[Congressional Record Volume 144, Number 86 (Friday, June 26, 1998)]
[Senate]
[Pages S7231-S7235]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
JUDICIARY COMMITTEE'S MICROSOFT INQUIRY
Mr. HATCH. Mr. President, I rise this morning to speak for just a few
moments on the Senate Judiciary Committee's progress with respect to
our Microsoft inquiry and, more specifically, to share my perspectives
on how Microsoft has conducted itself before the committee; to discuss
some important developments from this past week; and to discuss the
committee's upcoming plans with respect to the Microsoft issue.
This week has been a significant one. Just yesterday, Windows 98 was
rolled out to consumers. I might note that, contrary to Microsoft's
emphatic protests last month that a federal lawsuit would have
catastrophic consequences for the PC industry, the Justice Department
did file suit, and, lo and behold, the sky has not fallen on either
Microsoft or the computer industry. Meanwhile, the Department of
Justice encountered a set back in its original consent decree case.
And, something which got less attention in the midst of these other
developments, the Software Publisher's Association, the 1,200 member
software industry association of which Microsoft is a member, released
a report describing how, if allowed to proceed with its tried and true
market practices, Microsoft will extend its current desktop monopoly to
control the market for network servers--a technology which provides the
foundation for the Internet and corporate intranets. So this is
important. Microsoft is attempting to extend its current monopoly of 90
percent of the underlying operating system to control all the market
for network services, both the Internet and corporate intranets.
So, for those who have looked seriously at the Microsoft issue, I
believe it is clear that the issue is about much more than just the
browser. In fact, I have never thought that the browser issue was the
most important issue at all, although it is important if you look at
all of the ramifications of the browser problems.
It is about whether one company will be able to exploit its current
monopoly in order to control access to, and commerce on, the Internet;
whether one company will control the increasingly networked world in
which we are coming to conduct our businesses and in which we are
coming to lead our lives.
Indeed, the reach of Microsoft's monopoly power is on the verge of
extending well beyond markets which we have traditionally thought of as
software or technology markets, and the effects of this expansion will
be felt not just by the software companies who have traditionally
competed with Microsoft, but by a broad swath of U.S. consumers. As The
New York Times yesterday observed,
Right now Microsoft is expanding into myriad Internet
businesses, including news, entertainment information,
banking, financial transactions, travel bookings and other
services. Since consumers have no choice but to buy the
Windows operating system when they buy personal computers,
Microsoft is in a position to give such a big advantage to
its own software that any other software maker would not be
able to compete.
I agree with the Times's conclusion. They went on to say: ``It is not
healthy for the courts to grant Microsoft a permanent chokehold over
the entire expanding world of the Internet.'' I ask unanimous consent
that this New York Times editorial be printed in the Record.
There being no objection, the editorial was ordered to be printed in
the Record, as follows:
[From the New York Times, June 25, 1998]
A Mistaken Microsoft Ruling
One month after the Justice Department filed its sweeping
antitrust suit against Microsoft, a Federal appeals court has
issued a deeply flawed ruling that may weaken the
Government's case. The three-judge panel seemed to adopt
Microsoft's arrogant claim that it has the right to
incorporate its browser, or any other software, into its
Windows operating system as long as doing so offers certain
advantages to consumers. But if the thinking behind this
decision prevails, it could permit Microsoft to use its
monopoly power to crush competitors throughout the Internet.
The Justice Department thus needs to mount a vigorous
counterattack invoking the full force of antitrust laws.
The Justice Department can argue that the appeals court
ruling need not determine
[[Page S7232]]
the outcome of its larger antitrust case against Microsoft.
That is because it was based on a narrow case brought by the
Justice Department last year, when it charged that Microsoft
violated a 1995 consent decree affecting the marketing of
Windows 95. In that decree, Microsoft agreed not to condition
its sale of Windows to computer makers on the sale of other
software, but could improve Windows by integrating other
functions into it.
In December a Federal district judge ordered Microsoft to
split off its browser, the software used to navigate the
World Wide Web, from Windows 95. Now the appeals court has
said the browser can be included, because with it Windows
became a new and improved integrated product.
