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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
Plaintiff,
vs.
MICROSOFT CORPORATION,
Defendant.
STATE OF NEW YORK ex. rel.
Attorney General ELIOT SPITZER, et al.,
Plaintiffs and
Counterclaim-Defendants,
vs.
MICROSOFT CORPORATION,
Defendant and
Counterclaim-Plaintiff.
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Civil Action No. 98-1232 (TPJ)
Civil Action No. 98-1233 (TPJ)
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COURT'S FINDINGS OF FACT
FINDINGS OF FACT PDF
- BACKGROUND PDF
- THE RELEVANT MARKET PDF
- Demand Substitutability PDF
- The Possibility of Supply Responses PDF
- MICROSOFT'S POWER IN THE RELEVANT MARKET PDF
- Market Share PDF
- The Applications Barrier to Entry PDF
- Viable Alternatives to Windows PDF
- Price Restraint Posed by Microsoft's Installed Base PDF
- Price Restraint Posed by Piracy PDF
- Price Restraint Posed by Long-Term Threats PDF
- Significance of Microsoft's Innovation PDF
- Microsoft's Pricing Behavior PDF
- Microsoft's Actions Toward Other Firms PDF
- THE MIDDLEWARE THREATS PDF
- The Netscape Web browser PDF
- Sun's Implementation of the Java Technologies PDF
- Other Middleware Threats PDF
- MICROSOFT'S RESPONSE TO THE BROWSER THREAT PDF
- Microsoft's Attempt to Dissuade Netscape from Developing
Navigator as a Platform PDF
- Withholding Crucial Technical Information PDF
- The Similar Experiences of Other Firms in Dealing with Microsoft PDF
- Developing Competitive Web Browsing Software PDF
- Giving Internet Explorer Away and Rewarding Firms that Helped
Build Its Usage Share PDF
- Excluding Navigator from Important Distribution Channels PDF
- Microsoft's Success in Excluding Navigator from the Channels
that Lead Most Efficiently to Browser Usage PDF
- The Success of Microsoft's Effort to Maximize Internet Explorer's
Usage Share at Navigator's Expense PDF
- The Success of Microsoft's Effort to Protect the Applications
Barrier to Entry from the Threat Posed by Navigator PDF
- MICROSOFT'S RESPONSE TO THE THREAT POSED BY SUN'S IMPLEMENTATION
OF JAVA PDF
- Creating a Java Implementation for Windows that Undermined
Portability and Was Incompatible with Other Implementations PDF
- Inducing Developers to Use the Microsoft Implementation
of Java Rather than Sun-Compliant Implementations PDF
- Thwarting the Expansion of the Java Class Libraries PDF
- The Effect of Microsoft's Efforts to Prevent Java from
Diminishing the Applications Barrier to Entry PDF
- THE EFFECT ON CONSUMERS OF MICROSOFT'S EFFORTS TO PROTECT THE
APPLICATIONS BARRIER TO ENTRY PDF
FINDINGS OF FACT
These consolidated civil antitrust actions alleging violations of the Sherman
Act, 1 and 2, and various state statutes by the defendant Microsoft
Corporation, were tried to the Court, sitting without a jury, between
October 19, 1998, and June 24, 1999. The Court has considered the record
evidence submitted by the parties, made determinations as to its relevancy
and materiality, assessed the credibility of the testimony of the witnesses,
both written and oral, and ascertained for its purposes the probative
significance of the documentary and visual evidence presented. Upon the
record before the Court as of July 28, 1999, at the close of the admission
of evidence, pursuant to Fed. R. Civ. P. 52(a), the Court finds the following
facts to have been proved by a preponderance of the evidence. The Court
shall state the conclusions of law to be drawn therefrom in a separate
Memorandum and Order to be filed in due course.
I.
BACKGROUND
1. A "personal computer" ("PC") is a digital information processing device
designed for use by one person at a time. A typical PC consists of central processing
components (e.g., a microprocessor and main memory) and mass data storage (such
as a hard disk). A typical PC system consists of a PC, certain peripheral input/output
devices (including a monitor, a keyboard, a mouse, and a printer), and an operating
system. PC systems, which include desktop and laptop models, can be distinguished
from more powerful, more expensive computer systems known as "servers," which
are designed to provide data, services, and functionality through a digital
network to multiple users.
