WPC.  + -:Dֹ SGgX^ܺ;Bt$e`*v\ײNVueTMG~Qd$84քNЪ  `Ympo҇Br,pBcb҄Gu-;x1-o]y:U:2 :qW~o$]:B.G7"/8K*FkD$O½-# L ɖ>2hˠB [کR"#fX|B?x@6Ce v$(J`9 t| ][Yg+q<o$Ș5!LwOvq/]7S&Tr;}1uAzxT3p R!mMxVfШE ~dX 4 g8rgAEjN S^l 'P@¬UB %B H 0 0 0z. 0p 0 0| 0d 0 0z 0l 0p 0p 0PvU : 0h 0@h 0^U. 0Z4 0 0Hi 0 0K 08 0` 0q 0u 0NUBE! 0N! 0n" 0NC# 0N$ 0N% 0x-' 0 ' 0( 0jG) 0) 0;G* 0j+ 0+ 0R|, 0 - 05- 0x. 0bG0 01 0y2 0^734 0%6 D+66 07 0=8 0U8 AQ8^ '939 0;C<'F= 0m>>"w@@f@a@ 1 e@ 1 e,A 1uAB 0CBaBF3KMMOS@ [[^|f@jHFmqmty{sV 1e~iyiIoE 0=í AMw@M4 0ln| 0"f-#!N 1u B+oGFHH"GUB>:x Az m\  `*Times New RomanTT' -Interests of Amicus Curiae 2 Ari Litan&0W. D. Nordhaus .   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"X!37    K4X` hp x (#"K    ?+  m u%}- "X?(Y2$ rm!XXXXXX  'dxd Level 1 Level 2 Level 3 Level 4 Level 5(Y2$ rm!XXXXXX  ($    (Y2$ rm!XXXXXX  9<:;8C<< c(  @)XXXXXX  _=AJ:6zHk p @ H@Ekkk (#(# (#(#   "XaXX  @    1  A     @        ?+  m u%}- ""?XXa(Y2$ rm!XXXXXX   <"XXXXXX  _   "X               C*XXXXXX  _=DI95x h k p @ HETTT (#(#  (Y2$ rm!XXXXXX    <"XXXXXX  _   "X             aXX@    1  A   <        X  $  Table_A$35;AGMSY_6A.A.A.A.A.A.A.A.$35;AGMSY_71.1.1.1.1.1.1.1.$35=EMU]em8(a)(a)(a)(a)(a)(a)(a)(a) ($      rm!XXXXXX  _I?+ I x(0 "X?/r        .      H+ I p x(0 " I XHӀahX  1  .r      ݀Dr.Litanisalsoanattorneybutjoinsthisbriefinhiscapacityasaneconomist,althoughhisviewsareinformedbyhis X roleasaformerprosecutorandpolicymakerintheJusticeDepartmentsAntitrustDivision,wherehewasactiveinsupervisingapreviousinvestigationofMicrosoftandnegotiatingthe1994consentdecreewiththecompany.̀XXa  rm!XXXXXX  _I?+ I x(0 "X?.      H+ I p x(0!" I XHӀahX  2  .r      ݀Seealso      UnitedStatesr      ݀v.      UnitedStatesGypsumCoVr      .,340U.S.76,88(1950)[adecreemust pryopentocompetitiona X marketthathasbeenclosedbydefendantsillegalrestraints.];and      UnitedStatesr      ݀v.      E.I.duPontde_Nemours_Ԁ&Co r      .,366 " U.S.316,326(1961).̀XXa  rm!XXXXXX  _I?+ I p x(0 "X?.       I I ahX  2  .r      ݀LawrenceAnthonySullivan,HandbookoftheLawofAntitrust,West,1977,at146XXa  rm!XXXXXX  _I?+ I p x(0 "X?.       IuE. I p x(0 " I XE8  I ahX  3  .r      ݀Richard_Posner_,Antitrust:AnEconomicPerspective,UniversityofChicagoPress,1978,at89.XXa  rm!XXXXXX  _I?+ I p x(0 "X?.      IB+  p x(0 " I XBӀahX  4  .r      ݀Thisproceedingdiffersfromthatarisingfromthe1994consentdecreethatMicrosoftenteredintowiththeJustice X Department.Inthatmatter,theD.C.CircuitheldthatJudge_Sporkin_Ԁexceededhisauthorityunderthe_Tunney_ԀAct,whichappliesonlytoconsentdecreesandnottofinaljudgments,becauseJudge_Sporkin_Ԁwantedthegovernmenttopursueabroadercasethantheoneitactuallyfiled.XXa  rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .      B+ I p x(0 " I XBӀ  5  .Dr      ݀Microsoftslatestfinancialfiguresforthethirdquarterofitsfiscalyear(2000)donotcontradictthesepoints.While X thegrowthofincomefromitscorebusinessesslowed,salesofallversionsofWindowsstillincreasedby14percentoverthepreviousyear.AnalystsexpectedaslowdowninWindowsrevenuegrowthbecauseMicrosoftisnowtargetingthebusinessmarketwithitsWindows2000(discussedingreaterdetailinthetextbelow);businessesoftentakemoretimetomakewhatforthemaremajorpurchasedecisionsthanconsumers.Inaddition,thecompanyhasclaimedthattheslowerrecentgrowthofWindowsreflectsaslowdowninthegrowthofpurchasesofpersonalcomputersbycorporations,whichhadbeenholdingbackonbuyingnewmachinesjustpriortotheturnoftheyearbecauseofY2Krelatedfears.Seegenerally,Rebecca_Buckman_, MicrosoftRevenueFallsShortofForecast,The  WallStreetJournal,April21,2000,A3A4.NotwithstandingMicrosoftsclaimsaboutthePCmarket,PCshipments P reportedlygrewby1719percentinthefourthquarterof1999(relativetothesamequarterof1998)accordingtotwootherrespectedindustrysources.SeeJohnMadden, PCShipmentsDidntTakeY2KHitinQ4,PCWeek,January <   24,2000.̀w   rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .      B+ I p x(0 " I XBӀ  6  .Dr      ݀_Lucile_Ԁ_Sheppard_ԀKeys, TheShoeMachineryCaseandtheProblemoftheGoodTrust,QuarterlyJournalof X Economics,68,May1954,287304.  rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      1r    XX,aXXhX    .      IB+  p x(0 " I XBӀ  7  .r      ݀AccordingtoJudgeGreenesopinion, Considerableevidencewasadducedduringthe1r    XXXXXXXX x           AT&Tr      ݀trialthattheBellSystemhadan admirablerecord8ininnovationinthe h telecommunicationsindustryand,morebroadly,inindustrialresearch.Inhis_Tunney_ԀActreview,JudgeGreenestated, TheCourtisoftheopinionthatthereisconsiderablemerittothesecontentions.BellLaboratorieshasbeenapositiveforcebothinbasicandinappliedresearch,andthisresearchhashadabeneficialeffectonthenation'seconomicpositioninallofitsvariedaspects.Yetthatfindingdidnotleadhimtoconcludethatan injunctive,nonstructuralremedy8wouldbeasefficaciousasthedivestitureoftheOperatingCompaniesin `  meetingthegoalsoftheremedy.UnitedStatesv.AT&T,552F.Supp.131,167(_D.D.C._Ԁ1982), P   _affd_Ԁ460U.S.1001(1983).̀ r rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .      IhB+  p x(0 " I XBӀ  8  .Dr      ݀AlistofMicrosoftinnovationsispresentedinRichardB.McKenziessympatheticdepiction,TrustonTrial, X _Persius_,Cambridge,Mass.,2000,137139andincludessuchitemsas firstpointingdevicetoaddawheeltoimprovenavigation. 6 rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .      I  B+  p x(0 " I XBӀ  9  .Dr      ݀Forthoroughdocumentationofthispoint,seeCliffordWinston, U.S.IndustryAdjustmenttoEconomicDeregulation, X JournalofEconomicPerspectives,Vol.12,No.2,Spring1998,pp.89. " Ѐ > rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .      I  B+  p x(0 " I XBӀ  10  .Dr      ݀Forexample,onesurveyreportedinlate1983indicatedthat,ofthosewhounderstoodthatAT&Twasgoingtobebroken X up,41percentthoughtthatthebreakupwouldmaketelephoneserviceworse,whileonly25percentthoughtitwouldgetbetter(16percentthoughtitwouldremainthesamewhile18percentdidnotexpressanopinion).AndrewPollack, PollIndicatesConfusiononBreakupof_A.T._&.T,TheNewYorkTimes,October4,1983,D1.  rm!XXXXXX  _I6" I :(0 "X61  aXXaa      .        H+ I p x(0 " I :XHӀ  11  .;r      ݀Givenitsmonopolyinoperatingsystems,Microsoftwouldhavenoincentivetooffsetanymandatedchargeforthebrowser X byloweringitspricesforWindowsbyanequivalentamount. c rm!XXXXXX  _IE1 I p x(0 "XE1  aXXaa      .      I  N+  p x(0 " I p XNӀ  12  .Jr      ݀Digitalcomputersworkonthebasisofwhatiscalledobjectcodecomplexarraysofzeroesandonesunintelligible X tomostifnotallpeople.Theobjectcodeiscreatedbyaprogramknownasacompilerfromsourcecode(usuallywritteninsomelanguagesuchasC++),whichcanbereadandunderstoodbyexperiencedprogrammers.Atpresent,theWindowssourcecode,unlikesuch opensourceprogramsas_Linux_,Java,and(recently)Navigator,iskeptconfidential.  rm!XXXXXX  _IE1 I p x(0 "XE1  aXXaa      .      I  N+  p x(0 " I p XNӀ  13  .Jr      ݀U.S.Senate,ReportoftheSubcommitteeonPatents,Trademarks,andCopyrights, Patents,Trademarks,andCopyrights, X 1957,p.14.̀  rm!XXXXXX  _IE1 I p x(0 "XE1  aXXaa      .      I  N+  p x(0 " I p XNӀ  14  .Jr      ݀U.S.v.GeneralElectricCo.etal.,115F.Supp.835,844(1953).SeealsoU.S.v.NationalLeadCo.etal.,322U.S.319, X 338(1947).̀  rm!XXXXXX  _IE1 I p x(0 "XE1  aXXaa      .      I  N+  p x(0 " I p XNӀ  15  .Jr      ݀InthematterofXeroxCorporation,86_F.T.C._Ԁ364(1975). X Ѐ i rm!XXXXXX  _IE1 I p x(0 "XE1  aXXaa      .      