The problem with the appeals court's reasoning is that
virtually any new form of software can be integrated into the
basic Windows system, arguably improving it. Right now,
Microsoft is expanding into myriad Internet businesses,
including news, entertainment information, banking, financial
transactions, travel bookings and other services. Since
consumers have no choice but to buy the Windows operating
system when they buy personal computers, Microsoft is in a
position to give such a big advantage to its own software
that any other software maker would not be able to compete.
Because the court of appeals ruling was based on the
meaning of the 1995 consent decree, the Justice Department
has a chance to reverse its thinking in its larger case
against Microsoft, which is to come to trial in September. In
that case, the judge will be asked to look beyond the consent
decree to the broad principles of antitrust law, and to look
as well at Microsoft's predatory practices. The department
has assembled impressive evidence that Microsoft deliberately
used its monopoly in Windows to crush its rival Netscape,
which was selling a browser that many consumers preferred to
the one made by Microsoft.
The appeals court's decision referred to the general
``undesirability of having courts oversee product design.''
Judge Patricia Wald, in her dissent, correctly warned that
the decision ``would seem to permit'' Microsoft to
incorporate ``any now-separate software product into its
operating system by identifying some minimal synergy'' as a
result. It is not healthy for the courts to grant Microsoft a
permanent chokehold over the entire expanding world of the
Internet.
Mr. HATCH. I believe this is one of the more important policy issues
of our day, one which will have far reaching ramifications for years to
come, and that it would be remiss for lawmakers and law enforcers not
to be paying close attention to these issues. So, when we return from
the July recess, I plan to hold further hearings on competition in the
digital age. In particular, I plan for the committee to examine market
practices and developments in the so-called ``enterprise'' or back
office software market, and more generally to examine practices and
developments affecting access to, and transactions on the Internet.
Specific hearing dates and witness lists will be released when
finalized.
While I will reserve comments regarding Microsoft's tactics in these
markets until after we learn more about this issue next month, I do
have a few comments regarding Microsoft's tactics in Washington over
the last several months. In a nutshell, I would offer my view that
Microsoft has, regrettably, seen fit to deploy a massive pr campaign
grounded in spin control and misdirection, as opposed to engaging the
American public, on the basis of the facts and the merits surrounding
all of these issues.
For starters, I find it rather surprising that any one company would,
rather than seeking to prevail on the merits, instead have the hubris
to try and use the appropriations process to ``go on the offensive''
and seek to restrain a federal law enforcement agency that has an
obligation to enforce the laws, as was recently reported. I trust that
my colleagues in this Chamber would have little difficulty in seeing
this as anything but an effort to interfere with an ongoing law
enforcement action. I can certainly appreciate my colleagues wanting to
go to bat for their constituent, but I would find it surprising and
disturbing were they or any other Senators swayed to permit this body
to seriously consider such an effort to interfere with the
appropriations system hope and cut out funds for the Justice Department
division on antitrust. I hope that they don't continue in those efforts
if those reports are true.
More fundamentally, though, I am troubled that Microsoft has seen fit
to engage in a game of hide the ball, as opposed to putting their best
case forward on the facts and on the merits. This issue has nothing to
do with the government trying to design software. It is about trying to
preserve competition and innovation--the hallmark of a free market--in
an area that is absolutely critical to the future of our economy and I
guess you have to pay the world. It is critical to our economy, as
well. It is about getting to the bottom of the true facts here so as to
understand how best to accomplish this fundamental objective. Frankly,
if the facts truly aren't so bad, I would expect Microsoft to be happy
to explain them.
One of the issues I have been concerned with since last fall, for
example, happens to be the restrictive contracts Microsoft has imposed
on various Internet firms seeking placement on the ubiquitous Windows
desktop. Rather than admit that they have indeed imposed such terms,
and explain to us why we should not find them objectionable, Microsoft
has consistently sought to avoid the existence and implications of
these contract terms. When pressed on the issue, Microsoft announced on
the eve of our March hearing that it would no longer enforce these
restrictive covenants or these restrictive contract provisions, instead
of explaining why these provisions were legal. But, when the Justice
Department filed its suit nearly three months later, we learn not only
that these restrictive and exclusionary provisions existed, but that
Microsoft in fact continues to enforce them with respect to the biggest
Internet firms such as AOL and Compuserve, notwithstanding Microsoft's
prior representations to the Committee that these very provisions had
been removed from its contracts ``on a worldwide basis.''
