3653 1 IN THE IOWA DISTRICT COURT FOR POLK COUNTY ----------------------------------------------- 2 JOE COMES; RILEY PAINT, ) 3 INC., an Iowa Corporation;) SKEFFINGTON'S FORMAL ) 4 WEAR OF IOWA, INC., an ) NO. CL82311 Iowa Corporation; and ) 5 PATRICIA ANNE LARSEN; ) ) TRANSCRIPT OF 6 Plaintiffs, ) PROCEEDINGS ) VOLUME XIV 7 vs. ) ) 8 MICROSOFT CORPORATION, ) a Washington Corporation, ) 9 ) Defendant. ) 10 ----------------------------------------------- 11 The above-entitled matter came on for 12 trial before the Honorable Scott D. Rosenberg 13 and a jury commencing at 8 a.m., December 8, 14 2006, in Room 302 of the Polk County 15 Courthouse, Des Moines, Iowa. 16 17 18 19 20 HUNEY-VAUGHN COURT REPORTERS, LTD. 21 Suite 307, 604 Locust Street 22 Des Moines, Iowa 50309 23 (515)288-4910 24 25 3654 1 A P P E A R A N C E S 2 Plaintiffs by: ROXANNE BARTON CONLIN 3 Attorney at Law Roxanne Conlin & Associates, PC 4 Suite 600 319 Seventh Street 5 Des Moines, Iowa 50309 (515)283-1111 6 RICHARD M. HAGSTROM 7 MICHAEL R. CASHMAN Attorneys at Law 8 Zelle, Hofmann, Voelbel, Mason & Gette, LLP 9 500 Washington Avenue South Suite 4000 10 Minneapolis, Minnesota 55415 (612)339-2020 11 DOUGLAS J. ROVENS 12 Attorney at Law Zelle, Hofmann, Voelbel, 13 Mason & Gette, LLP 550 South Hope Street 14 Suite 1600 Los Angeles, California 90071 15 (213)895-4150 16 Defendant by: DAVID B. TULCHIN 17 STEVEN L. HOLLEY SHARON L. NELLES 18 JOSEPH E. NEUHAUS Attorneys at Law 19 Sullivan & Cromwell, LLP 125 Broad Street 20 New York, New York 10004-2498 (212)558-3749 21 ROBERT A. ROSENFELD 22 KIT A. PIERSON Attorneys at Law 23 Heller Ehrman, LLP 333 Bush Street 24 San Francisco, California 94104 (415)772-6000 25 3655 1 STEPHEN A. TUGGY HEIDI B. BRADLEY 2 Attorneys at Law Heller Ehrman, LLP 3 333 South Hope Street Suite 3900 4 Los Angeles, CA 90071-3043 5 BRENT B. GREEN Attorney at Law 6 Duncan, Green, Brown & Langeness, PC 7 Suite 380 400 Locust Street 8 Des Moines, Iowa 50309 (515)288-6440 9 STEVEN J. AESCHBACHER 10 Attorney at Law Microsoft Corporation 11 One Microsoft Way Redmond, California 98052 12 (425)882-8080 13 14 15 16 17 18 19 20 21 22 23 24 25 3656 1 (The following record was made out 2 of the presence of the jury.) 3 THE COURT: Which one do you want to 4 start with? Head fake or product reviews? 5 MR. CASHMAN: Your Honor, I just want 6 to make a couple of additional preliminary 7 comments before we go on to some of these 8 specific articles. 9 And, first of all, I'd like to hand up 10 to the Court some evidence, which we've 11 collected which underscores the -- one moment 12 please -- underscores some of the points that I 13 was making yesterday. 14 I have here a collection and a chart 15 explaining the deposition testimony -- one 16 moment, please -- the deposition testimony of 17 certain individuals, which I'd like to go 18 through quickly for the record and explain the 19 significance of this evidence briefly for the 20 record. 21 First on the chart, we have testimony 22 which is attached then from Robert Frankenberg 23 and the testimony -- pertinent testimony there 24 is excerpted. 25 Mr. Frankenberg is president and CEO 3657 1 of Novell. The point of the testimony here is 2 that trade press is unreliable. 3 Second of all, we've got testimony 4 from Mr. Richard Freedman, who is a product 5 manager -- Microsoft product manager, and as 6 you'll see in the testimony that's excerpted 7 here, Mr. Freedman is asked about trade press, 8 and his comments are very pertinent to the 9 unreliability of trade press. He says that 10 these are just gossip columns, rumor columns. 11 Second of all -- or third of all, we 12 have testimony attached from George Grayson, 13 and he was president of a company called 14 Micrographics, and he compares Info World and 15 other trade press to the National Inquirer. 16 He says, quote, it is like the 17 inquirer of our industry, so typically, there 18 are a lot of inaccuracies. 19 Fourth, we have testimony from an 20 individual by the name of Corey Tobin, and he 21 was the senior director and vice president from 22 marketing at Novell for DR-DOS. And he says 23 again, underscores the unreliability of trade 24 press. 25 Turning to the second page of the 3658 1 chart, we have testimony from Bruce Freyer, and 2 again, he -- his testimony is pertinent in a 3 little bit of a different point. 