IN+  p x(0 " I p XNӀ  16  .Jr      ݀Thelegalityofreverseengineeringisdeterminedbytheintellectualpropertyregimeunderwhichthesourceor X engineeredproductoperates.Inthecaseofaproductprotectedbyapatent,theuseorsaleofthereverseengineeredproductwouldbeinfringement.Thelawoftradesecretsallowsreverseengineeringofapubliclysoldproductforanypurpose.Withrespecttocopyrights,thelawisevolvingandliesbetweenpatentandtradesecretlaw.Inthecaseofcopyrightedcomputerprograms,theCourtshaveheldthatthereisalimitedrighttoreverseengineeraworktoextract_uncopyrightable_Ԁinformationfromthework,butourunderstandingisthatthereisnotauniversalrighttoreverseengineercomputerprogramsforanypurpose.  rm!XXXXXX  _I?+ I p x(0 "X?.      B+ I p x(0 " I XBӀahX  17  .r      ݀Theterm functionalisusedtoratherthanthecommontermsofhorizontalorverticalbecausetheprincipleof X divisionisseparatingalongprogrammaticlines.XXa  rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .      IB+  p x(0 " I XBӀ  18  .Dr      ݀Theexperienceofhavingjusttwocompetitorsinamarket,suchasthe_duopoly_Ԁthatusedtoexistinthewireless X telecommunicationsbusinessbeforethenumbersoflicenseswereexpanded,suggeststhathavingtwocompetitorsinamarketisnotareliableprotectionagainstmonopoly.Itwouldrequireatleastthreecompetitorsbeforeanysignificantpriceand/orqualitycompetitioncanbeexpectedtotakehold.Moreover,particularlybecausesignificantbarrierstonewentrantsarelikelytoexistforsometime,havingthreecompetitorsprovidesamarginofsafety.Withbuttwocompetitors,ifonestumblesandfails,themarketwouldthenrevertbackintoafullblownmonopoly.̀$35;AGMSY_9a.a.a.a.a.a.a.a. x rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .        B+ I p x(0 " I XBӀ  19  .Dr      ݀OurdiscussionofthismodeldrawsheavilyontheproposaloutlinedinThomasM._Lenard_,CreatingCompetitioninthe X MarketforOperatingSystems:AStructuralRemedyforMicrosoft(Washington:TheProgress&FreedomFoundation, " January2000). _ rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .        B+ I p x(0 " I XBӀ  20  .Dr      ݀DivisionofMicrosoftsemployeeswouldposeconcernssimilartothosethatariseintryingtopromotecompetitionamong X majorleaguebaseballorfootballteams.OnedesideratumisthatthethreeWindowsteamsbeasnearlyequalaspossibleandthateachbeabletoruntheoperatingsystems.Thesecondissueisastrategicone:asymmetricinformationbetweenthecurrentmanagersandothersshouldnotallowcurrentmanagerstocherrypickthebestemployeesandsetthemupinonecompanywhichwillrapidlydominatethenewOSmarket.Withoutgoingintodetailintoproposals,webelievethattherearerelatively ( l straightforwardproceduresformeetingbothoftheseobjectivesbyusing cakecuttingalgorithmssuchas youdivide,Ichoose. o rm!XXXXXX  _I?+ I p x(0 "X?.      B+ I p x(0 " I XBӀahX  21  .r      ݀Thereisalegalquestionastowhethertheexistenceofan applicationsbarriertoentryisgroundsfortaking X affirmativestepstolowerthatbarrier.Wedonotrelyonsuchanargumenttomotivatethedivestitureproposal.However,ifsuchanargumentapplied,itwouldstronglyreinforcetheneedforlegalseparationbetweenoperatingsystemsandapplications.XXa  rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .      C b $$bC  B+ I p x(0 " I XBӀ  22  .Dr      ݀WeincludeinthislistStandardOil,AmericanTobacco,U.S.Steel,Alcoa,andAT&T.  rm!XXXXXX  _I?+ I p x(0 "X?.      C b $$bC' I !" I X'Ӏ  23  .r      ݀aXXStan_Liebowitz_,BreakingWindows:EstimatingtheCostsofBreakingupMicrosoftWindows,April30,1999 X estimatesthatapplicationsproducerswouldfaceanincreaseaveraging$4.8billionperyearinportingcostsoverthenextthreeyearsforeachnewoperatingsystem.Wehavenotexaminedthisnumberorestablisheditsreliability.Wenote,however,thatiftheseestimatesarecorrect,theywouldbelowrelativetofinalannualexpendituresoncomputersandsoftware,whichwere$241billionin1999(BureauofEconomicAnalysis).Anincreaseinthevaluetoconsumersandbusinessesofcomputersandsoftwareofonly4percentfromimprovedquality,higherinnovation,greaterchoice,andlowerpricewouldoffsettheestimatedhigherportingcostsfortwoadditionaloperatingsystems.Wenoteaswellthattherateoftechnologicalchangeandofpricedecreaseintheinformationsector(computerhardware,computersoftware,andtelecommunicationsequipment)hasbeenontheorderof10to20percentperyear,sotheimpactoninnovationislikely v todominatetheissueofportingcosts.XXa ? rm!XXXXXX  _I?+ I p x(0 "X?1  aXXaa      .      IB+  p x(0 " I XBӀ  24  .Dr      ݀Forreasonsthatescapethepresentamicicuriae,noevidenceontherateofprofitappearstohavebeenintroducedin X theliabilityphaseofthecase.Therewasevidenceonprofitmargins,butthesehavelittlebearingonthequestionofmonopolyprofits,whichreferstoasupernormalreturnoninvestmentabovetheopportunitycostoffunds.TheAppendixalsodiscusseswhytherateofprofitratherthantheprofitmarginistheappropriatemeasureofmonopolyprofits. (  Ѐ ; rm!XXXXXX  _I?+ I p x(0 "X?.      IB+  p x(0 " I XBӀahX  25  .r      ݀AlthoughinthisrespectinvestorshadlittleusefulguidancefromMicrosoft,whichstatedinitssecondquarterform X 10Qthat Managementcurrentlybelievesthatresolvingthese[legal]matterswillnothaveamaterialadverseimpactontheCompany'sfinancialpositionoritsresultsofoperations.XXaԁ Level 1 Level 2 Level 3 Level 4 Level 5($    j:k8A<< c DDDDUUDDU DZ<(h (21$ rm!XXXXXX  I  0  3|x \  `*Times New RomanTTC\  P6QP\  `*Times New RomanTTXXP\  P6QXP<6X9`("Courier NewTTTTd6X@DQ@<6X9`("Courier NewTTTTXXx6X@DQX@%2A`ArialTTomanTT;2PQP\  `*Times New RomanTT6\  P6QP\  `*Times New RomanTT^\  P6QP\  `*Times New RomanTTy\  P6QP\  `*Times New RomanTT\  P6QP%2A`ArialTTomanTTXXX2PQXP\  `*Times New RomanTTW\  P6QP *Times New RomanTTXX20XhX<6X9`("Courier NewTTTTP6X@DQ@(>m$XXXXXXHP LaserJet 4 Plus0##37=CIQYag1.a.i.(1)(a)(i)1)a) dWPC$^$^!$^Eƚ$^oi "&WordMicrosoft Word  @Times New Roman- &.  - "-  rm   rm'' '  yt'  yt Arial- 2 eTable 2. Calculation of Rate of Return on Invested Capital and Research and Development for Microsoft83833B3383888B338B38$888833338B383388B3333$38388B33388R388$M3$838 Arial-32 Fiscal Year Income Statements3...7.. 3.3J.7..J.3. Arial-O2 ~0in millions, except percent return and tax rates%8%%"%""%%%%"%%%%%%%%%"%%" Arial- 2 FY8537.. 2  FY8637.. 2 i FY8737.. 2  FY8837.. 2 ;FY8937.. 2 FY9037.. 2  FY9137.. 2 vFY9237.. 2 FY9337.. 2 HFY9437.. 2 FY9537.. 2 FY9637.. 2 FY9737.. 2 FY9837.. 2 UFY9937..Arial- 2 M1. Arial-2 MRevenue<.*.... 2 M$140.... 2 M0 $198....Q 2 M $346.... 2 M $591....# 2 Mk$805....2 M$1,186.....2 M$1,847.....^2 Ma$2,777.....2 M$3,786.....02 M3$4,714.....2 M$6,075.....2 M$9,050.....k2 M@$11,936......2 M$15,262......=2 M$19,747......- 2 2.-$2 Operating expenses:A......*...*.*- 2 '3.-2 'Cost of revenue<.*..*.... 2 '( 30 .. 2 ' 41 .. 2 ' 78 .. 2 '5 158 ... 2 '220 ... 2 '273 ... 2 'p410 ... 2 '581 ... 2 'B785 ...2 'f1,077 ....2 '1,346 ....2 '82,145 ....2 '2,170 ....2 ' 2,460 ....2 's2,814 ....- 2 4.-+2 Research and development<.*..*......*...E.. 2 ( 17 .. 2  21 .. 2  38 .. 2 c 70 .. 2 110 ... 2 181 ... 2 p235 ... 2 352 ... 2 B470 ... 2 610 ... 2 860 ...2 81,326 ....2 1,863 ....2  2,601 ....2 s2,970 ....- 2 5.-42 Acquired in-process technology7*.......*.**.*.....* 2 O296 ...Times New Roman- - 2 n6.-$2 nSales and marketing7..*...E.*... 2 n( 43 .. 2 n 57 .. 2 n 81 .. 2 n5 152 ... 2 n205 ... 2 n300 ... 2 np490 ... 2 n758 ...2 n1,086 ....2 nf1,135 ....2 n1,564 ....2 n82,185 ....2 n2,411 ....2 n 2,828 ....2 ns3,231 ....- 2 7.-.2 General and administrativeA.........E.*.*. 2 V 9 . 2  18 .. 2  22 .. 2 c 24 .. 2 28 .. 2 539 .. 2 62 .. 2 90 .. 2 B119 ... 2 166 ... 2 267 ... 2 }316 ... 2 362 ... 2 O433 ... 2 689 ...- 2 H8.-2 HOther expensesA...*...*.* 2 HV 0 . 2 H 0 . 2 H 14 .. 2 Hc 14 .. 2 H10 .. 2 H514 .. 2 H16 .. 2 H11 .. 2 H7 . 2 H16 .. 2 HB16 .. 2 H19 .. 2 H259 ... 2 HO230 ... 2 H115 ...- 2 9.-+2 DTotal operating expenses3.........*...*.* 2 ( 99 .. 2 c 137 ... 2  233 ... 2 5 418 ... 2 573 ... 