These are just a few examples where Microsoft has been less than one
hundred percent candid and forthright. There are others. Committee
staff has prepared a brief report outlining some of the areas where I
believe Microsoft could and should have been more forthright with the
Committee.
As the Committee continues its inquiry, I plan to give Microsoft a
fair opportunity to be heard on these issues. But I think they should
be heard on the record, rather than through carefully orchestrated,
multi-million dollar pr campaigns that are more concerned with blurring
the true facts than explaining them. So I hope that, when given the
opportunity to be heard on the record, Microsoft chooses to be somewhat
more candid with the American people than it has been so far.
I ask unanimous consent that a report prepared by the majority staff
of the Senate Judiciary Committee, dated June 26, 1998, be printed in
the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[A Report Prepared by Majority Staff, Senate Judiciary Committee, June
26, 1998]
Microsoft Statements to the United States Senate Judiciary Committee
introduction
Throughout the course of the Senate Judiciary Committee's
ongoing inquiry into competition in the software industry,
Microsoft has continually sought to steer the Committee away
from important but potentially damaging areas of inquiry. At
times, Microsoft has relied on factually misleading or
inaccurate statements to accomplish this objective. A
sampling of such statements, and a brief assessment of their
accuracy, are provided in the following report.
i. exclusionary licenses with internet service providers
At the Committee's November 4, 1997 hearing, Senator Hatch
raised concerns about the exclusive nature of Microsoft's
licenses with Internet Service Providers (ISPs) that appeared
to have the effect of limiting ISP's freedom to promote and
distribute competing browsers. Senator Hatch specifically
cited a number of provisions in Microsoft's license with
Earthlink.
In response, Microsoft Senior Vice President William Neukom
wrote Senator Hatch, stating that: ``The implication at the
hearing that Microsoft's agreement with Earthlink was somehow
directed at locking out competing software is plainly refuted
by the facts.
``. . . the ISP is free at all times to distribute and
promote any browser software to any customers not referred by
Microsoft.'' \1\
\1\ Footnotes at end of report.
In addition, Microsoft Chairman Bill Gates testified at the
Committee's March 3 hearing that Microsoft's ISP agreements
``are not exclusive.'' \2\ and reiterated Mr. Neukom's
suggestion that those restrictions Microsoft did impose on
ISPs only applied to customers referred to the ISP by
Microsoft.\3\
When pressed by Committee staff to square these assertions
with the plain language of the Earthlink license, Microsoft
officials stated that staff was overlooking the fact that the
Committee's version of the contract
[[Page S7233]]
contained redactions. The redactions referred to, however,
turned out to be largely irrelevant and Microsoft's
assertions cannot be squared with the unredacted language of
the contracts.
First, Microsoft's restriction on an ISP's freedom to
promote competing browsers plainly is not limited, as Messrs.
Neukom and Gates suggested, to customers referred to the ISP
by Microsoft. Microsoft's contracts include blanket
prohibitions, not limited to customers referred by Microsoft,
stating that the ISP ``shall not advertise or otherwise
promote any non-MS browser more than 10 to 20% of total
impressions,'' and that the ISP ``shall not display any logo
for, or maintain a link to, a non-MS web browser on [ISPs]
home page for the ISP Service, on the Start Page, or on any
[ISP] home page for any other Internet access service offered
by [the ISP].'' \4\ (Emphasis added). Messrs. Gates and
Neukom's assertion that ``the ISP is free at all times to . .
. promote any browser software to any customers not referred
by Microsoft'' is simply false.
Second, and more importantly, Microsoft required its ISP
licensees, in order to avoid being removed from the Windows
ISP referral, to ensure that a high percentage (between 75%
and 85%) of total browser shipments were Internet
Explorer.\5\ Independent of other restrictions in Microsoft's
ISP contracts, an ISP which is obliged to guarantee that 85%
of the browsers it distributes are Microsoft browsers clearly
is not, as Mr. Neukom stated, ``free at all times to
distribute . . . any browser software to any customers not
referred by Microsoft.''