4 When you read the testimony that's 5 attached, he describes a product in which they 6 receive multiple awards for that product, and 7 he is asked if the product was successful. He 8 says no, it wasn't successful in spite of all 9 these high awards. 10 So this shows that Microsoft has no 11 support; and even though they've not provided 12 any foundation, this shows that there's no 13 correlation between awards in product reviews 14 and success contrary to Microsoft's claim. 15 Next we have testimony from Marc 16 Andreessen, and he was the former vice 17 president of technology at Netscape. 18 And his testimony goes somewhat to the 19 same point that the trade press articles just 20 aren't reliable. And in here, this testimony 21 he describes an example of where the trade 22 press was saying that users wanted certain 23 features, and then it turned out that wasn't 24 the case at all. 25 Next we have testimony that we would 3659 1 attach from Jim Barksdale, and here he talks 2 about claims about -- that he saw in trade 3 press and in relation to Microsoft's claims 4 that Internet Explorer won 19 out of 20 5 head-to-head reviews against Navigator. 6 And Mr. Barksdale testifies how he 7 didn't think that was true, and he commissioned 8 a study of his own, which found it to be false. 9 So that underscores the unreliability 10 of the trade press and counters Microsoft's 11 unsubstantiated claims. 12 Turning to the third page, we have 13 testimony -- this is trial testimony from James 14 Gosling, who is the vice president at Sun 15 Microsystem. 16 And again, his testimony underscores 17 that trade press reviews, product reviews are 18 unreliable, and he's talking in the sense that 19 there's no -- there's no way of knowing how 20 they run their tests and what they've done. 21 Next we have testimony from Michael 22 Homer, executive VP and general manager of Net 23 Center. 24 And his testimony -- his testimony is 25 that it's, quote, common for press to misquote 3660 1 or for statements to be taken out of context 2 and that -- there's nothing that people can do 3 about the inaccuracies in product reviews in 4 trade press. 5 Next, if it may please the Court, I'd 6 like to hand up two additional pieces of 7 evidence. 8 One is Plaintiffs' Exhibit 1088. This 9 is a memo -- this is an internal Microsoft memo 10 which is reacting to positive trade press 11 product reviews for DR-DOS, and it -- a battle 12 plan of how Microsoft and their public 13 relations firm, Waggener Edstrom, are going to 14 manipulate further trade press and product 15 reviews in the future. 16 And I've provided this to the Court's 17 attention, for the Court's attention because it 18 underscores the fact that trade press is highly 19 manipulable and wholly unreliable product 20 reviews in particular. 21 And then the second deposition excerpt 22 which I just handed up, actually it's trial 23 testimony, DOJ trial testimony from an 24 individual by the name of John Soyring, and 25 I've highlighted the pertinent testimony here 3661 1 in which Mr. Soyring is talking about the fact 2 that -- I'm going to actually quote Mr. 3 Soyring. 4 This is on page 81 of his trial 5 testimony, and I'm going to focus on lines 20 6 to 23. 7 He says, so you can't make a general 8 claim in performance that one is faster than 9 the others. Different benchmarks yield 10 different results showing different products 11 performing better. 12 And that just underscores the point 13 that the product reviews are unreliable because 14 it's just a matter of subjective -- somebody's 15 subjective opinion. 16 So I think all of those pieces of 17 evidence which I have just supplied to the 18 Court underscore the unreliability of product 19 reviews in particular. 20 Next I wanted to follow up quickly on 21 my comments yesterday that Microsoft has failed 22 to provide any foundation for its claim that PC 23 Magazine, or PC World in particular, the two 24 publications that contain the product reviews 25 is either widely read. 3662 1 I've highlighted for the Court that 2 absence of foundation for that claim, but last 3 night I decided to do a little further digging 4 and I looked up the population of Iowa in 1990 5 on the U.S. census statistics in comparison to 6 the total population of the United States. 7 That shows that Iowa has about 1 percent in 8 1990, had about 1 percent of the population. 