2. An "operating system" is a software program that controls the allocation
and use of computer resources (such as central processing unit time, main memory
space, disk space, and input/output channels). The operating system also supports
the functions of software programs, called "applications," that perform specific
user-oriented tasks. The operating system supports the functions of applications
by exposing interfaces, called "application programming interfaces," or "APIs."
These are synapses at which the developer of an application can connect to invoke
pre-fabricated blocks of code in the operating system. These blocks of code
in turn perform crucial tasks, such as displaying text on the computer screen.
Because it supports applications while interacting more closely with the PC
system's hardware, the operating system is said to serve as a "platform."
3. An Intel-compatible PC is one designed to function with Intel's 80x86/Pentium
families of microprocessors or with compatible microprocessors manufactured
by Intel or by other firms.
4. An operating system designed to run on an Intel-compatible PC will not function
on a non-Intel-compatible PC, nor will an operating system designed for a non-Intel-compatible
PC function on an Intel-compatible one. Similarly, an application that relies
on APIs specific to one operating system will not, generally speaking, function
on another operating system unless it is first adapted, or "ported," to the
APIs of the other operating system.
5. Defendant Microsoft Corporation is organized under the laws of the State
of Washington, and its headquarters are situated in Redmond, Washington. Since
its inception, Microsoft has focused primarily on developing software and licensing
it to various purchasers.
6. In 1981, Microsoft released the first version of its Microsoft Disk Operating
System, commonly known as "MS-DOS." The system had a character-based user interface
that required the user to type specific instructions at a command prompt in
order to perform tasks such as launching applications and copying files. When
the International Business Machines Corporation ("IBM") selected MS-DOS for
pre-installation on its first generation of PCs, Microsoft's product became
the predominant operating system sold for Intel-compatible PCs.
7. In 1985, Microsoft began shipping a software package called Windows. The
product included a graphical user interface, which enabled users to perform
tasks by selecting icons and words on the screen using a mouse. Although originally
just a user-interface, or "shell," sitting on top of MS-DOS, Windows took on
more operating-system functionality over time.
8. In 1995, Microsoft introduced a software package called Windows 95, which
announced itself as the first operating system for Intel-compatible PCs that
exhibited the same sort of integrated features as the Mac OS running PCs manufactured
by Apple Computer, Inc. ("Apple"). Windows 95 enjoyed unprecedented popularity
with consumers, and in June 1998, Microsoft released its successor, Windows
98.
9. Microsoft is the leading supplier of operating systems for PCs. The company
transacts business in all fifty of the United States and in most countries around
the world.
10. Microsoft licenses copies of its software programs directly to consumers.
The largest part of its MS-DOS and Windows sales, however, consists of licensing
the products to manufacturers of PCs (known as "original equipment manufacturers"
or "OEMs"), such as the IBM PC Company and the Compaq Computer Corporation ("Compaq").
An OEM typically installs a copy of Windows onto one of its PCs before selling
the package to a consumer under a single price.
11. The Internet is a global electronic network, consisting of smaller, interconnected
networks, which allows millions of computers to exchange information over telephone
wires, dedicated data cables, and wireless links. The Internet links PCs by
means of servers, which run specialized operating systems and applications designed
for servicing a network environment.
12. The World Wide Web ("the Web") is a massive collection of digital information
resources stored on servers throughout the Internet. These resources are typically
provided in the form of hypertext documents, commonly referred to as "Web pages,"
that may incorporate any combination of text, graphics, audio and video content,
software programs, and other data. A user of a computer connected to the Internet
can publish a page on the Web simply by copying it into a specially designated,
publicly accessible directory on a Web server. Some Web resources are in the
form of applications that provide functionality through a user's PC system but
actually execute on a server.
13. Internet content providers ("ICPs") are the individuals and organizations
that have established a presence, or "site," on the Web by publishing a collection
of Web pages. Most Web pages are in the form of "hypertext"; that is, they contain
annotated references, or "hyperlinks," to other Web pages. Hyperlinks can be
used as cross-references within a single document, between documents on the
same site, or between documents on different sites.