In sum, it is inconceivable how licensing provisions that
prevents ISPs from promoting competing browsers, and actually
require that ISPs ensure that 75-85% of its browser shipments
are Microsoft's, are not ``exclusive'' and directed precisely
at ``locking out competing software.'' Indeed, this
conclusion is only buttressed by the fact that, as a top
strategic priority aimed at ``Winning the Internet platform
battle,'' Microsoft executives directed its sales force to
sign ``[e]xclusive licensing of Internet Explorer to top 5
[Internet] Access providers.'' \6\
II. Withdrawal of Exclusive ISP Licensing Provisions
When the Committee persisted in questioning how these ISP
contract provisions were anything other than exclusionary and
designed to ``lock out competing software,'' Microsoft,
instead of providing any plausible, substantive response,
stated that it had agreed to remove these provisions from its
contracts. On the eve of the Committee's March 3 hearing,
Microsoft provided the Committee with a letter stating that
the contract provisions at issue had been deleted from its
ISP agreements ``on a worldwide basis.'' \7\ When questioned
on the subject by Senator Hatch at the Match 3 hearing, Mr.
Gates states that ``we agreed to waive'' the ISP contract
provisions that had raised concerns.\8\ The clear implication
of Microsoft's letter to the Committee, and Mr. Gates's
testimony, was that Microsoft would no longer prevent firms
that provide Internet access from promoting or distributing
alternative browsers as a condition of gaining placement on
the Windows desktop.
Notwithstanding Mr. Gates's testimony, and Microsoft's
assertion to the Committee that it had removed these
restrictive contract terms ``on a worldwide basis,''
Microsoft had apparently continued to enforce the most
restrictive of its contract terms with the largest Internet
access firms, including AOL, CompuServe and Prodigy.\9\ In
fact, the firms still restricted from distributing and/or
promoting non-Microsoft browsers represent over 53% of North
American Internet users.\10\ Given the fact that more than
half of U.S. consumers accessing the Internet are still
subject to Microsoft's restrictive and exclusionary contract
terms, Microsoft's failure to, at a minimum, qualify or
clarify its officially asserted waiver of these provisions
can be considered nothing other than a sleight of hand.
III. ability to switch browsers
In his testimony before the Judiciary Committee, Mr. Gates
sought to limit the relevance of any restrictions it might
impose on ISPs by suggesting that, regardless of what browser
was bundled by an ISP, the ISP's customers ``could always go
out and switch their browser. There is no product that is
easier to switch in the world today than a browser. It takes
about five seconds to go up and click and go get the Netscape
browser or the Microsoft browser or any other browser that is
out there on the Internet.\11\
In reality, it is simply not possible to switch browsers in
five seconds. To execute the procedure referred to by Mr.
Gates, a user would have to launch Internet Explorer, find
that Netscape homepage, find an option for downloading,
Netscape Navigator, and executive the download. Using a
typical 28.8 K modem, it took the Committee systems
administrator over two hours merely to complete the download
process. The reality is that all but the most sophisticated
Internet users are likely to forego the time and effort
necessary to download a browser off the Internet when they
can instead use the browser which comes bundled with their
Internet service of PC. Thus, Mr. Gates's attempt to minimize
the exclusionary impact of its ISP contracts is misleading at
best.
IV exclusive licensing provisions with content providers
Microsoft has also imposed restrictions on the ability of
firms providing Internet content (``content providers'' or
``ICPs'') to promote, distribute, or render payment of non-
Microsoft browsers. Here again, Mr. Gates has been less than
candid about these resctictions. At the Judiciary Committee's
March 3 hearing, for example, Mr. Gates testified: ``At far
as Internet content providers go, let me be very clear about
that. There is nothing that restricts anybody who has content
relationships with use from developing sites that exploit any
browser out there in the marketplace. Those people are free
to do as they choose in terms of developing sites, and they
have lot of ways they can promote the other sites that they
do.\12\
This statement, however, glossed over the very significant
fact that, while Microsoft might not have been able to
explicitly prohibit a content provider from developing
content that can be retrieved with using nonMicrosoft
browsers, it did manage to split its leverage over content
providers, to get them to agree, as a condition for obtaining
placement on the Windows desktop, to various restrictions
designated at ``locking out'' competing browser platforms.