2 807 ...2 +1,213 ....2 1,792 ....2 2,467 ....2 f3,004 ....2 4,053 ....2 85,991 ....2 7,065 ....2  8,848 ....2 s9,819 ....- 2 "10..-2 "Operating incomeA......*.E. 2 "( 41 .. 2 " 61 .. 2 " 113 ... 2 "5 173 ... 2 "232 ... 2 "379 ... 2 "p634 ... 2 "985 ...2 "1,319 ....2 "f1,710 ....2 "2,022 ....2 "83,059 ....2 "4,871 ....2 " 6,414 ....2 "s9,928 ....- 2 11..-!2 Investment Income.*.*E...*.E. 2 V 2 . 2  5 . 2 ( 8 . 2 c 11 .. 2 19 .. 2 531 .. 2 37 .. 2 56 .. 2 p82 .. 2 102 ... 2 191 ... 2 }320 ... 2 443 ... 2 O703 ...2 s1,803 ....- 2 12..-$2 Noncontinuing items<..*.......E*7 2 Q 0.7 2  0.7Q 2 # 0.7 2  0.7# 2 0.7 2 ^0.7 2 0.7^ 2 00.7 2 0. 2 (90).. 2 !(46)..7 2 0.7k 2 =0.7 2 0.7= 2 160...- 2 i13..-.2 iIncome before income taxes.*.E......*.E..*.* 2 i( 43 .. 2 i 66 .. 2 i 121 ... 2 i5 184 ... 2 i251 ... 2 i410 ... 2 ip671 ...2 i1,041 ....2 i1,401 ....2 if1,722 ....2 i2,167 ....2 i83,379 ....2 i5,314 ....2 i 7,117 ....2 iE11,891 .....- 2 14..-.2 Provision for income taxes7.**....*.E..*.* 2 ( 19 .. 2  27 .. 2  49 .. 2 c 60 .. 2 80 .. 2 131 ... 2 p208 ... 2 333 ... 2 B448 ... 2 576 ... 2 714 ...2 81,184 ....2 1,860 ....2  2,627 ....2 s4,106 ....- 2 C15..-2 C Net income<..*.E. 2 C( 24 .. 2 C 39 .. 2 C 72 .. 2 C5 124 ... 2 C171 ... 2 C279 ... 2 Cp463 ... 2 C708 ... 2 CB953 ...2 Cf1,146 ....2 C1,453 ....2 C82,195 ....2 C3,454 ....2 C 4,490 ....2 Cs7,785 ....- 2  16..-?2  %Fiscal Year business division revenue3...7.. 33.3...3..33 ...33.- 2 17..-!2 Windows PlatformsN...<*7..E* k2 n$4,917..... 2 $6,279..... =2 @$8,504.....- 2 18..-B2 'Productivity Applications and Developer7...***7..*...*...<.*....2 5,615 ....2 7,041 ....2 s8,816 ....- 2 ] 19..-"2 ] Consumer and Other<..*.E....A..2 ] 1,404 ....2 ] 1,942 ....2 ] s2,427 ....- 2 20..-"System- '-  $ 0  "2  Total revenue3...*....- '-  yt    2 $140.... 2 0 $198.... Q 2 $346.... 2  $591.... # 2 k$805.... 2 $1,186..... 2 $1,847..... ^2 a$2,777..... 2 $3,786..... 02 3$4,714..... 2 $6,075..... 2 $9,050..... k2 @$11,936...... 2 $15,262...... =2 $19,747......--2  Stocks of Capital and R&D73...3<.3..33<<< 2  4 85.. 2  89.. 2  109... 2  A 157... 2  236... 2  370... 2  |531... 2  777... 2  1091.... 2  1483.... 2  2046.... 2  [2963.... 2  4234.... 2  -5988.... 2  9371....- 2 21..(2 Property and equipment7...*.......E..- 2 1611....- 2 22..92 !Stock of Research and Development7.**.<.*..*....<.*...E.. 2 ? 85.. 2 89.. 2 109... 2 L 157... 2 236... 2 370... 2 531... 2 777... 2 +1091.... 2 1483.... 2 2046.... 2 f2963.... 2 4234.... 2 85988.... 2 7760.... 2 ^ 23..2 ^ R&D depreciation<7<....*... 2 ^ ? 17.. 2 ^ 17.. 2 ^  18.. 2 ^ z 22.. 2 ^ 31.. 2 ^ L47.. 2 ^ 74.. 2 ^ 106... 2 ^ Y155... 2 ^ 218... 2 ^ +297... 2 ^ 409... 2 ^ 593... 2 ^ f847... 2 ^ 1198....-12 8Net Income Corrected for R&D<.3.3J.<3 ...33 <<<- 2 24..2 Operating incomeA......*.E. 2 ? 41.. 2  61.. 2  113... 2 L 173... 2 232... 2 379... 2 634... 2 985... 2 +1319.... 2 1710.... 2 2022.... 2 f3059.... 2 4871.... 2 86414.... 2 9928.... 2 25..B2 'Effective tax rate (fraction of income)7.**..*...*....*.E.2 0.442....2 5 0.409....2  0.405....2  0.326....2 p0.319....2 0.319....2 B0.310....2 0.320....2 0.320....2 }0.334....2 0.329....2 O0.350....2 0.350....2 !0.369....2 0.345.... 2 26...2 Operating income after taxA......*.E....* 2 ? 23.. 2  36.. 2  67.. 2 L 117... 2 158... 2 258... 2 437... 2 670... 2 Y897... 2 1138.... 2 1356.... 2 f1987.... 2 3166.... 2 84046.... 2 6500.... 2 27..'2 Net investment in R&D<..*.*E...<7< 2  4. 2  20.. 2 z 48.. 2 79.. 2 134... 2 161... 2 246... 2 Y315... 2 392... 2 +563... 2 917... 2 1270.... 2 81754.... 2 1772.... 2 Y28..:2 Y"Corrected net income including R&D<..*.....*.E..*....<7< 2 Y 40.. 2 Y 87.. 2 YL 165... 2 Y237... 2 Y392... 2 Y599... 2 Y916... 2 Y+1212.... 2 Y1530.... 2 Y1919.... 2 Yf2904.... 2 Y4436.... 2 Y85801.... 2 Y8272.... Arial- 2 2988[2 8Rate of return (as percent of stocks of capital and R&D)H8!8=!'8!='=!88=8'88=!=!8!=888=!88=!88==HHH! 2 88%88Y-2 g Assumptions:7**.E...*(2 ANotes to calculations:<..*.*.*....*{2 MLines 1 through 20 from Microsoft's financial statements at www.microsoft.com...*.........EE*.*.*...*.*..E..*.<<<E*.*.*.Ea2 <Line 21 from Microsoft's balance sheet at www.microsoft.com.......EE*.*.*....*.*....<<<E*.*.*.E2 }Line 22 uses declining balance method with a depreciation rate of 20 percent per year. First year set at 5 times initial R&D.......*.*..*.......*.E....<......*..........*....*..3**..*...E.*..<7<2 nLine 23 calculates depreciation as the declining balance depreciation rate times previous year's stock of R&D......*.*...*....*....*....*.......*.....*.....E.*..*..**..**.**.<7<02 bLine 24 from line 10 above.......E.......*.F2 *Line 25 equals line 14 divided by line 13..........*.....*....*....d2 <>Line 26 equals line 24 times one minus the effective tax rate..........*....E.*...E..*....**..*..?2 %Line 27 is the net investment in R&D......*.....*.*E...<7<[2 8Line 28 adds back net investment in R&D into net income.........*..**...*.*E...<7<.....*.E.- '-  rm-   "- 4B4j "- !(4B- Bj- !(B-  B j- !( B- PBPj- !(PB- *B*j- !(*B-  B j- !( B !( B- - '-  yt  '  - "-'&Courier New-      = 7'{XX{XXXX  _=|J:6zHk p @ H@Ekkk (#(# (#(#! "X!37    K4X` hp x (#"K    ?+  m u%}- "X?\  `*Times New RomanTT 4 <"{XX{XXXX  _3   "X              <      Jj:k8 I&mage <=8C HKKKKU rm!XXXXXX  _$6z?B      INTHEUNITEDSTATESDISTRICTCOURT  EFFORTHEDISTRICTOFCOLUMBIA     *GH cddd Xdd Xdd X(#(#,jZZ@,ZZ@+  ," p lC,UNITEDSTATESOFAMERICA, 'pC C' ?5pC l  C?Plaintiff, ' ,C3 C' ?5 ,C   wC?v. ' 9 C" C'CivilActionNo.981232(_TPJ_) ?5 9 C" w C?MICROSOFTCORPORATION, '` C C' ?5` C  3C?Defendant. 'S C3 C' ?5S C 3 C?STATEOFNEWYORKexrel. '6C C' ?56C  C?AttorneyGeneralEliot_Spitzer_,etal., ' ]C C' ?5 ]C  C?Plaintiffs, 'C3 C' ?5C  C?v. 'C" C'CivilActionNo.981233(_TPJ_) ?5C"  C?MICROSOFTCORPORATION 'xC C' ?5xC  C?Defendant. 'kC3 C'(kC (  REMEDIESBRIEFOFAMICICURIAE ;    0  0m  (# (#0 m (#m (#0 (# (#0u(#(#  RobertE.Litan u(#u(# 0  0m  (# (#0 m (#m (#0 (# (#0u(#(#  1775MassachusettsAvenue,NW u(#u(# 0  0m  (# (#0 m (#m (#0 (# (#0u(#(#  Washington,DC20036 u(#u(# 0  0m  (# (#0 m (#m (#0 (# (#0u(#(#  (202)7976120 u(#u(# 0  0m  (# (#0 m (#m (#0 (# (#0u(#(#   u(#u(# 0  0m  (# (#0 m (#m (#0 (# (#0u(#(#  RogerG._Noll_ u(#u(# 0  0m  (# (#0 m (#m (#0 (# (#0u(#(#  WilliamD.Nordhaus u(#u(# 0  0m  (# (#0 m (#m (#0 (# (#0u(#(#  FredericScherer u(#u(#    K)$&   EF EX$$ FEB F  TABLEOFCONTENTS     !  "X! Page  B+  m u%}- " B  ! !"X!TABLEOFAUTHORITIES!r."iii  B+  m u%}- "!"B! !"X!INTERESTSOFAMICUSCURIAE!r.ee(1   B+  m u%}- "!"B! !"X!INTRODUCTION!r. 3   ' "!"'' !" X'SUMMARYOFARGUMENT!r.!6 ``  B+  m u%}- "!"B! !"X!GUIDINGREMEDYPRINCIPLES!r.%%'8 @@  C I $#uC* A !"!"*0  0A  (# (#  THREEANALYTICALPRINCIPLESFORESTABLISHINGAREMEDYINTHISCASE!r.//10A (#A (# 0  0A  (# (#  THECOURTHASBROAD_DECRETION_ԀINFASHIONING A (#A (# - !" A !"-0  ANTITRUSTRELIEF!r.&12 (# (# - A !" !"-0  0A  (# (#  THEGRAVITYOFMICROSOFT'SOFFENSES,VIEWEDIN A (#A (# -A !" A !"-0 A CONTEXT,CREATEAPRESUMPTIONFORA A (#A (# 0 A STRUCTURALREMEDY!r.&13A (#A (# - A !"A !"-0  0A  (# (#  APRINCIPLEOBJECTIVEOFTHEREMEDYSHOULDBETO A (#A (# - !" A !"-0  PROMOTEINNOVATION!r.(15 (# (# - A !" !"-0  0A  (# (#  THEINNOVATIONDEFENSE!r.YY)18A (#A (# 0  0A  (# (#  THECOURTMUSTTAKEACCOUNTOFMICROSOFT'SNEWCAMPAIGNTOEXTENDTHEDOMINANCEOFWINDOWS!r.719ppA (#A (# 0  0A  (# (#  THEBALANCEOFRISKSDOESNOTNECESSARILYTILT A (#A (# - !" A !"-0  TOWARDACONDUCTREMEDY!r.OO-21PP (# (# - A !" !"-0  0A  (# (#  THECOURTCANLEARNFROMRECENTEXPERIENCEIN A (#A (# C I $$IC- !" A !"