Windows 95 and Explorer
The Internet Explorer browser that Microsoft adapted from a licensed Spyglass design was introduced in late 1995. Prior to that time, in June 1995, Microsoft and Netscape executives met to discuss their browser products. Testimony and documents from Netscape officials revealed that Netscape’s goal in the meeting was to gain access to Windows 95 APIs needed to make Netscape’s Navigator browser run successfully. A Netscape executive, supported by detailed notes taken at the meeting, testified that Microsoft representatives tried to persuade Netscape to agree to a division of the browser market, with Navigator becoming the sole browser for earlier versions of Windows and other operating systems (such as Macintosh) while Microsoft’s Explorer would be the only browser offered by the two companies for Windows 95 and subsequent Windows versions. As an incentive for accepting its proposal, Microsoft offered to invest a 20 percent equity share in Netscape. Whatever the proposal was, it was rejected by Netscape. Microsoft witnesses denied suggesting a division of the market, which would be clearly illegal. They insisted that they were merely seeking to learn Netscape’s plans and to inform Netscape that Microsoft would be competing aggressively in the browser arena.
When Microsoft’s Internet Explorer was ready for marketing in late 1995, it was made available separately to consumers running older versions of Windows and also, in a modified version, to Macintosh owners. But for purchasers of Windows 95 or new computers loaded with Windows 95, Explorer was provided as an added feature at no incremental price, i.e., in a bundle that included both the operating system and the browser. For the Spyglass Company, which had licensed Microsoft to use its core browser architecture and had 82 additional royalty licenses outstanding, Microsoft’s effective zero-price strategy came as an unpleasant surprise, undermining much of Spyglass’ $20 million annual revenue. For Netscape too, the Microsoft strategy meant that Navigator had to compete against a zero-price product, and Netscape subsequently began distributing all copies of Navigator free, attempting to make up for the revenue loss through sales of complementary services. The government’s expert economic witness asserted that Microsoft’s zero-price strategy was predatory, aimed at driving competing browsers out of the market and failing to cover marginal costs, which included not only the modest cost of distributing Explorer on compact discs or over the Internet but also the more substantial cost of providing post-sale advice to Explorer purchasers. Microsoft witnesses argued in reply that Microsoft’s strategy was by no means unique, since Netscape had seeded the market by distributing millions of copies of its Navigator browser free, and that consumers buying new computers loaded with Windows 95 preferred to obtain the browser as part of a bundle rather than having to purchase and install the browser separately.
Even though Microsoft’s Internet Explorer was provided at a zero incremental price to Windows 95 buyers, many computer makers preferred to include Netscape’s Navigator in the new computers they sold and/or to feature Navigator on the first screen that confronts computer users following boot-up. This preference was attributable to Navigator’s earlier availability and the strong
For the exclusive use of Y. Gao, 2017.
This document is authorized for use only by Yuanyuan Gao in Industrial Organization II: Spring 2017 taught by Erich Muehlegger, University of California – Davis from April 2017 to June 2017.
Microsoft on Trial ___________________________________________________________ CR14-99-1522.0
consumer acceptance it enjoyed. In June 1996, Compaq, at the time the world’s leading personal computer seller, announced that it would not only include Navigator as a standard feature in the computers it sold, but it would remove from the Windows desktop screen the icon for Explorer. Microsoft responded by notifying Compaq that its Windows 95 license would be terminated forthwith—a threat that led Compaq to back off from its Navigator-favoring strategy. Other Windows-based computer makers were induced to feature Explorer on their machines’ desktop screens by discounts for Windows 95 that were larger if Explorer were given pride of place than if it was not. Microsoft defended these practices by arguing that the discounts let end users enjoy lower prices and the convenience of one-click access to Explorer websites. And that they did not prevent other browser vendors, e.g., Netscape, from finding alternative ways such as direct transmission over the Internet to emplace their browsers in users’ computers. In 1996, the leading provider of on-line network services, America Online (AOL), disclosed preliminary plans to distribute Netscape’s Navigator to its roughly five million subscribers. AOL’s choice was motivated in part by the revealed consumer preference for Navigator and by AOL’s unhappiness over Microsoft’s decision to initiate a network service competing with AOL’s. However, Microsoft induced AOL to choose Internet Explorer instead by offering AOL’s icon a preferred position on the Windows desktop. Microsoft executives insisted that AOL’s decision was influenced less by the valuable screen “real estate” offered by Microsoft than by Microsoft’s superior responsiveness to AOL’s technical requirements. Apple Computer, which did not use Microsoft’s Windows operating systems, nevertheless depended upon Microsoft for popular applications software programs such as the Office suite. When Apple made Netscape’s Navigator the default browser on its Macintosh computers, it was informed in 1997 that Microsoft would cease developing Macintosh-compatible versions of Office—a threat that led Apple to reverse course and feature Explorer instead of Navigator. Microsoft thereupon rewarded Apple by investing $150 million in the company, which at the time was experiencing declining product acceptance and growing financial stress.
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