any component, we will too.

Second option. Scratch the DOS clause, pay $35 for Windows instead of 15. You have until 4-1-91 to consider. The proposal showed impact.

In my judgment, they will hurt if they do not ship WIN, and paying $35 for it is out of the question.

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Kempin tells Lieven it will cost more to license Windows alone than it will to license MS-DOS and Windows together, and two days later Mr. Lieven, who needs to have WIN, signs the license for MS-DOS.

Microsoft -- this is not over yet. Microsoft, however, just has not made him stop shipping DR-DOS.

At the time he signs the MS-DOS 5.0 license agreement, he's still got copies of DR-DOS. DR-DOS does its licensing a bit different, and they have holograms that Mr. Lieven has, and I think he has quite a number of them left. So he goes on because he's already paid for those holograms. He's already paid for those DR-DOS holograms.

And so he -- he goes on shipping DR-DOS to his customers after he signs this agreement. This agreement doesn't say you can't ship it. It just says you got to pay.

So Microsoft invites him to come to Redmond, Washington, to headquarters, and during the visit, Mr. Kempin offers to pay Mr. Lieven between 50,000 and $100,000 in cash to stop selling DR-DOS.

2749

Stephanie Reichel, the Vobis account manager, testifies that both Bill Gates and Steve Ballmer were aware of the cash payment. Lieven accepts it. Microsoft funnels that money through a marketing fund, disguising the cash payment.

And the idea is to keep Mr. Lieven from shipping any DR-DOS.

So what's happened here is Microsoft has, one, a new per processor agreement from Vobis worth about $18 million for MS-DOS and Windows preloaded on 400,000 Vobis computers. You'll see the contracts. They're not so easy to read.

And Vobis has further agreed to bundle 25,000 copies of Windows for work groups, the different Windows. And this is long before that product was launched.

So in less than a year, Vobis turns around from selling about 50/50, 50 percent DR-DOS, 50 percent MS-DOS, to selling 100 percent MS-DOS.

You know, I'm not sure he said 100 percent. 90 percent, 95 -- most.

When Vobis renegotiates its MS-DOS

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license after DR-DOS is dead, Microsoft nearly doubles the price.

All right, FUD.

Compatibility, as we've discussed, is an essential requirement of competing operating systems. And it's market perceptions that matter so much, you know, what does -- how does the market perceive the product, and Microsoft is aware of the potency of a FUD campaign.

When closing a license with Acer in September 1989, Jeremy Butler, who is the senior vice president of international business, plays the FUD card to great effect against DRI.

This is Plaintiffs' Exhibit 151. He says, "It only takes a couple of reports about noncompatibility to give the kiss of death to a PC. We've seen that on the hardware side as well as on the operating system side."

So even though prior to DR-DOS 5.0, Mr. Chestnut will tell you he disagrees with taking a little thing and blowing it up into a big thing to create FUD.

And he's the guy who pulls together FUD sheets. These are FUD sheets to distribute

2751

to the field on DR-DOS.

In September 1990, in Plaintiffs' Exhibit 382, this is E-mails that Mr. Chestnut is sending to the field.

"The following is a summary of compatibility problems that we have verified with DR-DOS 5.0 based on internal testing and results from an outside test lab. This is a technical summary of confirmed problems with DR-DOS 5.0. This information is being provided to assist in disproving DRI's claims that DR-DOS 5.0 is 100 percent compatible with MS-DOS. It is, however, very confidential information and should be provided to customers only under nondisclosure."

I want to show you what Kempin says back. Okay. Love, try to get it into publications as soon as possible. That's one of the reasons I said to you earlier that they know that these nondisclosures aren't -- Mr. Kempin is saying okay, get it out there.

Microsoft account managers are directed to share what they claim are serious problems with OEMs considering a switch to DR-DOS.

2752

And so Chestnut hires an outside testing lab, and he says to beat DR-DOS to death, and much to Microsoft's dismay, they find it to be nearly perfectly compatible with important products including Windows 3.0. And that's the biggy, does it work with Windows 3.0.

Microsoft keeps secret the independent test that confirm DR-DOS's compatibility.

Now they do some of their own tests. And I will tell you that DRI can't recreate what Microsoft says it's done, and there are some that are easily patched. I'll tell you in a minute why that didn't happen. It didn't happen in a timely fashion.