14. Typically, one page on each Web site is the "home page," or the first access
point to the site. The home page is usually a hypertext document that presents
an overview of the site and hyperlinks to the other pages comprising the site.
15. PCs typically connect to the Internet through the services of Internet
access providers ("IAPs"), which generally charge subscription fees to their
customers in the United States. There are two types of IAPs. Online services
("OLSs") such as America Online ("AOL"), Prodigy, and the Microsoft Network
("MSN") offer, in addition to Internet access, various services and an array
of proprietary content. Internet service providers ("ISPs") such as MindSpring
and Netcom, on the other hand, offer few services apart from Internet access
and relatively little of their own content.
16. A "Web client" is software that, when running on a computer connected to
the Internet, sends information to and receives information from Web servers
throughout the Internet. Web clients and servers transfer data using a standard
known as the Hypertext Transfer Protocol ("HTTP"). A "Web browser" is a type
of Web client that enables a user to select, retrieve, and perceive resources
on the Web. In particular, Web browsers provide a way for a user to view hypertext
documents and follow the hyperlinks that connect them, typically by moving the
cursor over a link and depressing the mouse button.
17. Although certain Web browsers provided graphical user interfaces as far
back as 1993, the first widely-popular graphical browser distributed for profit,
called Navigator, was brought to market by the Netscape Communications Corporation
in December 1994. Microsoft introduced its browser, called Internet Explorer,
in July 1995.
II.
THE RELEVANT MARKET
18. Currently there are no products, nor are there likely to be any in the
near future, that a significant percentage of consumers world-wide could substitute
for Intel-compatible PC operating systems without incurring substantial costs.
Furthermore, no firm that does not currently market Intel-compatible PC operating
systems could start doing so in a way that would, within a reasonably short
period of time, present a significant percentage of consumers with a viable
alternative to existing Intel-compatible PC operating systems. It follows that,
if one firm controlled the licensing of all Intel-compatible PC operating systems
world-wide, it could set the price of a license substantially above that which
would be charged in a competitive market and leave the price there for a significant
period of time without losing so many customers as to make the action unprofitable.
Therefore, in determining the level of Microsoft's market power, the relevant
market is the licensing of all Intel-compatible PC operating systems world-wide.
- Demand Substitutability
- Server Operating Systems
19. Consumers could not turn from Intel-compatible PC operating systems
to Intel- compatible server operating systems without incurring substantial
costs, since the latter type of system is sold at a significantly higher
price than the former. A consumer intent on acquiring a server operating
system would also have to buy a computer of substantially greater power
and price than an Intel-compatible PC, because server operating systems
generally cannot function properly on PC hardware. The price of an Intel-compatible
PC operating system accounts for only a very small percentage of the
price of an Intel-compatible PC system. Thus, even a substantial increase
in the price of an Intel-compatible PC operating system above the competitive
level would result in only a trivial increase in the price of an Intel-compatible
PC system. Very few consumers would purchase expensive servers in response
to a trivial increase in the price of an Intel-compatible PC system.
Furthermore, a consumer would not obtain a satisfactory substitute for
an Intel-compatible PC operating system even if he purchased a server,
since server operating systems lack the features and support for the
breadth of applications that induce users to purchase Intel-compatible
PC operating systems.
- Non-Intel-Compatible PC Operating Systems
20. Since only Intel-compatible PC operating systems will work with
Intel- compatible PCs, a consumer cannot opt for a non-Intel-compatible
PC operating system without obtaining a non-Intel-compatible PC. Thus,
for consumers who already own an Intel-compatible PC system, the cost
of switching to a non-Intel compatible PC operating system includes
the price of not only a new operating system, but also a new PC and
new peripheral devices. It also includes the effort of learning to use
the new system, the cost of acquiring a new set of compatible applications,
and the work of replacing files and documents that were associated with
the old applications. Very few consumers would incur these costs in
response to the trivial increase in the price of an Intel-compatible
PC system that would result from even a substantial increase in the
price of an Intel-compatible PC operating system. For example, users
of Intel- compatible PC operating systems would not switch in large
numbers to the Mac OS in response to even a substantial, sustained increase
in the price of an Intel-compatible PC operating system.