-0  OTHERINDUSTRIESANDRELATEDSITUATIONS!r.qq=240 0 (# (#   J.RELIANCEONPRIVATEDAMAGESASAREMEDY!r.%%>26  !  ' !" !"'MERITSANDDRAWBACKSOFALTERNATIVEREMEDIES!r.:26 #  C I $$IC* A !"!"*0  0A  (# (#  ACONDUCTREMEDY!r.#29$"A (#A (# C J $$IC0A m !" A !"00 A 0m A (#A (# A ElementsofaConductRemedy!r.//129% #m (#m (# 0 A 0m A (#A (# A AppraisalofaConductDecree!r.231&!$m (#m (# 0 A 0m A (#A (# A Summary!r.K K 36'"%m (#m (# C I $$JC0 A !"A m !"00  0A  (# (#  SOURCECODEANDLICENSINGREMEDIES!r.536(#&A (#A (# C J $$IC0A m !" A !"00 A 0m A (#A (# A ThreeLicensingOptions!r.,37)$'m (#m (# 0 A 0m A (#A (# A LicensingFees!r.#39*%(m (#m (# 0 A 0m A (#A (# A AppraisalofLicensingOptions!r.339p+p&)m (#m (# C I $$JC0 A !"A m !"00  0A  (# (#  STRUCTURALREMEDIES!r.OO&44A (#A (# C J $$IC0A m !" A !"00 A 0m A (#A (# A WhySubstantialandFarreachingStructural m (#m (# -A !"A m !"-0 A ChangesareNecessary!r.-46A (#A (# -A m !"A !"-0 A 0m A (#A (# A Minimum,StructuralReliefShouldRequireSeparationofApplicationsfromOperatingSystems!r.YY)46m (#m (# 0 A 0m A (#A (# A FullDivestitureoftheMicrosoftMonopoly!r.?49 m (#m (# C K $$JC3A m !"A m !"30 A 0m A (#A (#0 m (#m (# m FullDivestiture:OperationalDetails!r.=52  (# (# 0 A 0m A (#A (#0 m (#m (# m OverviewofDiscussionoftheFullDivestiturePlan!r.K56  (# (# 0 A 0m A (#A (#0 m (#m (# m AntitrustRemediesinthe"NewEconomy"!r.?57  (# (# 0 A 0m A (#A (#0 m (#m (# m TheIssueof"Fragmentation"!r.460p p  (# (# 0 A 0m A (#A (#0 m (#m (# m HigherPortingCosts!r.,62``  (# (# 0 A 0m A (#A (#0 m (#m (# m LossofValuetoShareholders!r.564PP  (# (# C K $$KC3A m !"A m !"30 A 0m A (#A (# m (#m (# -A !"A m !"-CONCLUSIONS!r.5 5 67 00  APPENDIXONRATEOFRETURNONINVESTMENTSOFMICROSOFTANDDOMESTICNONFINANCIALCORPORATIONS!r.A70       ' !"A !"' TABLEOFAUTHORITIES      Cases     FederalTradeCommissionv.XeroxCorporation,86_F.T.C._Ԁ364(1975)!r.CCQ38   UnitedStatesv._A.T._&T,552FSupp131,167(1982)!r.iiA19 ``  UnitedStatesv.CrescentAmusementCo.,323U.S.173,189(1944)!r.O27 @@  UnitedStatesv.E.I.duPont_Nemours_Ԁ&Co.,366U.S.316,326(1961)!r.S9    UnitedStatesv.GeneralElectricCo.etal.,115Supp.835,844(1953)!r.U38  UnitedStatesv.GlaxoGroupLtd.,410U.S.52,64(1973)!r.F9  UnitedStatesv._Grinnell_ԀCorp.,384U.S.563,577(1966)!r.G9  UnitedStatesv.NationalLeadCo.,322U.S.319,338(1947)!r.J38  InternationalSaltCo.v.U.S.AmusementCo.,332U.S.392,40001(1947)!r.WWW27  UnitedStatesv.United_Gypsom_ԀCo.,340U.S.76,88(1950)!r.H9 `` ' "!"'UnitedStatesv.UnitedShoeMachineryCorp.,391U.S.244,255(1968)r.T9,11,44  @@   ' !" X' OTHERCITATIONS     !  !"!PhilipE._Areeda_Ԁ&Herbert_Hovenkamp_,AntitrustLaw(rev.ed.1996) r.Q  15,24$!" $Rebecca_Buckman_,"MicrosoftRevenueFallsShortofForecast,"TheWallStreet   0  Journal,April21,2000!r.'18 (#(# Lucille_Shappard_ԀKeys,"TheShoeMachineryCaseandtheProblemoftheGoodTrust,"  QuarterlyJournalofEconomics,(May1954)!r.:19 ``  Stan_Liebowitz_,BreakingWindows:EstimatingtheCostsofBreakingupMicrosoft @@    Windows,(1999)!r. 62 00  ThomasM._Lenard_,CreatingCompetitionintheMarketforOperatingSystems:A    StructuralRemedyforMicrosoft(2000)!r.652  ' !"!"'JohnMadden,"PCShipmentsDidn'tTakeY2KHitinQ4,"PCWeek,  '!"!"'  January24,2000!r. 18  ' !"!"'RichardB._Mckenzie_,TrustonTrial,(2000)!r.919  '!"!"'AndrewPollack,"PollIndicatesConfusiononBreakupof_A.T._&T,"NewYork    Times,October4,1983!r.&25  ' !"!"'Richard_Posner_,Antitrust:AnEconomicPerspective(1978)!r.eeG11 `` LawrenceAnthonySullivan,HandbookoftheLawofAntitrust(1977)!r.P11 @@ U.S.Senate,ReportoftheSubcommitteeonPatents,Trademarks,andCopyrights,'!"!"'  "Patents,Trademarks,andCopyrights,"(1957)!r.HH=38 " CliffordWinston,"U.S.IndustryAdjustmenttoEconomicDeregulation,"Journalof #!   EconomicPerspectives(Spring1998)!r.ll324 $"   (#& y F        I*IIi!!"* InterestsoftheAmiciCuriae   j=Lice        L/        E+ I x(0 "IIXEӀEachofthesignatoriesofthisbriefisaprofessionaleconomistwithspecialinterestandexpertiseinthematternowbeforetheCourt,namelythedesignofanappropriateremedytoaddressMicrosoftsantitrustviolations.Thesignatoriesarefilingthissubmissionintheirownpersonalcapacitiesandnotonbehalfoftheinstitutionswithwhichtheyarecurrentlyaffiliatedoremployed.TheyaresubmittingtheirviewsbecausetheybelievetheycanassisttheCourtinfashioningthisremedy.NoneofthesignatorieshasbeenemployedbyorretainedasconsultantforMicrosoft,thefederalorstategovernmentsoranyotherinterestedpartyinthislitigation.̀Collectively,thesignatoriestothisbriefhavehadextensiveexperiencewithvariousfacetsofindustrialreorganizationthatwebelievearerelevanttotheCourtsremedydeterminationinthiscase.Wehaveworkedonandstudiedextensivelyawiderangeofgovernmentinterventions,includingderegulation(inairlines,thefinancialsector,electricityandtelecommunications);structuralreliefinantitrustcases;privatization(theelectricpowerindustry);_demonopolization_Ԁand_marketization_Ԁinformerlystateruneconomies(includingtheformerSovietUnionandEastGermany),andforeigntradecases(includingtariffandquotareliefandstructuraladjustment).̀RobertE.Litan,currentlytheVicePresidentandDirectoroftheEconomicStudiesProgramattheBrookingsInstitution,wasformerlyDeputyAssistantAttorneyGeneraloftheJusticeDepartmentsAntitrustDivisionfromSeptember1993untilMarch1995.Duringhistenure,hehelpedsupervisethefirstcivilantitrustinvestigationagainstMicrosoftandparticipatedactivelyinnegotiatingtheconsentdecreelimitingthecompanyslicensingpractices,whichthisCourtapproved(afterremandfromtheCourtofAppeals)in1995.Hehascloselyfollowedthetrialand *%( L L L  subsequentjudicialdecisionsinthismatterand,inhisrecentresearch,hasconcentratedon,amongotherthings,economicandpolicyissuesrelatingtotherapiddevelopmentanduseoftheInternet.Dr.Litanisbothaneconomistandanattorney.Duringthecourseofhiscareerasaneconomist,hehaswrittenoredited20booksandover100articlesinjournalsrelatingtoabroadrangeofeconomic,regulatoryandlegalissues.̀RogerG._Noll_ԀistheMorrisM.DoyleCentennialProfessorofPublicPolicyintheDepartmentofEconomicsatStanfordUniversity.Professor_Noll_Ԁistheauthororeditorofthirteenbooksandover300articles,focusingonpublicpoliciestowardbusiness.AmonghisspecialareasofexpertisearetheeconomicsoftelecommunicationsindustryandtheInternet.Hehasexaminedprivatizationandregulationoftelecommunicationsandelectricpowerfirmsinmanycountriesaroundworld.HealsohasservedonseveralboardsandcommitteesoftheU.S.government,andhasbeenaconsultanttotheAntitrustDivisionoftheJusticeDepartment,theFederalTradeCommission,andtheFederalCommunicationsCommission.̀WilliamD.NordhausistheA.WhitneyGriswoldProfessorofEconomicsatYaleUniversity,wherehehasservedonthefacultysince1967.From1977to1979,hewasaMemberoftheU.S.President'sCouncilofEconomicAdvisers.WhileattheCouncilofEconomicAdvisers,heestablishedandchairedtheRegulatoryAnalysisReviewGroup,whichwaschargedwithanalyzingtheimpactsofmajorregulations.From1986to1988heservedastheProvostofYaleUniversity.Heistheauthorofmanybooks,amongthem/>    Թ          Invention,GrowthandWelfareQNthei      ;/     (#&           ReformingFederalRegulation@Othei      ݀(jointlywithRobertLitan);andtheclassictextbook,/     *%(           EconomicsdPthei      ,nowinitssixteenthedition(jointlywithPaulSamuelson).Hisresearchhasdealtwith  issuesofinnovation,technologicalchange,deregulation,and_demonopolization_ԀforRussiaandothereconomiesintransition.Dr.NordhauswasanexpertwitnessforAT&Tduringthegovernmentsantitrustinvestigationofthatcompanyinthelate1970sandearly1980s,specificallyonissuesrelatingtotheimpactofbreakupofthecompanyontechnologicalchangeandinnovation.Heservesonanumberofgovernmentpanels,includingmembershipontheCongressionalBudgetOfficePanelofEconomicExperts,andheischairmanoftheAdvisoryCommitteeoftheBureauofEconomicAnalysis.InApril2000headdressedtheFirstPlenarysessionoftheWhiteHouseConferenceontheNewEconomy.