For example, the Justice Department learned that, contrary to
Mr. Gates's testimony, Mirosoft's contracts with the largest
and most popular ICPs in fact do require those ICPs
to promote their Microsoft channel exclusively, and do
restrict the ICPs' abilities to deal with ``Other
Browsers.'' As the Justice Department's brief explains:
ICPs are not allowed to compensate in any manner a producer
of an ``Other Browser''--including by distributing its
browser--for the distribution, marketing, or promotion of the
ICP's content, effectively precluding payment for a channel
on Netscape's competing Netcaster product;
Even if an ``Other Browser'' (namely Netscape)
distributes--without compensation--an ICP's content through
Netcaster, the ICP is still prohibited by its Microsoft
contract from promoting or advertising the existence of its
Netcaster channel and from licensing its logos to Netscape in
order for Netscape to promote and highlight the existence of
that content for Netcaster;
ICPs are not allowed to promote any ``Other Browser''
products;
Microsoft restricts the distribution of ``Other Browsers''
by requiring that the ICP ``distribute Internet Explorer and
no Other Browser as an integral part'' of an ICP Channel
Client for the Win32, Win16 or Macintosh platforms; and
ICPs must create channel content exclusively viewable with
Internet Explorer, and optimize many of their websites to
take advantage of Internet Explorer--specific extensions to
web standards (such as HTML) and Windows-specific technology
(such as Active X).\13\
Thus, Mr. Gates's testimony that Microsoft does not
restrict content providers' ability to develop for, or
promote, competing browsers, is flatly contradicted by the
evidence unearthed by the Justice Department. Moreover, when
pressed on this issue at the Committee's March 3 hearing, Mr.
Gates went to great lengths to avoid conceding that Microsoft
imposed such restrictions, even when posed with direct
questions and asked to give a ``yes-no'' answer. For example,
when Senator Hatch repeatedly questioned whether Microsoft
prevented any of its content partners from advertising or
promoting Netscape, Mr. Gates persisted in giving non-
responsive answers and avoiding the simple ``yes'' or ``no''
answer that was requested. Only after Senator Hatch, visibly
frustrated, repeated the question for a fifth time, did Mr.
Gates finally concede albeit in a grossly incomplete fashion,
that Microsoft did in fact impose restrictions on Internet
Content Providers. The colloquy was as follows:
Q: Mr. Gates, you have been somewhat hard to nail down on a
very specific question, and I would appreciate just a yes or
no, if you can. Do you put any limitation on content
providers that limit them . . . for advertising or promoting
Netscape? Yes or no, if you can.
A: Every Internet content provider that has a business
relationship with Microsoft is free to develop content that
uses competitors' platforms and standards.
Q: But my question is do you put any limitations on content
providers that limit them . . . for doing any advertising or
promoting of Netscape?
A: Well, understand, there are more people in the Netscape
channel guide than there are on the Microsoft channel guide.
Q: How about Microsoft: Do they put limitations or
restrictions on people from advertising and promoting
Netscape?
A: I am not aware of any limitation that prevents them from
doing content that promotes Netscape.
Q: Do you use your exclusive arrangement with the
companies--do you use that as leverage to stop them from
advertising or promoting Netscape?
A: I don't--we don't-- . . .
Q: Does Microsoft then limit--place any limit on any
content providers that limits them . . . for advertising or
promoting Netscape or any other competitor?
A: I said earlier that on the pages that you link to
through the channel guide--that on those pages you don't
promote the competitive product, but that is a unique URL.
You are free to promote their content in quite a variety of
ways, but not off the specific page that we link to.\14\
Mr. Gates's steadfast refusal to answer Senator Hatch's
question prevented the
[[Page S7234]]
Members of the Committee from discovering what would be
revealed in the Justice Department suit nearly three months
later--a broad range of exclusionary restrictions that
Microsoft imposes on content providers. Indeed, contrary to
Mr. Gates's testimony, it appears that Microsoft does, in
fact, restrict content providers from promoting content
developed for competing browsers, and from promoting or
distributing other browsers. These practices all are, to use
Mr. Neukom's own words, clearly designed at ``locking out
competing [browser] software.''