21. The response to a price increase would be somewhat greater among
consumers buying their first PC system, because they would not have
already invested time and money in an Intel-compatible PC system and
a set of compatible applications. Apple does not license the Mac OS
separately from its PC hardware, however, and the package of hardware
and software comprising an Apple PC system is priced substantially higher
than the average price of an Intel- compatible PC system. Furthermore,
consumer demand for Apple PC systems suffers on account of the relative
dearth of applications written to run on the Mac OS. It is unlikely,
then, that a firm controlling the licensing of all Intel-compatible
PC operating systems would lose so many new PC users to Apple as the
result of a substantial, enduring price increase as to make the action
unprofitable. It is therefore proper to define a relevant market that
excludes the Mac OS. In any event, as Section III of these findings
demonstrates, including the Mac OS in the relevant market would not
alter the Court's conclusion as to the level of Microsoft's market power.
- Information Appliances
22. No operating system designed for a hand-held computer, a "smart"
wireless telephone, a television set-top box, or a game console is capable
of performing as an adequate operating system for an Intel-compatible
PC. Therefore, in order to adopt a substitute for the Intel-compatible
PC operating system from the realm of "information appliances," a consumer
must acquire one or more of these devices in lieu of an Intel-compatible
PC system.
23. It is possible that, within the next few years, those consumers
who otherwise would use an Intel-compatible PC system solely for storing
addresses and schedules, for sending and receiving E-mail, for browsing
the Web, and for playing video games might be able to choose a complementary
set of information appliances over an Intel-compatible PC system without
incurring substantial costs. To the extent this substitution occurs,
though, it will be the result of innovation by the producers of information
appliances, and it will occur even if Intel- compatible PC operating
systems are priced at the same level that they would be in a competitive
market. More importantly, while some consumers may decide to make do
with one or more information appliances in place of an Intel-compatible
PC system, the number of these consumers will, for the foreseeable future,
remain small in comparison to the number of consumers deciding that
they still need an Intel-compatible PC system. One reason for this is
the fact that no single type of information appliance, nor even all
types in the aggregate, provides all of the features that most consumers
have come to rely on in their PC systems and in the applications that
run on them. Thus, most of those who buy information appliances will
do so in addition to, rather than instead of, buying an Intel-compatible
PC system. Not surprisingly, then, sales of PC systems are not expected
to suffer on account of the growing consumer interest in information
appliances. It follows that, for the foreseeable future, a firm controlling
the licensing of all Intel-compatible PC operating systems could set
prices substantially above competitive levels without losing an unacceptable
amount of business to information appliances.
- Network Computers
24. A network computer system (sometimes called a "thin client") typically
contains central processing components with basic capabilities, certain
key peripheral devices (such as a monitor, a keyboard, and a mouse),
an operating system, and a browser. The system contains no mass storage,
however, and it processes little if any data locally. Instead, the system
receives processed data and software as needed from a server across
a network. A network computer system lacks the hardware resources to
support an Intel-compatible PC operating system. It follows that software
applications written to run on a specific Intel-compatible PC operating
system will not run on a network computer. Network computers can run
applications residing on a designated server, however. Moreover, a network
computer system typically can run applications residing on other servers,
so long as those applications are accessible through Web sites. The
ability to run server-based applications is not exclusive to network
computer systems, however. Generally speaking, any PC system equipped
with a browser and an Internet connection is capable of accessing applications
hosted through Web sites.
25. Since the network computing model relies heavily on the processing
power and memory of servers, the requirements for the user's hardware
(and thus the price of that hardware) are low relative to those of an
Intel-compatible PC system. Still, a user who already owns a relatively
expensive Intel-compatible PC system is not likely to abandon the investment
and acquire less powerful hardware just because one of the least expensive
components of his PC system the operating system is substantially
more expensive than it would be under competitive conditions. Just as
does the Mac OS, the network computing model presents a somewhat more
attractive alternative to the first-time computer buyer. But as in the
case where a prospective purchaser is considering acquiring the Apple
alternative, a new buyer considering the network computing model must
choose between types of computer systems. If the consumer opts for the
less expensive hardware of the network computer, that hardware will
not support an Intel-compatible PC operating system; and if the new
buyer opts for the more expensive hardware of an Intel-compatible PC,
an Intel-compatible PC operating system will almost certainly come pre-installed
(and in any event represent very little additional cost relative to
the price of the hardware).