̀  FredericM.SchereristheAetnaProfessorofPublicPolicyandCorporate  ManagementattheJohnF.KennedySchoolofGovernmentatHarvardUniversity.Heisanexpertontheeconomicsofindustrialorganizationandantitrustandtheauthorofaleadingtextinthefield,IndustrialMarketStructureandEconomicPerformance.Duringhiscareer,hehasauthored  19otherbooksandover100articlesinprofessionaljournals,mainlyonsubjectsrelatedtoindustrialorganizationandtechnologicalchange.HehasservedasDirectoroftheFederalTradeCommissionsBureauofEconomicsandeconomicadvisortotheCommitteeonGovernmentPatentPolicy.Dr.SchererhastestifiedonmonopolizationandmergerissuesinseveralantitrustcasesbeforeorinvolvingtheFederalTradeCommissionandtheDepartmentofJustice.  H+I I Q Y ai! I XH Introduction  &!$   E+ I x(0 "II XEӀNowthatithasfoundMicrosoftinviolationoftheShermanAct,theCourtfacesitsmostimportantchallenge.Itmustfashionadecreethatpromisestointroduceeffectivecompetitionin *%( _themarketthatMicrosofthasmonopolized!Intelcompatibleoperatingsystems!andtorestrain  Microsoftfromprojectingitscurrentmonopolyintoadjacentmarkets.ThatmonopolyhasprovedofenormousvaluetoMicrosoft:asshownbelow,in1999Microsoftsrateofreturnwas88percentonitsinvestmentsincapitalandresearchanddevelopment!arecordofprofitabilityexceedingthe   averagereturnofothermajorcorporationsbyafactorofmorethanthirteen.   ЀAchievingtherequiredremedyobjectivesisaheavyresponsibility.Tooofteninthepast,thegovernmentplaintiffsandthecourtshavedevotedmostoftheirattentiontotheliabilityphaseofantitrustcasesandhavetendedtobreezethroughtheremedyphase.Thiscaseistooimportantandthestakesforthenationaretoohightoallowsuchacourseofactiontobefollowedhere.TheCourthasauniqueopportunitynotonlytoestablishaclearrecordforappellatereviewoftheremedy,butalsotosetanimportantprecedentforthewayinwhichremedydeterminationsaremadeinfutureantitrustactions.̀Inparticular,thisCourtwillestablishintheprocessofsettingaremedyinthismatterthecontoursofreliefinmonopolizationcaseswherethedefendantsvaluearisesprimarilyfromintangibleassetsintheformofintellectualpropertyratherthanthetangiblecapitalassetscharacteristicofsuchpriormajormonopolizationcasesasStandardOil,Alcoa,andAT&T.Inessence,thiscaseprovidesanimportanttestofhowantitrustlawandremediesshouldbeappliedinthe NewEconomy,whereinformationalcapitalisthescarceandpreciousassetandphysicalassetsarerelativelyminorandhardlyunique.Wearguethatwhilethevaluableassetsunderlyingoureconomymaybenew,therulesofantitrustremainjustasvalidaswhentheShermanActwasfirstenacted:monopolypowerisjustasdangeroustodaywhenfirmsholdingithaverepeatedly *%( demonstratedawillingnessandabilitytoabusethatpower.DissolutionofthekindproposedforMicrosoft'soperatingsystemmonopolywasbothimpossibleandirrelevantinmanyearliermajorstructuralcases;dissolutionhereisthelogicalextensionofphysicalorregionaldivestitureforcompaniesbasedlargelyontangibleassetstoacompanywhosevalueisbasedlargelyonintellectualandinformationalassets.̀Wesubmitthisbriefwithoutthebenefitofknowingwhatreliefthegovernmentplaintiffswillseek.However,ourunderstandingoftherelevantlegalstandardisthatthisCourthasbroaddiscretioninfashioninganappropriateremedy.Itneednotbelimitedtotheremediesthegovernmentplaintiffsmaypropose.NowthattheCourthasissuedabroadlegalConclusionsofLaw,ithastheauthority!indeedtheresponsibilitywithinthecontoursofexistinglaw!toimpose  whateverremedyitfindsmostappropriatetoaddresstheviolationsithasfound,regardlessofwhatthegovernmentplaintiffsmaypropose.Forthisreason,weurgetheCourt,followingitsscheduled  May24hearing,toestablishprocedures(includingevidentiaryhearingsontherisksandbenefitsofalternativecoursesofaction)fordevelopingarecordthatwillenabletheCourttodeveloparemedythatwillprovideareasonablechanceforcompetitiontoworkwithoutthemonopolisticdistortionsoutlinedintheCourtsFindingsofFactandConclusionsofLaw.  !  ЀTheCourthasrecognizedthetimeurgencyofdecidingthismatterbysuggestingthatitmayaskforimmediatereviewofitsConclusionsofLawandremedyorderbytheSupremeCourt.Thereiscertainlymerittothisconcept,especiallyinlightofMicrosoftsannouncedplanstoextendWindowstotheserverandInternetaccessprovidermarkets.Nonetheless,webelievethat, (#& becausetheunderlyingremedyissuesaresocomplex,thekeyconcernisthequalityofthe *%( assessmentratherthanthespeedoftheresolution.Hence,acarefulstudyandassessmentof  alternativesshouldnotbesacrificedintherushtoresolveuncertaintiessurroundingtheoutcomeofthiscase.̀TheneedforacarefulandthoroughstudyofremediesisunderlinediftheCourtcontemplatesastructuralremedywithrespecttothemonopolizedmarkets.WewillarguethatconductandlicensingremediesareunlikelytointroduceworkablycompetitiveconditionsintothemarketmonopolizedbyWindowsandthatitwillbenecessarytoimposeastructuralremedyif_demonopolization_Ԁisthegoal.Atthesametime,however,thecomplexityandpotentialrisksofastructuralremedyalongwiththehistoryofpaststructuralcasesunderlinetheneedtoensureacarefulandthoroughstudyandassessmentofalternativeapproachesbeforeafinalremedyisordered.  H+I I Q Y ai! I XH SummaryofArgument     E+ I x(0 "II XEӀThreebroadcategoriesofremediesareavailabletoCourtinthiscase:(1)adecreeconstrainingMicrosoftsfutureconduct;(2)rulesinvolvinglicensingorprovidingaccesstotheWindowssourcecodes;and(3)variousformsofstructuralrelief.Inaddition,theCourtmightfindattractivearemedythatcombinesoneormoreofthesebasicapproaches.̀First,whileaconductorientedremedywouldbetheleastdisruptiveofalloftheoptionsintheshortrun,itisalsotheleastlikelytoremedythecoreproblemidentifiedintheCourtsConclusionsofLaw:thepatternofcontinuingabusesthathaveunlawfullymaintainedMicrosoftsmonopolypower.Aconductdecreewouldbedifficulttoenforce,andMicrosoftcanbeexpectedtotakeadvantageofthe enforcementlagbuiltintothepostdecreeprocesstotiltthemarketinits *%( favor.Moreover,aconductorderthatrequirescontinuedjudicialsupervisionofthecontentofMicrosoftsfutureoperatingsystemswouldrunariskofchillinginnovationbyinvolvingtheCourtsonanongoingbasisinthedesignofcomputersoftware,againstwhichtheD.C.Circuithasalready,andinourviewcorrectly,warned.̀Second,alicensingremedyforWindows,whichmightinvolvepublishingthesourcecode,mandatorylicensing,orprovidingopensourceversions,wouldalsoberelativelyeasytoaccomplish.Inprinciple,theseoptionswouldallowothercompaniestocompetedirectlywithMicrosoftinthevariousplatformmarkets.Inpractice,however,becausethesourcecodeislong,complex,anddifficulttoadapt,rivalsarenotlikelytobeabletocompeteeffectively,evenwitha  licensetothesourcecode.Ataminimum,outsiderswillneedtohaveextensiveaccesstoMicrosoft'sprogrammersandmiddlemanagers.MandatingthatMicrosoftsemployeescooperateinhelpingitscompetitorsproduceacompetitiveproductseemsatallorderforanyCourttowriteandenforce.