V. Strategic Motivation Behind ``Integration'' of Windows and Internet
Explorer
An issue central to understanding the ``browser wars'' and
the nature of competition in the software industry generally
is whether Microsoft's decision to link its browser to
Windows was a response to consumer demand and preferences, or
an effort to lock competing browsers out of the market. A
December 20, 1996 email by Microsoft Senior Vice President
Jim Allchin appears to shed light on this question. It reads
as follows: ``Ensuring that we leverage Windows. I don't
understand how IE is going to win. The current path is simply
to copy everything that Netscape does packaging and product
wise . . . My conclusion is that we must leverage Windows
more, Treating IE as just an add-on to Windows . . . [is]
losing our biggest advantage--Windows market share . . . We
should first think about an integrated solution. That is our
strength? \15\
In follow-up questions to the Committee's March 3 hearing,
Senator Hatch inquired whether Mr. Allchin was ``urging that
Internet Explorer be integrated into Windows as a strategic
marketing measure intended to compete with Netscape Navigator
by ensuring that all Windows users would automatically
receive Internet Explorer as well.'' In his written response,
Mr. Gates claimed that this interpretation was inaccurate,
stating that ``Mr. Allchin's e-mail had nothing to do with
the distribution of Internet Explorer. . . .''\16\
Mr. Gates' assertion is puzzling at best. Mr. Allchin's
questioning ``how IE is going to win'' and criticism of
Microsoft's current plan ``simply to copy everything that
Netscape does packaging and product wise'' certainly appears
to be concerned with nothing other than ``the distribution of
Internet Explorer.'' Indeed, Mr. Allchin's view that
Microsoft should tie Internet Explorer to Windows in order to
gain an advantage over Netscape is abundantly clear in an E-
mail he wrote only two weeks after the above-quoted E-mail.
In this second E-mail, Allchin wrote: ``You see browser share
as job 1 . . . I do not feel we are going to win on our
current path. We are not leveraging Windows from a marketing
perspective. . . . We do not use our strength--which is that
we have an installed base of Windows and we have a strong OEM
shipment channel for Windows. Pitting browser against browser
is hard since Netscape has 80% marketshare and we have 20% .
. . I am convinced we have to use Windows--this is the one
thing they don't have. . . . (emphasis added) \17\
Indeed, Allchin's view was echoed by other Microsoft
employees.
Christian Wildfeuer, for example wrote as follows: ``It
seems clear that it will be very hard to increase browser
market share on the merits of IE 4 alone. It will be more
important to leverage the OS asset to make people use IE
instead of Navigator.\18\
It is, in short, difficult to accept Mr. Gates' summary
assertion that ``Mr. Allchin's e-mail had nothing to do with
the distribution of Internet Explorer.''
VI. The Windows Monopoly
Notwithstanding the fact that Microsoft has a 90% plus
market share in the market for personal computer operating
systems, Mr. Gates denies that Microsoft enjoys a monopoly in
this market. In an effort to support his position, Mr. Gates
has repeatedly made reference to the fact that prices in the
computer industry have been falling. For example, in his oral
testimony before the Judiciary Committee, Mr. Gates stated
that: ``Another sign of a healthy, competitive industry is
lower prices. The statistics show that the cost of computing
has decreased ten-millionfold since 1971.''
(Mr. Gates repeated this statistic in a recent Economist
piece, where he also stated that the price of Windows has
remained ``relatively stable.'')\20\ And, in his written
testimony, Mr. Gates proudly declared that ``Prices for
personal computers continue to fall, even as PC's become more
powerful and offer greater features than ever before . . .
Microsoft has been an active participant in providing the
incredible price/performance gains that distinguished the
computer industry.\21\
What Mr. Gates fails to mention, however, is that the price
of Windows has steadily increased since its introduction to
the marketplace. According to one news report, the price
Microsoft charges OEMs for a PC operating system has risen
from $12-$15 per copy of DOS, to $35 for Windows 3.x, to
approximately $60-$70 for Windows 95.\22\ Four OEMs have
reported that Microsoft will further raise the price of
Windows 98 \23\ and it is expected that Windows NT 5.0 (which
eventually will replace Windows) will cost OEMs approximately
$130 per copy.\24\ Thus, while the cost of computing has
``decreased ten-millionfold,'' the price of a Microsoft
operating system has increased roughly ten-fold--from $12 to
$130. This market departure from an overwhelming industry
trend of decreasing prices is a classic sign of monopoly
power.
