United States Of America. v. Microsoft Corporation Court Filing by Thomas Penfield Jackson, November 5, 1999, is part of
c. Pressuring OEMs to Promote Internet Explorer and to not Pre-Install or Promote Navigator
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Microsoft’s restrictions on modifications to the boot sequence and the configuration of the Windows desktop ensured that every Windows user would be presented with ready means of accessing Internet Explorer.
Although the restrictions also raised the costs attendant to pre-installing and promoting Navigator, senior executives at Microsoft were not confident that those higher costs alone would induce all of the major OEMs to focus their promotional efforts on Internet Explorer to the exclusion of Navigator.
Therefore, Microsoft used incentives and threats in an effort to secure the cooperation of individual OEMs.
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First, Microsoft rewarded with valuable consideration those large-volume OEMs that took steps to promote Internet Explorer. For example, Microsoft gave reductions in the royalty price of Windows to certain OEMs, including Gateway, that set Internet Explorer as the default browser on their PC systems.
In 1997, Microsoft gave still further reductions to those OEMs that displayed Internet Explorer’s logo and links to Microsoft’s Internet Explorer update page on their own home pages. That same year, Microsoft agreed to give OEMs millions of dollars in co-marketing funds, as well as costly in-kind assistance, in exchange for their carrying out other promotional activities for Internet Explorer.
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Microsoft went beyond giving OEMs incentives to promote Internet Explorer. The company’s dealings with Compaq in 1996 and 1997 demonstrate that Microsoft was willing to exchange valuable consideration for an OEM’s commitment to curtail its distribution and promotion of Navigator.
In early 1996, at around the same time that Compaq was removing the MSN and Internet Explorer icons and program entries from the Presario desktop, Compaq announced its intention to work with Netscape for its internal Internet needs and on Internet server initiatives. In response, Microsoft insisted that Compaq support Microsoft’s Internet initiatives throughout its business.
To make its displeasure felt, Microsoft initiated a series of cooperative ventures with some of Compaq’s competitors, including DEC and Hewlett-Packard.
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When Compaq eventually agreed to restore the MSN and Internet Explorer icons and program entries to the Presario desktop, it did so because its senior executives had decided that the firm needed to do what was necessary to restore its special relationship with Microsoft.
On May 13, 1996, Compaq signed an addendum extending the firms’ Frontline Partnership to the realm of network-related products.
Pursuant to the addendum, Compaq agreed to ship Internet Explorer as the default browser product on all of its desktop and server systems, to adopt and promote Internet Explorer internally, and to focus the majority of Compaq’s key networkoriented announcements and marketing activities on Microsoft’s technologies and strategy.
In September of the same year, Compaq agreed to offer Internet Explorer as the preferred browser product for its Internet products and to use two or more of Microsoft’s hypertext markup language (“HTML”) extensions in the home page for each of those products.
Then in February 1997, Compaq committed itself to promote Internet Explorer exclusively for its PC products in exchange for Microsoft’s agreement to pay Compaq a bounty for each user that signed up for Internet access using a Compaq PC.
Despite the view of some within Compaq that the firm’s goal should be “to feature the brand leader Netscape,” Compaq elected not to resume the pre-installation of Navigator on its Presario PCs after it removed the joint Spry/Navigator icon.
In fact, Compaq stopped pre-installing Navigator on all but very small percentage of its PCs.
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In return for Compaq’s capitulation and revival of its commitment to support Microsoft’s Internet strategy, Microsoft has guaranteed Compaq that the prices it pays for Windows will continue to be significantly lower than the prices paid by other OEMs.
Specifically, the operating system licenses signed by Compaq and Microsoft in March 1998 gave Compaq “[g]uaranteed better” pricing than any other OEM for Windows 95, Windows 98, and Windows NT Workstation (versions 4 and 5) until April 2000.
Compaq’s license fee for Windows is so low that other OEMs would still pay substantially more than Compaq even if they qualified for all of the royalty reductions listed in Microsoft’s Market Development Agreements (“MDAs”). What is more, while Microsoft requires other OEMs to verify actual compliance with particular milestones in order to receive Windows 98 royalty reductions, Microsoft has secretly agreed to provide the full amount of those discounts to Compaq regardless of whether it actually satisfies the specified conditions.
In addition to a guaranteed most-favorable price on Windows, Compaq has enjoyed free internal use of all Windows products for PCs since March 1998
- Microsoft’s relations with Compaq beginning in late 1996 illustrate the blandishments that Microsoft is willing to extend to OEMs that ally with it to help it capture browser share. Microsoft’s relations with Gateway and the IBM PC Company, by contrast, reveal the pressure that Microsoft is willing to apply to OEMs that show reluctance to cooperate on this front.
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In February 1997 a Microsoft account representative told his counterpart at Gateway that Gateway’s use of Navigator on its own corporate network was a serious issue at Microsoft. He added that Microsoft would not do any co-marketing and sales campaigns with Gateway if the firm appeared to be anything but pro-Microsoft.
If Gateway would replace Navigator with Internet Explorer, Microsoft would compensate Gateway for its investment in Netscape’s product. If Gateway refused, Microsoft might be compelled to audit Gateway’s internal use of Microsoft products. Gateway was separately told by Microsoft representatives that its decision to ship Navigator with its PCs could affect its business relationship with Microsoft.
Despite the pressure from Microsoft, Gateway refused to switch its internal use to Internet Explorer or to stop shipping Navigator with its PCs. Although Microsoft did not implement its more specific threats, Gateway has consistently paid higher prices for Windows than its competitors.
Microsoft’s actions not only corroborate the evidence of its interest in suppressing the usage of Navigator, they also demonstrate its ability to threaten recalcitrant customers without losing their business.
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Similarly, in early 1997, Microsoft tried to convince the IBM PC Company to promote and distribute the upcoming release of its new browser, Internet Explorer 4.0. At a meeting with IBM executives in March 1997, Microsoft representatives threatened that, if IBM did not pre-load and promote Internet Explorer 4.0 to the exclusion of Navigator on its PCs, it would suffer “MDA repercussions.”
One of the Microsoft representatives in attendance, Bengt Ackerlind, stated that in return for IBM shipping its systems without any software that competed with Microsoft, IBM would receive “soft dollars,” marketing assistance, improved access to the source code of Windows 95 and Microsoft’s BackOffice product, and the ability to self-certify for Microsoft’s Windows Hardware Quality Lab provisions.
In a follow-up meeting three weeks later, Microsoft representatives again insisted that IBM distribute and promote Internet Explorer exclusively and again offered soft dollars, marketing assistance, and MDA reductions in return.
Later that day, in a smaller meeting that Microsoft referred to as “secret discussions,” Ackerlind stated Microsoft’s desire that IBM promote Internet Explorer 4.0 exclusively and warned that if IBM pre-installed Navigator on its PCs, “We have a problem.”
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The IBM PC Company refused to promote Internet Explorer 4.0 exclusively, and it has continued to pre-install Navigator on its PCs. The difference in the ways that Compaq and IBM responded to Microsoft’s Internet-related overtures in 1996 and 1997 contributed to the stark contrast in the treatment the two firms have since received from Microsoft.
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