9 If we took the total alleged 10 circulation as stated in Mr. Machrone's 11 testimony about the total circulation 12 approximately at that time for either PC World 13 or PC Magazine as being one million worldwide, 14 one million copies worldwide a month, and if we 15 did just basic math and calculated how much 16 that would mean as far as copies sold in Iowa 17 or distributed in Iowa, it would be less, less 18 than 10,000 copies. 19 And that means if there were 10,000 20 copies circulated in Iowa in 1990, that would 21 be less than one-half of 1 percent of the total 22 population of this state, less than one-half of 23 1 percent. 24 Furthermore, as the Court may recall 25 from the notice plan papers that were discussed 3663 1 in Court, PC Magazine in 2006 has actually been 2 identified as having a circulation of 8,500 3 copies, 8,500 copies. I think it's a fair 4 assumption that the circulation in 1990 was 5 substantially 8,500 copies for PC Magazine. 6 Nonetheless, even if we took that 7 figure, 8,500 copies, that would mean that less 8 than one-half of 1 percent of all Iowans 9 receive PC Magazine or PC World, and that 10 certainly does not come close in any measure to 11 constituting widely read as Microsoft claims 12 sufficient to put the entire state of Iowa on 13 notice to be deemed to have knowledge of the 14 specific article in any one of the publications 15 that might have been asserted in a given month. 16 And I contrast that for the Court's 17 benefit with the situation in the Fanning case. 18 Again we're talking about a county 19 with 14,000 people at most, or I guess it's 20 just over 14,000 in 1990. And there we are 21 talking about newspaper articles, multiple 22 newspaper articles that are circulated there 23 from four different publications. 24 Of course newspapers are distributed 25 on a daily basis, so the penetration in a 3664 1 community such as Fanning in that situation 2 would have been dramatically higher than what 3 would be the case for PC Magazine or PC World. 4 Indeed, I would venture to say that 5 when you're talking about an undeniable fact 6 such as anhydrous ammonia and whether or not 7 that's dangerous and would affect property 8 value, it's in a community of 3,000 people, if 9 you're talking about Sac City, or the county of 10 Sac County 14,100 people. 11 The way that word travels in a 12 community like that is close to being judicial 13 notice, and that certainly isn't remotely 14 similar to what we have here. 15 And I just wanted to highlight, then, 16 the dramatic absence of logic in Microsoft's 17 argument because they're telling the Court that 18 product reviews allegedly are widely read and 19 that this alone constitutes a sufficient basis 20 for you to permit them to be used for not for 21 truth purpose because that's just notice to the 22 market. 23 Well, under that standard, virtually 24 any article would come in for a not for truth 25 purpose, including -- we'll put the extreme 3665 1 example aside of National Inquirer, but it 2 would include articles which bash Microsoft 3 products, and it would include blogs because 4 those are widely read. 5 It would include blogs by people who 6 say Microsoft products are the worst thing that 7 ever happened. 8 You have all that kind of testimony or 9 that kind of evidence that would be admissible 10 under the -- for a nonhearsay purpose under 11 Microsoft's theory to show that, quote, the 12 market was aware of all these negative comments 13 by Microsoft. 14 You also have all these articles which 15 talk about how Microsoft responds 16 disproportionately to threats in order to send 17 notice to the market that it is going to crush 18 competitors or potential competitors if they 19 try to enter the market and compete with 20 Microsoft. 21 So all that kind of stuff would come 22 in under the standard that they're 23 articulating. 24 Now, as I've explained before, 25 Plaintiffs believe that is -- that the standard 3666 1 articulating is wholly incorrect and should be 2 rejected and that the cases, including the 3 Fanning case, set a pretty high burden which 4 Microsoft has not and cannot meet for product 5 reviews in particular. 6 If Microsoft wants to respond to these 7 general comments before we talk about these 8 articles in particular, that's fine with me. 9 MR. NEUHAUS: I think we'll never 10 finish, Your Honor, if we don't get through 11 this. Let's let him finish. 12 Your Honor, I can respond to these 13 points. 