While it is, of course, true that new features and
functionality have been added to Microsoft's operating
systems over this period, the same clearly can be said of
other computing components and computing generally. Whereas a
single transistor cost $5-$6 in 1959, today $6 will buy a 16
megabit DRAM chip with sixteen million transistors.\25\ And,
while Intel's first Pentium chip, with 3.1 million
transistors and a speed of 60 megahertz, sold for $878 in
1993, the Pentium II, with 7.5 million transistors and a
speed of 233 megahertz, now sells for $268.\26\
Thus, Mr. Gates's use of the fact that the price of
computing has fallen dramatically to imply that Microsoft
operating systems are priced competitively is quite
misleading. In fact, Microsoft's monopoly power in the
operating system market has enabled it not just to raise
operating system prices while the price of other computing
components has dropped precipitously, but in fact has allowed
Microsoft to reap huge monopoly profits. According to the
Wall Street Journal, for example, Microsoft earns a
staggering 92% gross and 50% operating margin in its Windows
business.\27\
VII. Competition and Choice in the PC Operating System Market
In another effort to rebut the seemingly self-evident
proposition that Microsoft's 90%-plus market share for PC
operating systems amounts to a monopoly, Mr. Gates also
stated to the Committee that, ``if Microsoft attempted to
raise its prices beyond competitive levels, powerful
operating system competitors like IBM, Sun Microsystems,
Novell, Apple or a new entrant to the business could satisfy
consumer demand instantly.'' \28\
This sweeping statement is plainly at odds with the
economic reality, attested to by OEMs, that, given
Microsoft's monopoly and the fact that such a vast majority
of desktop applications are written for Windows,\29\ computer
manufacturers clearly do not have the choice of turning to an
operating system other than Windows. Indeed, numerous
representatives from computer manufacturers have testified
that they simply have no choice but to ship computers with
Windows, and that there is no other operating system which a
computer manufacturer could or would use as a substitute to
Windows.
Packard Bell executive Mal Ransom testified that there were
no ``commercially feasible alternative operating systems'' to
Windows 98.
Micron executive Eric Browning asserts: ``I am not aware of
any other non-Microsoft operating system product to which
Micron could or would turn as a substitute for Windows 95 at
this time.''
Hewlett Packard executive John Romano testified that HP had
``absolutely no choice'' except to install Windows on its
PCs.
Gateway executive James Von Holle testified that Gateway
had to install Windows because ``We don't have a choice.''
Mr. Von Holle has testified that if there were competition
to Windows, he believed such competition ``would drive prices
lower'' and promote innovations.\30\
footnotes
\1\ November 12, 1997 Letter to Chairman Hatch from William
H. Neukom, Microsoft Senior Vice President, Law and Corporate
Affairs. (Appendix A)
\2\ Senate Judiciary Committee Transcript of Proceedings,
``Market Power and Structural Change in the Software
Industry,'' March 3, 1998, p. 78. (Appendix B)
\3\ Senate Judiciary Committee Transcript of Proceedings,
``Market Power and Structural Change in the Software
Industry,'' March 3, 1998, p. 62. (Appendix C)
\4\ Provision 7 of Earthlink License Agreement, see February
18, 1998 Letter to Manus Cooney, Chief Counsel and Staff
Director, Senate Judiciary Committee, from Marc Berejka,
Federal Regulatory Affairs Manager, Corporate Attorney, p. 3.
(Appendix D)
\5\ U.S. v. Microsoft Corporation, Memorandum of the United
States In Support of Motion for Preliminary Injunction, May
18, 1998, at 30. (Appendix E)
\6\ Brad Chase Memo, ``Winning the Internet Platform
Battle,'' April 4, 1996, p. 1. (Appendix F)
\7\ February 28, 1998 Letter to Manus Cooney, Chief Counsel
and Staff Director, Senate Committee on the Judiciary, from
Jack Krumholtz, Director Federal Government Affairs, Senior
Corporate Attorney. (Appendix G)
\8\ Senate Judiciary Transcript of Proceedings, p. 62.