̀Third,therelativemeritsanddrawbackofstructuralreliefvarysubstantiallydependingonitsdesign.Onecomponentofanyeffectivestructuralremedyentailssplittingthecompanyintoitstwomainconstituentparts:onecompanyholdingrightstoalloftheWindowsoperatingsystemsorplatformproducts(the _WinCo_)andasecondcompanyengagedinapplicationsandotherenterprises(the applicationscompanyor _AppCo_).Suchadivestiturewouldbeorganizationallystraightforward,andifitwereaccompaniedbyarequirementthattheapplicationscompanydealwithallplatformcompanies(includingthenewMicrosoftOScompany)inanondiscriminatoryfashion,itwouldreducetheapplicationsbarriertoentry. *%( ЀThemajordrawbackofafunctionalbreakupisthatitleavestheplatformmonopolyintact.IftheCourtdoesnotlimitthelinesofbusinessofthismonopoly,itthenrunstheriskofhavingtheWindowscompanyleverageitsdesktopmonopolyintoadjacentmarkets.Ontheotherhand,ifthecourtdoesimposelineofbusinessrestrictionsontheOScompany,limitingiteithertospecificoperatingsystemsmarketsinwhichitmaycurrentlybeengaged,orevenmorerestrictively,tojusttheWindows98andWindows2000versions,itrunstheriskofchillinginnovation.TheexperienceofthisdistrictcourtinadministeringsimilarrestrictionsimposedonAT&T,turningthecourtintoajudicialregulatoryagency,shouldgivethisCourtpauseaboutthewisdomofsuchanapproach.̀Thepresentamicicuriaebelievethatthemostsatisfactoryapproachisthe fulldivestiture  option.Thiswouldcombinethefunctionaldivestiture!which,inourview,isaminimumremedy  requirement!witha monopolydissolution.AfulldivestiturewouldrequireMicrosoftinitially  todivestitsoperatingcompanyfromtherestoftheenterprise.TheOScompanywouldthenbesplitintothreeidenticalcompanies,eachofwhichwouldownandsellWindowsproducts(thesebeingthree_WinCos_).Thefulldivestiturewouldbethemosteffectiveway,inourview,ofintroducingrealcompetitionintotheplatformmarket,ofreducingtheapplicationsbarriertoentry,andofreducingorremovingMicrosoftsabilitytoprojectitsoperatingsystemsmonopolyintoothermarkets.WeemphasizethatthemanycomplexconsiderationsinafulldivestituredemonstratetheneedfortheCourttoconductathoroughinquiryintoallofthealternativeremedyproposals.  H+I I Q Y ai! I XH GuidingRemedyPrinciples  *%(   E+ I x(0 "II XEӀThesignatoriessubmitthisbriefintheirrolesasprofessionaleconomistswithspecialexpertiseinindustrialreorganizationandinnovation./dbe    Թ    .      N M  1     Indoingso,weconcentrateontheeconomicimplicationsofvariouspossibleremediesthathave  beenwidelydiscussedbothduringandaftertheCourtsFindingsofFactandConclusionsofLaw.Whereappropriate,however,weprovidecitationstolegalprecedents .   Ѐ  Webeginbyunderscoring theneedforacarefulandindependentjudicialinquiryinto ``  thenatureoftheappropriateremedy.Indeed,astheSupremeCourthashighlighted,thedevelopmentofanappropriateremedyis themostsignificantphaseofthe[antitrust]case.    UnitedStatesv.GlaxoGroupLtd.,410U.S.52,64(1973)(emphasisadded) . Fortunately,the  SupremeCourtalsohasprovidedguidanceonseveraloccasionsforevaluatingreliefinmonopolizationcases,announcingthattheremedyshouldterminatetheillegalmonopoly;preventpracticeslikelytoresultinmonopolizationinthefuture;anddenytothedefendantthefruitsofitsstatutoryviolation.See,e.g.,UnitedStatesv.UnitedShoeMachineryCorporation,391U.S.244,  255(1968).Or,astheCourtspokeinUnitedStatesv./dbe     ``           _Grinnell_ԀCorpJsets      / @@         .,384U.S.563,577(1966),reliefinaShermanActcase shouldputanendtothecombination  !  anddeprivethedefendantsofanyofthebenefitsoftheillegalconduct,andbreakuporrender #  impotentthemonopolypowerfoundtobeinviolationoftheAct.(Emphasisadded)./dbe     $"     .      O M  2      &!$ 񀀀񀀀_񀀀̀___Ԁ A.ThreeAnalyticalPrinciplesForEstablishingARemedyInThisCase   Ѐ  Appliedtothiscase,andinlightoftheFindingsofFactandConclusionsofLaw,these  principlessuggestthattheCourtshouldseektoaccomplishthreeobjectivesinfashioningaremedy:̀First,theremedyshouldwithinashortperiodintroduceworkablecompetitionintothemarketforIntelcompatibleplatformsforapplicationssoftware.̀Second,theremedyshouldreducetheapplicationsbarriertoentryasameansofestablishingeconomicconditionsmostconducivetoworkablecompetitionforoperatingsystems.̀Third,theremedyshouldreducetheabilityofMicrosofttoprojectitscurrentmonopolypowerintoothermarkets,asawayofpreventingnewmonopoliesinthoseothermarketsandtoinhibitMicrosoftfromreinforcingitsmonopolyinoperatingsystems.H+ I p x(0 " I XHӀAccomplishingthesegoalsisacomplextask,notjustbecauseofthesizeofthedefendant,butbecauseanyremedytheCourtdecidestoadoptislikelytohaveprofoundeconomicimplications `` notonlyinthemarketsinwhichMicrosoftcompetes!platformsforpersonalcomputers,servers, @@ andtheInternet!butforusersofthesetechnologiesthroughouttheglobaleconomy.  !  ЀToreorganizeafirmofsubstantialsize,whetherthroughconductorstructuralmeans,isacomplexundertaking.Itrequiresunderstandingindepthnotonlythemonopolizingfirmbutalsootherfirmsintheindustry,thetechnology,theevolvinglegalandcontractualstructures,thevariousbarrierstoentry,andtherelationofthevariousfirmstocapitalandlabormarkets.Whilesomeoftheseissueshavebeendealtwithintheliabilityphaseofthecase,mosthavenotbeen *%( analyzedextensively,andtheanalysisinanyeventhasbeenconductedinthecontextofliabilityratherthanrelief.̀  Ourreviewoftherelevantliteratureindicatesthatthereliefphaseofantitrustcasesisoften  treatedasanafterthought,evenincasesasimportantasmonopolizationfindingsunderSection2oftheShermanAct.Forexample,ProfessorLawrenceSullivanhasobserved: Perhapsthebesthopeisthat,hereafter,CourtsfacingstructuralremedyissueswillgetmorehelpthantheyhavecustomarilyreceivedfromtheDepartmentofJustice.AsJudge_Wyzanski_ԀimpliedinUnitedShoe @@  Machinery,thegovernmentissometimesextremelycasualaboutremedy./dbe            .      P M  2     AsimilarpointofviewhasbeenvoicedbyChiefJudgeRichard_Posner_Ԁ(whoattemptedto  mediateasettlementinthiscase): Anotherreasonforthepoorrecordofdivestitureasanantitrustremedyisthatthegovernmentslawyerstendtoloseinterestinacaseatthereliefstage.Theyderivebothpersonalsatisfactionandcareeradvancementfromthetrialofanantitrustcase,butgainneitherfromtheposttrialreliefnegotiationsandproceedings,whichtheyfrequentlytendtopayscantattention./dbe    Թ    .      _QZ M  3     _ @@ ЀInourexperience,whensimilarissuesariseoutsideantitrust,eveninsituationswithfarlesssignificantpotentialeconomicconsequences,agencieschargedwithmakingthesedeterminationsgenerallydosoonlyafterextensivefactfindingandhearings.Twoexamples!withwhichthe  $ " amicicuriaehavehadextensiveexperience!arethe injuryphaseofunfairinternationaltrade &!$ casesand_rulemaking_Ԁproceedingssuchasthoseinvolvingenvironmentalregulationsaffecting '"& privatefirms.Itisonlyappropriate,therefore,thattheCourtadoptasimilarprocedureinthisproceeding,althoughtheapproachherecouldbeexpeditedinlightoftheurgencyandrapidpaceofchangeintheindustry.Accordingly,weurgetheCourtatitsMay24hearingtoestablishafactfindingprocessaimedatresolvingthemanycomplexissueswediscussinthisbrief.Weanticipatethatsuchprocesswouldrequirefurtherevidentiaryhearingsandbriefsfromthepartiesandpossibly,attheCourtsdiscretion,fromknowledgeableoutsideexperts.̀  WhetherornottheCourtdecidestoestablishsuchaprocess,webelievethattheCourt @@  shouldbeguidedbyseveralkeyprinciplesindecidinguponaremedy.̀ B.TheCourtHasBroadDiscretionInFashioningAntitrustRelief   Ѐ  TheCourtshouldrecognizethatithasbroaddiscretiontofashionrelief.ItistheCourts  jobtoaccomplishtheobjectivessetoutbytheSupremeCourtforaddressingtheilleffectsofmonopolization.Thissimplestatementleadstoacriticalconclusion,however:theremedyshould  notbelimitedtothereliefthatthegovernmentplaintiffsmaypropose.TheCourtsrolein  fashioningaremedyforprovenantitrustviolationsisanalogoustobutmuchmoreextensivethan `` itsmuchmorelimitedroleinreviewingproposedantitrustconsentdecrees./oot    Թ    .      _R M  4     _  !  Ѐ  Inparticular,iftheCourtfindsthattheproposedremedieswillnotattainthefundamental @"@  principlesunderlyingtheneedforrelief,theCourtshouldnotbedeterredfromimposingadifferentremedythananythegovernmentplaintiffsmayoffer. &!