Mr. Kempin admits that as of April 1991, DR-DOS is a far superior product to MS-DOS for the proceeding nine months.

As the launch of MS-DOS finally approaches, Microsoft realizes they're going to have to continue their FUD campaign, and a guy named Sergio Pineda takes over from Chestnut.

Chestnut moves on, and Mr. Pineda becomes the MS-DOS product manager, and in May of 1991 he circulates to all OEM account

2753

managers a thing that he calls the DOS connection.

And here is the theme of the campaign in Exhibit 7461.

"Any degree of incompatibility is enough to create fear, uncertainty and doubt among end users when it comes time to buy new systems. This suggests that PC OEMs will take on a big risk if they ship DR-DOS with their systems."

And then Waggener Edstrom advises on October 15, 1990, in Exhibit 425, "Over the next couple months, Katherine and I are going to be in touch with a lot of editors regarding MS-DOS 5.0. We'll basically be covering all the key editors. We recommend that we informally plant the bug of FUD in their ears."

And then she gives some examples.

Have you heard about problems with DR-DOS? That security feature is a neat idea and, gosh, such a feature would be great, but it's just too easily circumvented.

Gee, it's unfortunate that DR-DOS can't be loaded high all the time; MS-DOS 5.0 can." We'll do this very tactfully she says.

2754

And if Digital Research came to Microsoft for help making DR-DOS work with Windows, would Microsoft help them? Maybe not?

In line with this, Pineda -- I hope I'm pronouncing his name close to correctly -- specifically focuses the FUD attack on future versions of Windows.

Now, we know DR-DOS 5.0 is compatible with the then existing Windows.

So they got to move on. In Plaintiffs' Exhibit 500, he says, "How should we sell against DRI? For OEMs committed to shipping Windows, only we can ensure 100 percent compatibility with future versions of DOS and Windows."

Now, at this time Microsoft has in hand a report from that outside testing lab that tested DR-DOS with Windows and found the two compatible.

And you'll have that whole technical testing -- they did it twice. In the first one -- we're talking about the first one.

Steve Ballmer -- this is Exhibit 5332, Mr. Ballmer asks on July 31, 1991, is DR in compatible with Windows in any mode in any way?

2755

And Mr. Pineda answers the next day, repeating Mr. Ballmer's question, but typing it better. Is DR-DOS incompatible with Windows in any mode in any way? And his answer is in an Info World article dated 5-27-91.

Info World found DR-DOS memory manager is not compatible with Windows enhanced mode. However, NSTL tested DR-DOS with Windows and found the two compatible.

NSTL is there -- it's a lab they hired to beat DR-DOS to death. And of course Microsoft does not publicize what NSTL has found.

Here's 617. This is the NSTL, National Software Testing Laboratory's contract to test DR-DOS. It is Exhibit 617.

They're supposed to test DOS -- DR-DOS with networking software, a memory manager -- I think that's -- I don't want to mislead you. I believe that is an -- those are E-mails, not the actual testing -- not the contract.

It's what they're saying they want NSTL to do. To test DR-DOS with networking software a memory manager, DOS and WIN apps and anything else you can think of that might raise

2756

some degree of incompatibility.

So NS -- NTSL knows what its assignment is, find some problems.

In July of 1991, Silverberg outlines the FUD plan to fellow executives.

He says in Exhibit 851, "We are engaged in a FUD campaign to let the press know about some of the bugs. We'll provide info a few bugs at a time to stretch it out."

Brad Chase, whose group product manager for MS-DOS 5.0, states by E-mail, "The purpose of a slow leak campaign is to short" -- this is Exhibit 847 -- "to short-circuit Novell DOS before it gets off the ground and to make it hard for customers or OEMs (IBM) to consider DR-DOS seriously."

Let me stop for a moment. Novell DOS is DR-DOS. I mentioned to you there was the merger in 1991. So they're talking about -- and this E-mail is sent right about at the time that DRI and Novell merge.

Back to NSTL and their massive efforts to find problems with DR-DOS. They test 34 applications on DR-DOS 5.0.

Of those, they report 29 worked

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without problems in a variety of networked and stand alone environments.

