DOJ Colburn Notes : LUSENET : MS-DOJ : One Thread

Here are my notes on David Colburn's direct and live testimony. ("par." refers to paragraph from Colburn's direct testimony. When there is a date and a session, I am referring to the trial transcript.)

Colburn is the Senior VP of Business Affairs for AOL, responsible for negotiation and oversight of many significant contracts, including AOLs browser contracts with Netscape and Microsoft from 1995-1998.

AOL has 13 million subscribers and distributes browsers to them as part of its free client software.

In 1994, AOL bought a browser company and began distributing its browser with its client software. (par. 10).

In 1995, AOL decided to stop developing its own browser and to license third-party browsers. (par 12)

In October 1995, AOL began negotiations with Netscape. (par 22) Microsoft became aware of the negotiations and contacted AOL about licensing IE. (par 23) AOL signed a licensing agreement with Netscape on March 11, 1996. (par. 22) Netscape agreed to componentize its browser at AOLs cost. (par 22) But, because of AOLs exclusivity agreement with Microsoft for IE, Netscape did not devote significant resources to the componentization and only just recently is there a beta version available.

At the start of the AOL-Microsoft negotiations, "Gates delivered a characteristically blunt query. How much do we need to pay you to screw Netscape? This is your lucky day." (10/29 pm session, at 37, lines 9-11; govt exhibit 38) AOL signed an agreement with Microsoft on March 12, 1996, whereby IE became the default AOL browser and AOL software would be distributed with Windows 95 and promoted in the "Online Services" folder, along with a limited number of other online services. (par 29) AOL promised "virtual exclusivity" for IE on AOLAOL was severely limited in its ability to distribute and promote other browsers. (par 29)

Being included in the Online Services folder and bundled with Windows was extremely important for AOL, because (1) AOL was in competition with MSN, which was bundled with Windows and had an icon on the desktop, and (2) AOL wanted to show to the industry that it had Microsofts support and avoid any perception in the marketplace that there are interoperability problems. This "was the fulcrum of the deal." (10/29 pm session, at 34, line 11) This did not put AOL on par with MSN in the Windows distribution, but at least it was close.

This was only the first of several agreements between MS and AOL regarding AOLs use of IE and AOLs presence on the desktop. The next agreement was signed on Oct 28, 1996, titled the "Promotional Services Agreement." MS agreed to pay AOL $.25 for each member that AOL converted to IE from another browser. In addition, MS agreed to pay $600,000 if AOL met a certain goal of conversion. The agreement included additional obligations for AOL to promote exclusively IE. Microsoft made a series of changes to how it promoted online services through the Windows distribution, significantly diluting the value of the Online Services folder. Initially, Microsoft included an Internet Connection Wizard on the desktop, basically at par with the Online Services folder. At first, this did not affect much the value of the Online Services folder. But, in IE 4.0, Microsoft included a "channel bar" as part of the "active desktop" which would link to the ICW if the user did not yet have an ISP. Thus, "AOL entered into the Active Desktop Marketing, Promotion and Distribution agreement" in September 1997. (par. 40) It turned out that the active desktop was not very successful, but at the time AOL thought it would be much more important. (par 41) The agreement further limited AOLs relationship with Netscape. The agreement prohibited AOL from using its web sites to promote Navigator (except for paid advertising), and "from compensating Netscape for marketing, distribution, or promoting AOL content." (par 42) Needless to say, this puts severe restraints on any Netscape-AOL strategic partnerships.

In Windows 98, Microsoft included an ICW as part of the welcome screen that a user first sees when using a new computer for the first time. AOL perceived that one of Microsofts objectives was to reduce the value of the Online Services folder even more. AOL wanted to maintain comparable exposure to MSN or other online services promoted by Microsoft, so AOL entered into the "Internet-Sign up Wizard Referral Agreement" in October, 1998. AOL can elect at the end of the year not to continue the exclusivity and Online Services folder provisions of the March 1996 agreement, but Microsoft has demanded that AOL continue these provisions or lose the listing in the referral server.

In the cross examination, Microsoft brought out that part of the AOL and Netscape negotiations at the end of 1995/start of 1996 were agreement to stay out of each others market. Netscape had agreed not to compete in online services and AOL agreed not to compete with respect to server software. Microsoft elicited from Colburn that "as part of a strategic relationship that was not something out of the ordinary." (Oct 28, pm session, at 56, lines 21-22) But, during the redirect, the DOJ asked Colburn about what he perceived the differences between what Netscape and AOL were discussing and what Microsoft had proposed to Netscape in the browser market. Colburn responded, "We were really forced together on this strategic relationship because we had a competitor out there who had unusual leverage that they could take advantage of to get into our business. So we were looking to come together in a joint alliance to get ourselves some advantages to be able to compete on an equal playing field." (Oct 29, pm session, at 40, lines 4-10) On the other hand, Microsoft was a huge monopolist in OSs and told Netscape, essentially, dont compete with us, give up half your market, or well crush you.

There are other differences that the DOJ didnt explore. Microsoft wanted Netscape to abandon a significant part of its market. Netscape and AOL were only agreeing to stay out of markets that neither were, at the time, significant players in. Also, the markets that AOL and Netscape considered dividing were more separated than the markets that Microsoft wanted to divide with Netscape. Microsoft wanted to split the browser market in two. AOL and Netscape wanted to split the browser/server market from the online-services market. In other words, AOL and Netscape were agreeing to stay out of each others core markets, while Microsoft was trying to divide Netscapes core markets.

A major portion of the cross-examination by Microsoft was an attempt to show that IE was chosen because it was technologically the better choice for AOL. Although Microsoft did make some headway and get limited admissions, Microsoft ultimately loses on this point in the face of innumerable clear statements by Colburn that the bundling with Windows was the "fulcrum of the deal." The bundling was "a critically important competitive factor that was impossible for Netscape to match." (par 24) Besides that, this does not explain why AOL was driven to accept the exclusivity agreement while it had wanted to give its customers a choice of browsers. (par 26) Even if AOL chose IE to be the default browser because it was somewhat superior to Navigator technologically, AOL would have still chosen to distribute and/or promote Navigator, were it not for the enormous leverage Microsoft had through its OS monopoly. Unfortunately, the DOJ did not seize on this point directly in its redirect, although I believe there is enough evidence already admitted for the DOJ to make a strong argument in its closing.

There are a few other interesting tidbits:

On the definition of a browser: Par 8: "From AOLs perspective, a browser is a software application that is different from and not a part of the underlying operating system. Browsers are layered on top of operating systems, and have the ability to act as a platform from which software applications and other programs on the Internet can be launched or driven. Browsers thus provide some of the platform characteristics of an operating system, since they can manage the calls to an operating system, although they are not themselves operating systems. From an application programmers perspective, browsers can be a platform for which programs can be written, and can provide support across different operating systems."

On the value of icons on the desktop: Par 9: " By placement of icons on the desktop, the desktop provider can direct or influence the navigation of a user to preferred functions and features of the operating system or to particular application programs or Internet destinations." I think this is part of a very important concept in the broader context of this case, which I will elaborate on in a future post.

-- Anonymous, November 08, 1998

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