26. Only a few firms currently market network computer systems, and
the systems have yet to attract substantial consumer demand. In part,
this is because PC systems, which can store and process data locally
as well as communicate with a server, have decreased so much in price
as to call into question the value proposition of buying a network computer
system. This fact would not change if the price of an Intel-compatible
PC operating system rose significantly, because the resulting change
in the price of an Intel-compatible PC system would be very minor. Another
reason for the limited demand for network computer systems is the fact
that few consumers are in a position to turn from PC systems to network
computer systems without making substantial sacrifices; for the network
computing option exhibits significant shortcomings for current PC owners
and first-time buyers alike. The problems of latency, congestion, asynchrony,
and insecurity across a communications network, and contention for limited
processing and memory resources at the remote server, can all result
in a substantial derogation of computing performance. Moreover, the
owner of a network computer is required to enter into long-term dependency
upon the owner of a remote server in order to obtain functionality that
would reside within his control if he owned a PC system. If network
computing becomes a viable alternative to PC-based computing, it will
be because innovation by the proponents of the network computing model
overcomes these problems, and it will happen even if Intel-compatible
PC operating systems are priced at competitive levels. In any case,
that day has not arrived, nor does it appear imminent.
- Server-Based Computing Generally
27. As the bandwidth available to the average user increases, "portal"
Web sites, which aggregate Web content and provide services such as
search engines, E-mail, and travel reservation systems, could begin
to host full lines of the server-based, personal-productivity applications
that have begun to appear in small numbers on the Web. If so, increasing
numbers of computer users equipped with Web browsers and IAP connections
could begin to conduct a significant portion of their computing through
these portals. To the extent they might do so, users probably would
not regard the Mac OS's limited stock of compatible applications as
the major drawback to using an Apple PC system that it is today, and
they might be increasingly drawn to network computer systems and information
appliances. The variety and ease of use of server-based applications
accessible through browsers would have to increase a great deal from
today's levels, however, before the total costs of dispensing with an
Intel-compatible PC operating system would decline sufficiently to impose
a significant constraint on the pricing of those systems. Again, that
day is not imminent; for at least the next few years, the overwhelming
majority of consumers accessing server-based applications will do so
using an Intel-compatible PC system and a browser.
- Middleware
28. Operating systems are not the only software programs that expose
APIs to application developers. The Netscape Web browser and Sun Microsystems,
Inc.'s Java class libraries are examples of non-operating system software
that do likewise. Such software is often called "middleware" because
it relies on the interfaces provided by the underlying operating system
while simultaneously exposing its own APIs to developers. Currently
no middleware product exposes enough APIs to allow independent software
vendors ("ISVs") profitably to write full-featured personal productivity
applications that rely solely on those APIs.
29. Even if middleware deployed enough APIs to support full-featured
applications, it would not function on a computer without an operating
system to perform tasks such as managing hardware resources and controlling
peripheral devices. But to the extent the array of applications relying
solely on middleware comes to satisfy all of a user's needs, the user
will not care whether there exists a large number of other applications
that are directly compatible with the underlying operating system. Thus,
the growth of middleware-based applications could lower the costs to
users of choosing a non-Intel-compatible PC operating system like the
Mac OS. It remains to be seen, though, whether there will ever be a
sustained stream of full-featured applications written solely to middleware
APIs. In any event, it would take several years for middlware and the
applications it supports to evolve from the status quo to a point at
which the cost to the average consumer of choosing a non-Intel compatible
PC operating system over an Intel-compatible one falls so low as to
constrain the pricing of the latter systems.