They report that the remaining five applications fail. Here is something that you really need to understand.

They tested -- MS-DOS has the same or even greater incompatibilities with some of the same products which would make you wonder if it's the other product, but -- or if it's MS-DOS.

Mr. Schulman, who will be coming, who is our technical -- one of our technical experts, will talk to you about the tests that were done with MS-DOS that showed major incompatibilities.

And he'll also help us to understand that nothing about what Microsoft is doing with respect to DR-DOS helps consumers, helps Iowa class members at all. And that's not what it's supposed to do.

Finally, we've talked about the exclusionary contracts, the warning, FUD vaporware, but Microsoft can't keep DRI at bay forever with these tactics. They got to get a product on the market, so they do.

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MS-DOS 5.0, which has no significant feature advantage over DR-DOS 5.0, just comes much later -- as they near the release to manufacturing, the RTM date, internal development records indicate that Microsoft knows it's going to be shipping a product with major bugs. Severe bugs.

That is already very, very late. They go ahead and ship it.

Now, one of the things that was surprising to me was -- to learn that all software has bugs, and every time you ship a piece of software, you have to make a tradeoff.

How bad are the bugs? How often will they appear? If we try to fix them, will it make some other worse bug. So all software has bugs, but the software, this software is -- has got what Microsoft internally I think maybe the whole computer industry calls show stopping bugs. Bad bugs.

Putting a software product into the market with show stopping bugs is not anticompetitive.

What -- I tell you this show because they're out there talking about what a terrible

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product DR-DOS is and how people should not use it, and they ship into the market a product that destroys people's data. And I'm not guessing about this. This is Microsoft's internal document.

June 11, 1991, within one week -- this June 11, 1991, is when Microsoft ships finally MS-DOS 5.0, and within a week, Microsoft product support services crying out for additional support, they just got a flood of bug reports.

And this is Plaintiffs' Exhibit 7587, and here's what this says, "We're currently hearing from numerous callers, approximately 150 a day, who are experiencing severe incompatibilities with MS-DOS 5.0 to the point that PSS, product support services, is unable to get the operating system to work successfully on their machines.

"Problems range from occasional hangs to total lockups of their machines that require the removal of hard drives in order to boot from a floppy. In these cases the uninstall does not allow them to return to the previous version of DOS and they can ultimately lose all

2760

information from the hard drive."

This is a very, very bad thing, and of course it has nothing to do with DR-DOS. DR-DOS is not on these machines. This is MS-DOS crashing and taking the data with it.

By August 3, 1991, Microsoft decides to do what they call a silent release of DOS 5.0. It's going to be called DOS, MS-DOS 5.0 small a, to address some of the data corrupting bugs in DOS 5.

The silent release means they're just going to put it out there and not tell people, not announce that it's going out there.

They put it into the market and then there are -- they place the silent release into the marketplace without ever acknowledging that users are in fact being harmed by MS-DOS 5.0, and all the while they keep up the steady drum beat of FUD against DR-DOS.

Your Honor, I've got -- I'm about to start a whole new series of years, so perhaps this would be, if the Court doesn't mind, a couple of minutes early.

THE COURT: Not at all.

Ladies and Gentlemen of the jury,

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we'll adjourn for the weekend.

Remember the admonition previously given to you.

We'll reconvene 8:30 a.m. on Monday. That's December 4; is that right? Hope so.

So we'll see you then, and have a good weekend and drive safely. You're excused.

All rise. Leave your notebooks here, we'll lock them up.

(Proceedings adjourned at 2:30 p.m.)

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CERTIFICATE TO TRANSCRIPT

The undersigned, Official Court Reporters in and for the Fifth Judicial District of Iowa, which embraces the County of Polk, hereby certifies:

That she acted as such reporter in the above-entitled cause in the District Court of Iowa, for Polk County, before the Judge stated in the title page attached to this transcript, and took down in shorthand the proceedings had at said time and place.

That the foregoing pages of typed written matter is a full, true and complete transcript of said shorthand notes so taken by her in said cause, and that said transcript contains all of the proceedings had at the times therein shown.

Dated at Des Moines, Iowa, this day of , 2006.

______________________________

Certified Shorthand Reporter(s)

[Next transcript: 04-Dec-2006]


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