$ C I $$KCB+  D p x(0 " I XB8 u I TheGravityofMicrosoftsOffenses,ViewedinContext,CreateAPresumptionFora  StructuralRemedy u(#u(# E+ I p x(0 "  , XEӀ  Itisstraightforwardthattheremedyshouldbeproportionaltothegravityoftheoffenses  foundbytheCourt,thecontextinwhichtheyhaveoccurred,andthebehaviorthatMicrosofthasdisplayed.TheConclusionsofLawmakesclearthattheseoffensesweresevere,numerous,andcommittedaspartofanoverallpatternoveranextendedperiodoftime.̀  MicrosoftviolatedtheShermanActinthreesignificantrespects:byunlawfullymaintaining @@  itscurrentmonopolyinIntelbasedPCoperating,inviolationofSection2;byattemptingtomonopolizethemarketforbrowsersthroughthiscampaignanditsattemptedmarketdivisionwithNetscape,alsoinviolationofSection2;andbyunlawfullytyingitsbrowser,InternetExplorer,toitsWindowsoperatingsystem.Asaresultoftheseacts,thisCourtconcludedthatMicrosofthaddone violencetothecompetitiveprocess(ConclusionsofLawat20)andthatitsconductwas predacious(ConclusionsofLawat21).̀  Theseareextremelyseriousfindings,especiallythefirst,andwesharetheCourtsmost `` importantconclusion:thatMicrosoftembarkedonasuccessfulcampaign,consistingofvarious @@ actsandthreatsagainstrivalsandcustomers,designedtoprotectitsplatformmonopoly.Thisfindingofmonopolizationisamongthemostseriousofallantitrustoffenses.Itisespecially #  importantherebecauseofthecontextinwhichMicrosoftscampaigntookplace:inamarketcharacterizedbyan applicationsbarrierstoentry,whichrendersitdifficultforotherplatformsforapplicationssoftware(suchasNetscapeandJava)tobecomesuccessful.Ineffect,theapplicationsbarriertoentrytiltsthe scaleofcompetitivefortuneinthecompanysfavor,evenin *%( theabsenceofMicrosofts oppressivethumb.(ConclusionsofLawat20).Forthisreason,aremedythatsimplyremovesthethumbcannotundothedamageofMicrosoftsprioracts.̀Moreover,webelievethat,infashioninganyremedy,theCourtshouldconsiderbothMicrosoftsprecedingandsubsequentconductthatisrelevanttothiscase.Microsoftearlierenteredintoaconsentdecree,requiringthecompanytomodifyvariouslicensingpractices,whichtheJusticeDepartmentcontendedhadunlawfullymaintainedthecompanysoperatingsystemmonopoly(thenWindows3.1,thepredecessortoWindows95,andsubsequentlyWindows98,subjectsofthiscase).AlthoughthisCourtsrulingthatMicrosofthadviolatedthisdecreebytyingitsbrowseranditsoperatingsystemwasoverturnedbytheCourtofAppeals,theCourtshouldnonethelesstakejudicialnoticeoftestimonyinthismattersuggestingthatMicrosoftdidnottakethisfirstconsentdecreeseriouslyorsignificantlymodifyitsbehaviorinresponsetoit . This  evidenceisrelevanttothe_enforceability_ԀofanyconductbasedremedythattheCourtmayordernow.̀  Similarly,theCourtshouldtakejudicialnoticeofMicrosoftsattempttogainmarket `` power!indeed,amonopoly!inthemarketforpersonalfinancialmanagementsoftwarethrough @@ itsattemptedmergerwithIntuit.OnlyaftertheJusticeDepartmentchallengedthatmergeronthegroundthatitwouldsubstantiallylessencompetitiondidMicrosoftabandontheplan.̀Perhapsmostsignificantanddaring,whilethiscasewaspending,MicrosoftmountedawellpublicizedcampaigntoinfluencetheCongresstolimitappropriationsfortheJusticeDepartmentsAntitrustDivision.Thesignatoriesofthisbriefcannotrecallasimilaractionbyapartywhoseactivitieshadalreadybeensubjectedtoafactualdetermination,aswastrueforMicrosoftinthis *%( case.Inaddition,asisdiscussedbelow,itiscontendedthatMicrosoftisattemptingonceagaintoprojectitsdesktopOSmonopolyintothemarketfornetworkserveroperatingsystemsandforprogramsusedbyvariousInternetaccessdevices.̀  Webelievethatallthesefactorstakentogethercreateapresumptiontowardastructural   remedy.Wearenotalone.Professor_Areeda_,oneoftheleadingantitrustscholarsofthe20th   century,hasobservedthatthesimplestandsurestremedyforunlawfulmonopolization istherestorationofcompetitionthroughdissolutionordismembermentofthemonopolistintotwoormoreviablecompetingunits.PhilipE._Areeda_Ԁ&Herbert_Hovenkamp_,AntitrustLaw,Paragraph    636c,at56[reved.1996].WebelievethisconclusionisespeciallyaptgivenitsownpastbehaviorandinlightofthehighbarrierstoentryintothemarketthatMicrosofthasunlawfullymonopolized. IB+  D p x(0 " I XB8 D  APrincipalObjectiveOfTheRemedyShouldBeToPromoteInnovation D !D ! C I $$ICI E+ I p x(0 "  , XEӀThecentralthemerunningthroughtheCourtsFindingsofFactisthatMicrosoftsactshavechilledinnovationandhavethereforedistortedtheevolutionofthesoftwaremarket.Whilehistorycannotberewrittenandthecountryhaslostseveralyearsofworkablecompetitioninoperatingsystems,anappropriateremedycanprovidefutureinnovationopportunitiestocurrentandwouldbeentrants . AdaptingtheCourtsownlanguage,ifoneobjectoftheremedyistorestoreworkable #  competitioninthemarketsinwhichMicrosoftcompetes,Microsofts oppressivethumbcannotbeeffectivelyremovedunlessthe scalesofcompetitivefortunearethemselves_rebalanced_.̀Microsofthasassertedthroughoutthetrialadifferentviewofitsimpactoninnovation,andindeed,sincethisCourtsverdictwasannounced,thecompanyhasembarkedonamajorpublic *%( relationsandtelevisionadvertisingcampaigndesignedtoconvincethepublicthatitintendstocontinueinnovating.Nonetheless,Microsofthasarguedthroughoutthisproceeding!andcanbe  expectedtocontinuearguingintheremedyphase!thatthefastpaceofinnovationintheentire  computerindustryrendersanystiffsanctionbythisCourtunnecessary.TheWindowsplatform,ithaspreviouslyclaimed,isbeingorwillbesuccessfullychallengedby_Linux_ԀandJavabasedprogramsdownloadedfromtheInternet(which,Microsoftcontends,_AOL_sacquisitionofNetscape,workinginconjunctionwithSun,willaccelerate).Furthermore,itissaidthatthepersonalcomputeritselfisrapidlybecominglessimportantinthemarketplace,especiallyasvariousappliancesforaccessingtheInternet!bytelephone,inautomobiles,atworkandathome!  assumegreaterimportanceinthemarketplace,andwhere,incidentally,Microsoftdoesnotcurrentlyenjoyamonopoly.̀TheCourthasalreadyrejectedthesecontentionsinitsFindingsofFact,whichweurgetheCourttorecognizewhenfashioningaremedy.WhiletheCourtacknowledged(paragraph408)thatthedistributionofInternetExplorerwithWindows increasedgeneralfamiliaritywiththeInternetandreducedthecosttothepublicofgainingaccesstoit,italsofound(atparagraph409)thatthecompanyhad engagedinaconcertedseriesofactions!ultimatelydeterminedtobeunlawful!  !   designedtoprotecttheapplicationsbarriertoentry,andhenceitsmonopolypower,fromavarietyof_middleware_Ԁthreats,includingNetscapesWebbrowserandSunsimplementationofJava.Thiscampaignwasfoundtohavechilledinnovationinboth_middleware_ԀandapplicationssoftwarewrittentointerfacewithJava.Morebroadly,theCourtfound(paragraph412)thatMicrosoftscampaignagainstrivalplatformshasdiscouragedcompetitionthroughoutthecomputerindustry, *%(  _deter[ring_]investmentintechnologiesandbusinessesthatexhibitthepotentialtothreatenMicrosoft.̀Microsoftsclaimsthattechnologicalchangesomehowrendersthiscasemoothavealsobeenrejected,anddevelopmentssincetheCourtannounceditsFindingsofFactdonotwarrantareversalofthesedeterminations.Despitemodestinroadsachievedby_Linux_Ԁintheservermarket,Windowsstillisshippedwithmorethan90percentofIntelbasedpersonalcomputers.Indeed,MicrosoftChiefExecutiveSteveBallmerrecentlyadmittedthat sofar,_Linux_Ԁdoesnthavealotoftractionontheclient[desktopcomputer],exceptinsomeuniversityenvironments.(QuotedinTheWashingtonPost,April19,2000,atE10).  ЀIndeed,Microsoftishelpingtominimizethetractionof_Linux_,exploitingtheapplicationsbarriertoentry,bydecliningtodevelopversionsofitsbestsellingOfficeproductsforthe_Linux_systems.Thisisoneofthemostpowerfulexamplesofhowmarketpowerandmonopolyinbothoperatingsystemsandinapplicationsreinforceeachother.MicrosoftsOfficesoftwareprovidesacriticalcoreofapplicationsthatmanydesktopusersdesirewhenchoosinganoperatingsystem.Therefore,for_Linux_Ԁtobeacceptabletoalargenumberofdesktopusers,itwillneedtoofferaversionofMicrosoftsOffice.Byrefusingtodevelopa_Linux_Ԁversion,Microsoftiscuttingoffthe airsupplytoatleastoneof_Linux_slungsandmakingitsentryintothemassconsumermarketmoredifficult.