- The Possibility of Supply Responses
30. Firms that do not currently produce Intel-compatible PC operating systems
could do so. What is more, once a firm had written the necessary software
code, it could produce millions of copies of its operating system at relatively
low cost. The ability to meet a large demand is useless, however, if the
demand for the product is small, and signs do not indicate large demand
for a new Intel-compatible PC operating system. To the contrary, they indicate
that the demand for a new Intel-compatible PC operating system would be
severely constrained by an intractable "chicken-and-egg" problem: The overwhelming
majority of consumers will only use a PC operating system for which there
already exists a large and varied set of high- quality, full-featured applications,
and for which it seems relatively certain that new types of applications
and new versions of existing applications will continue to be marketed at
pace with those written for other operating systems. Unfortunately for firms
whose products do not fit that bill, the porting of applications from one
operating system to another is a costly process. Consequently, software
developers generally write applications first, and often exclusively, for
the operating system that is already used by a dominant share of all PC
users. Users do not want to invest in an operating system until it is clear
that the system will support generations of applications that will meet
their needs, and developers do not want to invest in writing or quickly
porting applications for an operating system until it is clear that there
will be a sizeable and stable market for it. What is more, consumers who
already use one Intel-compatible PC operating system are even less likely
than first-time buyers to choose a newcomer to the field, for switching
to a new system would require these users to scrap the investment they have
made in applications, training, and certain hardware.
31. The chicken-and-egg problem notwithstanding, a firm might reasonably
expect to make a profit by introducing an Intel-compatible PC operating
system designed to support a type of application that satisfies the special
interests of a particular subset of users. For example, Be, Inc. (Be")
markets an Intel-compatible PC operating system called BeOS that offers
superior support for multimedia applications, and the operating system enjoys
a certain amount of success with the segment of the consumer population
that has a special interest in creating and playing multimedia content with
a PC system. Still, while a niche operating system might turn a profit,
the chicken-and-egg problem (hereinafter referred to as the "applications
barrier to entry") would make it prohibitively expensive for a new Intel-compatible
operating system to attract enough developers and consumers to become a
viable alternative to a dominant incumbent in less than a few years.
32. To the extent that developers begin writing attractive applications
that rely solely on servers or middleware instead of PC operating systems,
the applications barrier to entry could erode. As the Court finds above,
however, it remains to be seen whether server- or middleware- based development
will flourish at all. Even if such development were already flourishing,
it would be several years before the applications barrier eroded enough
to clear the way for the relatively rapid emergence of a viable alternative
to incumbent Intel-compatible PC operating systems. It is highly unlikely,
then, that a firm not already marketing an Intel-compatible PC operating
system could begin marketing one that would, in less than a few years, present
a significant percentage of consumers with a viable alternative to incumbents.
III.
MICROSOFT'S POWER IN THE RELEVANT MARKET
33. Microsoft enjoys so much power in the market for Intel-compatible PC operating
systems that if it wished to exercise this power solely in terms of price, it
could charge a price for Windows substantially above that which could be charged
in a competitive market. Moreover, it could do so for a significant period of
time without losing an unacceptable amount of business to competitors. In other
words, Microsoft enjoys monopoly power in the relevant market.
34. Viewed together, three main facts indicate that Microsoft enjoys monopoly
power. First, Microsoft's share of the market for Intel-compatible PC operating
systems is extremely large and stable. Second, Microsoft's dominant market share
is protected by a high barrier to entry. Third, and largely as a result of that
barrier, Microsoft's customers lack a commercially viable alternative to Windows.
- Market Share
35. Microsoft possesses a dominant, persistent, and increasing share of
the world- wide market for Intel-compatible PC operating systems. Every
year for the last decade, Microsoft's share of the market for Intel-compatible
PC operating systems has stood above ninety percent. For the last couple
of years the figure has been at least ninety-five percent, and analysts
project that the share will climb even higher over the next few years. Even
if Apple's Mac OS were included in the relevant market, Microsoft's share
would still stand well above eighty percent.
- The Applications Barrier to Entry
- Description of the Applications Barrier to Entry
36. Microsoft's dominant market share is protected by the same barrier
that helps define the market for Intel-compatible PC operating systems.
As explained above, the applications barrier would prevent an aspiring
entrant into the relevant market from drawing a significant number of
customers away from a dominant incumbent even if the incumbent priced
its products substantially above competitive levels for a significant
period of time. Because Microsoft's market share is so dominant, the
barrier has a similar effect within the market: It prevents Intel-compatible
PC operating systems other than Windows from attracting significant
consumer demand, and it would continue to do so even if Microsoft held
its prices substantially above the competitive level.