14 We are going to go on and on and on if 15 this continues, but on all of these points, 16 first of all, on the testimony that they've 17 offered, all of this goes to the weight of our 18 evidence of whether it's widely read and what 19 the jury will think of these things when they 20 see them. 21 And Fanning does set up a test. It 22 says that the test is whether -- I'm talking 23 about the testimony about how reliable this is. 24 That goes to the weight of the evidence. 25 We have evidence from experienced 3667 1 industry participants, people who aren't all on 2 the losing end, who say that these things are 3 -- both WordPerfect, Lotus, Microsoft, who say 4 that these things are paid attention to and are 5 influential. 6 And in fact, Ms. Conlin herself said 7 yesterday twice in opening, or the other day in 8 opening, that all these -- each of these 9 publications, including PC World, including PC 10 Week are influential, widely read, and 11 important. 12 And she is relying on those very same 13 publications for her FUD and vaporware stories 14 for freezing the market. 15 So to suggest that we can't get them 16 in and they can because -- and that they should 17 be able to argue that these things froze the 18 market and we can't is not even hand or 19 reasonable. 20 Fanning sets up a test. It is a test 21 -- it is the law of Iowa that newspaper 22 articles can come in for nonhearsay purposes, 23 that is for the purpose of notice, if you show 24 that they are widely read, and we have shown 25 that. 3668 1 We've shown that through Ms. Conlin's 2 own opening, through the Plaintiffs' own 3 concessions, and through the testimony of 4 experienced participants in the market on all 5 sides, both Microsoft and WordPerfect and Lotus 6 and others. 7 On the argument that trade press is -- 8 you know, can people work to get good product 9 reviews and good trade press, that shows how 10 important it is. 11 That shows how all these marketing 12 people do spend time working with the magazines 13 to get them product and make sure -- to try to 14 get their product placed in the best light 15 because it's so important. 16 The points about the Iowa consumers -- 17 and we don't have any Iowa consumers. Iowa 18 consumers, how often do they read PC Week, I 19 return to the point I said yesterday which is 20 that Plaintiffs have told us this is a 21 worldwide market. The points we're making go 22 to sales on a worldwide basis. 23 They say that Microsoft froze the 24 market. They don't suggest that the FUD went 25 to any particular Iowa consumers. The FUD went 3669 1 worldwide, and it froze the market. 2 We say the positive reviews from 3 Microsoft contributed to the worldwide sales 4 similarly as to the head fake. 5 The head fake doesn't go to whether 6 developers are in Iowa or not, it goes to 7 developers at Lotus and WordPerfect and 8 elsewhere. And for that, the question is, do 9 they read PC Week. 10 And we've got, you know, developer 11 after developer at Lotus, WordPerfect, and 12 other software makers who will testify and who 13 have testified that they do read it and they do 14 pay attention to it and they are aware of it on 15 a regular basis. 16 The test -- the test remains on this 17 motion whether we have a good faith basis, a 18 good faith basis to believe that these exhibits 19 are admissible or the testimony about them is 20 admissible because their motion is not only to 21 deny us the ability to talk about the exhibits 22 to the -- to show the exhibits to the jury, to 23 talk about them, but to talk about any of this, 24 to talk about any of these articles, and for 25 that, we certainly have a good faith basis. 3670 1 They basically have conceded that our 2 experts are going to be getting up there and 3 talking about this matter, at least them, about 4 these articles and about the effect of them and 5 about the effect on developers. And we 6 certainly should be able to talk about what our 7 experts can say. 8 No rule that I'm aware of says that 9 just because you bring it in through experts 10 doesn't mean that you can't discuss it in 11 opening. 12 We do intend, however, to offer these 13 into evidence through fact witnesses. You 14 asked yesterday who was going to bring them in. 15 Among others, we are bringing, or we 16 expect to have testimony from the senior 17 marketing people at Microsoft. A man named 18 Robbie Bach, who was marketing -- oversaw 19 marketing efforts from Microsoft products from 20 1996 to the present. 21 Another name, Pete Higgins, was in 22 charge of all Windows and Mac desktop 23 applications from 1992 through 1996. 