(Appendix C)
\9\ U.S. v. Microsoft Corporation, Memorandum of the United
States In Support of Motion for Preliminary Injunction, May
18, 1998, at 31 and note 25. (Appendix H)
\10\ Id., note 25. (Appendix H)
\11\ Senate Judiciary Committee Transcript of Proceedings, p.
62 (Appendix C)
\12\ Senate Judiciary Transcript of Proceedings, p. 62-63.
(Appendix C)
\13\ U.S. v. Microsoft Corporation, Memorandum of the United
States In Support of Motion for Preliminary Injunction, May
18, 1998, at 35-36. (Appendix I)
\14\ Senate Judiciary Transcript of Proceedings, p. 176-179.
(Appendix J)
\15\ Response of Bill Gates to Supplemental Questions from
Senator Hatch, p. 15. (Appendix K)
\16\ Response of Bill Gates to Supplemental Questions from
Senator Hatch, p. 16, (Appendix K)
\17\ U.S. v. Microsoft Corporation, Complaint, May 18, 1998,
at 8. (Appendix L)
\18\ U.S.V. Microsoft Corporation, Memorandum, at 25.
(Appendix M)
\19\ Senate Judiciary Committee Transcript of Proceedings, p.
19. (Appendix C)
\20\ The Economist, http://www.economist.com/editorial/
freeforall/current/sf10077.html. (Appendix N)
\21\ Statement of Bill Gates before the Senate Judiciary
Committee, p. 2-3. (Appendix O)
\22\ ZDNet, ``OS Pricing: The Crux of the Matter,'' February
2, 1998. (Appendix P)
\23\ Business Week, ``Just How Much Does Windows 98 Cost?,''
June 15, 1998, p. 50. (Appendix Q)
\24\ ZDNet, February 2, 1998. (Appendix P)
\25\ Wall Street Journal, ``Microsoft's Windows Bucks the
Pricing Trend,'' March 23, 1998. (Appendix R)
[[Page S7235]]
\25\ Wall Street Journal, ``Microsoft's Windows Bucks the
Pricing Trend,'' March 23, 1998. (Appendix R)
\27\ Ibid. (Appendix R)
\28\ Response of Bill Gates to Supplemental Questions from
Senator Hatch, p. 11. (Appendix S)
\29\U.S. v. Microsoft Corporation, Memorandum, at 17, and
note 10. (Appendix T)
\30\ U.S. v. Microsoft Corporation, Memorandum, at 2-3.
(Appendix U)
Mr. HATCH. I suggest people who are interested in this issue not only
listen to what I have to say here today but that they read this. I
think they will find that this is a group that basically disassembles
on many issues. Frankly, I don't think they need to disassemble. All
they have to do is come in and tell their case forthright and in a fair
and reasonable manner and do it on the merits. If you read this, I
think you will realize this is a much more serious set of problems than
some in the media make it, especially some of those who seem to think
there should never be an enforcement of the antitrust laws.
You don't get people from the left to the right, or right to the
left--from Bork to you-name-it on the left--saying that there are
things that are wrong here, that there is an exploitation of the
monopoly power of 90 percent of the operating system and the desktop
operating systems throughout the world to crush competition and to do a
number of other things that basically are violative of our laws,
without their being some heat to some of the arguments that they are
making.
I have to say, our committee hearings have shown that there are some
things that are wrong here. It is a matter of getting people in the
software industry to have the guts to come forward and tell their
stories. For instance, the OEM, the original equipment manufacturers,
are terrified because they depend totally on Microsoft's underlying
operating system to run their machines. All Microsoft has to do is to
delay the delivery of that underlying operating system or anything else
they do to the OEMs by 1 week and they could be multimillions of
dollars in the hole as others get an unfair advantage. We have had
people come in and tell us, who are afraid to testify for fear they
would lose their business, that they have been warned they better not
cooperate with the committee or they better not tell the story.
This happens in a wide variety of things according to people who have
come to us. Now I think they have to have the guts to get in front of
the committee and tell their stories and let the chips fall where they
may. If they are true, if what they have been alleging to us and to the
Justice Department is true, then we ought to find out about it and
Microsoft ought to have some answers for it.
I yield the floor.
The PRESIDING OFFICER. The Senator from Michigan.
____________________