37. Consumer interest in a PC operating system derives primarily from
the ability of that system to run applications. The consumer wants an
operating system that runs not only types of applications that he knows
he will want to use, but also those types in which he might develop
an interest later. Also, the consumer knows that if he chooses an operating
system with enough demand to support multiple applications in each product
category, he will be less likely to find himself straitened later by
having to use an application whose features disappoint him. Finally,
the average user knows that, generally speaking, applications improve
through successive versions. He thus wants an operating system for which
successive generations of his favorite applications will be released
promptly at that. The fact that a vastly larger number of applications
are written for Windows than for other PC operating systems attracts
consumers to Windows, because it reassures them that their interests
will be met as long as they use Microsoft's product.
38. Software development is characterized by substantial economies
of scale. The fixed costs of producing software, including applications,
is very high. By contrast, marginal costs are very low. Moreover, the
costs of developing software are "sunk" once expended to develop software,
resources so devoted cannot be used for another purpose. The result
of economies of scale and sunk costs is that application developers
seek to sell as many copies of their applications as possible. An application
that is written for one PC operating system will operate on another
PC operating system only if it is ported to that system, and porting
applications is both time-consuming and expensive. Therefore, application
developers tend to write first to the operating system with the most
users Windows. Developers might then port their applications to other
operating systems, but only to the extent that the marginal added sales
justify the cost of porting. In order to recover that cost, ISVs that
do go to the effort of porting frequently set the price of ported applications
considerably higher than that of the original versions written for Windows.
39. Consumer demand for Windows enjoys positive network effects. A
positive network effect is a phenomenon by which the attractiveness
of a product increases with the number of people using it. The fact
that there is a multitude of people using Windows makes the product
more attractive to consumers. The large installed base attracts corporate
customers who want to use an operating system that new employees are
already likely to know how to use, and it attracts academic consumers
who want to use software that will allow them to share files easily
with colleagues at other institutions. The main reason that demand for
Windows experiences positive network effects, however, is that the size
of Windows' installed base impels ISVs to write applications first and
foremost to Windows, thereby ensuring a large body of applications from
which consumers can choose. The large body of applications thus reinforces
demand for Windows, augmenting Microsoft's dominant position and thereby
perpetuating ISV incentives to write applications principally for Windows.
This self-reinforcing cycle is often referred to as a "positive feedback
loop."
40. What for Microsoft is a positive feedback loop is for would-be
competitors a vicious cycle. For just as Microsoft's large market share
creates incentives for ISVs to develop applications first and foremost
for Windows, the small or non-existent market share of an aspiring competitor
makes it prohibitively expensive for the aspirant to develop its PC
operating system into an acceptable substitute for Windows. To provide
a viable substitute for Windows, another PC operating system would need
a large and varied enough base of compatible applications to reassure
consumers that their interests in variety, choice, and currency would
be met to more-or-less the same extent as if they chose Windows. Even
if the contender attracted several thousand compatible applications,
it would still look like a gamble from the consumer's perspective next
to Windows, which supports over 70,000 applications. The amount it would
cost an operating system vendor to create that many applications is
prohibitively large. Therefore, in order to ensure the availability
of a set of applications comparable to that available for Windows, a
potential rival would need to induce a very large number of ISVs to
write to its operating system.
41. In deciding whether to develop an application for a new operating
system, an ISV's first consideration is the number of users it expects
the operating system to attract. Out of this focus arises a collective-action
problem: Each ISV realizes that the new operating system could attract
a significant number of users if enough ISVs developed applications
for it; but few ISVs want to sink resources into developing for the
system until it becomes established. Since everyone is waiting for everyone
else to bear the risk of early adoption, the new operating system has
difficulty attracting enough applications to generate a positive feedback
loop. The vendor of a new operating system cannot effectively solve
this problem by paying the necessary number of ISVs to write for its
operating system, because the cost of doing so would dwarf the expected
return.
42. Counteracting the collective-action phenomenon is another known
as the "first- mover incentive." For an ISV interested in attracting
users, there may be an advantage to offering the first and, for a while,
only application in its category that runs on a new PC operating system.
The user base of the new system may be small, but every user of that
system who wants such an application will be compelled to use the ISV's
offering. Moreover, if demand for the new operating system suddenly
explodes, the first mover will reap large sales before any comp
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