̀Meanwhile,anyclaimthatthePCitselfisrapidlybecomingextinctisimpossibletosquarewiththefactthatroughly100millionPCsweresoldworldwidein1999(MicrosoftAnnualReport,athttp://www.microsoft.com/msft/ar99/lts6.htm)andthat30millionPCsweresoldinthefirst *%( quarterof2000 . NordoesthecontentionfitwiththefactthatMicrosoftssalesfromWindows  platformsrepresentedanincreasingshareofitsoverallrevenuesoverthe199799period,rising  from41percentto43percent(calculatedfromMicrosofts1999Annual_Report)./the    Թ    _.      _S M  5     _  ЀTheprospectthatvariousNetaccessdevices!includingsocalledthinclientorNetwork   computers!willbecomeincreasinglypopulardoesnoteliminatetheneedforasignificant   remedy.Foronething,thisCourthasalsodeterminedinitsFindingsofFact(paragraph23)that nosuchinformationapplianceprovidesallofthefeaturesthatmostconsumershavecometorelyonintheirPCsystems,whileforvariousreasonsthe dayhasnotyetarrived,nordoesitappearimminentthatNetworkcomputerswilleliminatetheneedforPCs,whichcontinuetobetheworkhorsesforindividualsandbusinessforwordprocessing,datamanipulation,storageandcomputation.    E.TheInnovationDefense   ЀMicrosoftcanbeexpectedtoargueagainstanystructuralremedy(orpresumablyanystiffconductdecree)onthegroundsthatthecompanyallegedlyhasanimpressiverecordininnovation.Wewouldmaketwocommentsinthisregard. @@ ЀFirst,theinnovationdefense!asavariantofthe goodtrustgambit/the          .      _U M  6     _!wascentraltoAT&Ts  argumentsduringitsantitrustcase.YetitwasnotsufficienttopreventthisdistrictCourtfromultimatelyconcludingthatabreakupwaswarranted./unce    Թ    .      _V$ M  7     _   񀀀Second,whilewedonotgainsayMicrosoftsimpressivetalentsindevelopingandmarketing   software,Microsoftsinnovations/unce    Թ    .      _W  M  8     _palebesidethoseoftheBellSystem.TheBellSystemsinventionsandinnovationsincluded ``  fundamentalscientificworkonthewavenatureofmatter,thetransistoreffect,andcosmicbackgroundnoise(allthreeofwhichwonNobelprizes);thelaser(withColumbiaUniversityscientists);largesystemsinnovationssuchasmicrowavetransmission,satellitecommunication,electronicswitching,andopticalfiberdatatransmission;andothersignificantinnovationssuchasthesolarcell,magneticbubblememory,andtheUNIXprogramminglanguage.IftheinnovationdefensewaswantingforAT&T,itishardtoseehowitwouldbeworthamomentsconsiderationinthepresentcase.  C I $$IC IB+  D p x(0 " I XB8 D  TheCourtMustTakeAccountofMicrosoftsNewCampaignToExtend  theDominanceofWindows D !D ! I E+ I p x(0 "  , XEӀMicrosofthasmadeclear!evenduringtheremedyphaseofthiscase!thatitfullyintendsto  followitsbynowfamiliarstrategy,of embracing,extending,andextinguishingrival_middleware_threatsinanefforttoleverageitsdesktopplatformmonopolyintodominanceofthemarketsforoperatingserversandInternetaccessdevices,thetwoarenaswhichMicrosoftcurrentlydoesnotdominate.ConsiderthecompanyswelladvertisedWindows2000project.Thisnewsystem,developedduringthecourseofthetrial,envisionstyingbusinesscustomers!andeventually    individualconsumers!intoanintegrateddesktopserverplatformbylimitingfunctionalityof  currentlycompetingserverplatforms.Similarly,thecompanyhasannouncedplanstointegrateoperatingsystemsfordesktopsandserverswiththoseforaccessdevices,producingwhatBillGateshimselfhasacknowledgedtobe anoperatingsystemfortheInternet.(QuotedinTheNew  YorkTimes,April8,2000,B14).  ЀThemarketforindustrialstrengthserversforWebsitesandcorporatenetworksiscurrentlyhotlycontested.Uptonow,Microsofthaslaggedinthismarket.ItscurrentstrategyistoreconfigureitssystemswiththereleaseofWindows2000,aWindowsNTupgradepreviouslynamedWindowsNT5.0.ThissystemmarksthefirsttimeMicrosofthasunifiedtheoperatingsystemkernelandcodeforbothitsprimarydesktopandserveroperatingsystems.TheeffectofthisredesignisthatinordertogainfullfunctionalityoftheWindows2000desktopandserverapplications!includingMSOfficeand_BackOffice_Ԁ!endusersmustinstallWindows2000on (#& boththeirserversanddesktopcomputers.Thetechnologicaltieinlinksvariousheavilyused *%( applications:mediastreaming,_internet_Ԁbrowsing,messaging,andwebpagecreation.MicrosoftsWindows2000strategycontinuesthecompanyshistoricpatternofusingitsdesktopmonopolytogainafootholdinadjacentmarketsandthentovanquishallcompetitionby,amongotherthings,exploitingtechnologicalincompatibilitiesthatreinforceitsprimarydesktopplatformmonopolyandextendthatmonopolypowerintoothermarkets.̀Inshort,itisdifficulttotakeseriouslyanyclaimthatthenewcomputingtechnologiesthreatenMicrosoftscorebusinesswhenthecompanysfuturestrategyisbuiltaroundthesameconceptitusedagainstNetscape:bundlingnewfeaturesintotheoperatingsystem,exploitingcomplementaritiesbetweenitsdesktopmonopolyandadjacentmarkets,andfrustratingthecompatibilityofrivals'products.Aswediscussbelow,howtheCourttreatsthisevolvingcorporatestrategyisperhapsthemostcriticalchallengeitfacesinfashioningaremedythatenhancesinnovationthatservesinterestsofconsumers.Moreover,Microsoftsstrategyofintegratingthedesktop,serverandInternetplatformscompelstheCourttoconsideralltheseenvironmentsinanydecreeithandsdown,inwhateverform(conduct,licensingorstructuralrelief). IB+  D p x(0 " I XB8 D  TheBalanceOfRisksDoesNotNecessarilyTiltTowardAConduct @@ Remedy  ! D !D ! I E+ I p x(0 "  , XEӀNormally,theprudentcourseforpolicymakers!includingcourts,whichnecessarilytakeon #  policymakingfunctionswhendecidingonantitrustremedies!tofollowwhenconfrontedwith $" rapidtechnologicalchangeistoactcautiously,waitingforsignificantmarketfailurestoemergeandthencorrectingthemincrementallywithascalpelratherthaninterveningbroadly.Otherwise,therisksaregreatthatthe lawofunintendedconsequenceswillproduceoutcomesthatare *%( inferiortothosemarketforcesmaygenerate.̀Suchariskminimizingstrategywouldappear,atleastatfirstglance,tosupportaconductorienteddecreeinthiscase,wheretechnologicalchangehasbeenatcenterstage.Astructuralremedy,incontrast,wouldseemtorepresenttheriskiercourse.̀Appearancescanbedeceiving.Oncloserinspection,severalfactorspointinotherdirection.Themarketfailureinthiscasehasalreadyoccurred,intheformofMicrosoftsanticompetitiveconduct,whichtheCourthasfoundthwartedinnovation.Inaddition,throughacombinationoftheapplicationsbarriertoentryandMicrosoftscampaigntosuppresscompetingplatforms,Microsofthasmaintainedandincreaseditsplatformmonopolyforoveradecade,suggestingthathowever  significanttechnologicalchangeinthisindustryhasbeen,Microsoftsmarketdominancehasbeenimpervioustoit.̀  MicrosoftscurrentcampaigntoextenditsdesktopdominancetotheserverandNetwork  accessdevicemarketsironicallysuggeststhataconductremedymightbeevenriskier,andmoreintrusive,thanastructuralremedy.Inparticular,iftheCourtsholdingthatMicrosoftunlawfullytiedInternetExplorertoWindowsisupheldonappeal,thenunderanyconductdecree,theCourtwillbefacedlaterwiththecomplicated,jobofrequiringMicrosofttoabandonandundoitsplantointegratethedesktop,serverandInternetaccessdeviceplatform.Attheveryleast,theCourtwillneedtoconductfurtherevidentiaryproceedingstodeterminewhetherthisplan,too,constitutesunlawfultyingunderSection1oftheShermanAct.Bythen,ofcourse,itmaybetoolate:theintegrationwillhaveproceededsufficientlyfarthatthemarketplacealreadywillhavebeenirreparablydistortedbyanunlawfullygeneratedinstalledbase,justasitarguablymaybetoolate *%( forNetscapesbrowse