24 And there are also industry people, 25 plus the testimony we've gotten by deposition, 3671 1 all of which will establish the foundation that 2 we are required under Fanning to provide. 3 And to say that we don't have a good 4 faith basis to believe that we can meet that 5 standard is just not true given what we've 6 offered here and what we can expect to offer. 7 On whether -- on what the test is, as 8 I said, Fanning is dispositive on the question 9 of product reviews, and it is the law in Iowa. 10 On one other point on this idea that 11 we should have gotten Iowa people, Iowa class 12 members to talk about their product reviews and 13 whether they read the product reviews, keep in 14 mind, Your Honor, we were prohibited from 15 talking to Iowa class members. 16 On the head fake, numerous cases show 17 that when you are trying to show whether one 18 acted -- whether someone acted with the 19 requisite care, you can show newspaper articles 20 that were widely circulated to show that they 21 would or should have been aware of certain 22 facts, and that's our situation. 23 The head fake, they say we deceived 24 through trade press articles and other 25 information applications developers into 3672 1 believing that we were not developing for 2 Windows and they shouldn't develop for Windows. 3 And we should be entitled to show that 4 there is a lot of information out there in 5 which we reported we were developing for 6 Windows and that they should develop for 7 Windows. 8 Two cases we cited in our papers, 9 Coyne v. Taper Partners. I have a copy, Your 10 Honor. 11 And I'm going to talk about Associated 12 Randall Bank as well. 13 THE COURT: Thank you. 14 MR. NEUHAUS: Coyne involved a hotel 15 guest who was injured when the hotel driver 16 crossed a picket line in her car, and the 17 question was whether the hotel had exercised 18 due care in sending out the driver to cross the 19 picket line, and the Court noted that in the 20 local paper, the San Juan Star, there was 21 articles about the strike and how it was 22 turning violent. 23 And if you look on page 461, in the 24 language I've highlighted, the Court held that 25 the jury could find that the article in the San 3673 1 Juan Star furnished constructive notice of the 2 tense circumstances and the potential for 3 violence, and then the footnote goes on to say, 4 Taber argues that this article is hearsay 5 evidence. It should be excluded from 6 consideration. 7 This argument overlooks that plaintiff 8 did not offer the article for the truth of the 9 matter asserted, but rather as tending to 10 establish the hotel's management knew, or 11 should have known, of the volatile nature of 12 the labor protest. 13 Similarly here, all we are trying to 14 do is to show that applications developers in 15 companies where these very publications are 16 widely read knew or should have known that 17 Microsoft was urging developers to write for 18 Windows. 19 Associated Randall, Associated Randall 20 Bank v Griffin, Kubik, Stephens, and Thompson, 21 3 F. 3rd 208 at 211, was an investment adviser 22 who recommended risky bonds, according to the 23 Plaintiffs, when he should have known widely 24 circulation -- circulated information about the 25 bonds. 3674 1 So again it went to the investment 2 adviser, whether the investment adviser had 3 exercised care in whether he was -- whether he 4 was negligently misrepresenting in what was 5 known about the bond -- negligently 6 representing the bond. 7 And the Court said he should have 8 known about widely circulated publications, 9 specialized trade press called Bond Week, I 10 think, or something like that. 11 And on page -- well, page 3 of the 12 printout that I had given you, page 211 of the 13 reported case, you see in the highlighted 14 language Kubik subscribed to these journals and 15 he testified in his deposition read them 16 occasionally. 17 We have in our evidence, evidence that 18 the decision-makers at Lotus and WordPerfect 19 read these publications regularly. 20 And the bank and the Court held that 21 the bank could -- that these articles could be 22 used to show that the bank did not use -- the 23 bank offered them not to -- not for the 24 proposition that they were accurate; that 25 Memphis was in fact engaged in interest rate 3675 1 arbitrage. That was one of the bonds, the 2 Memphis-issued bond. Was to show that a person 3 such as Kubik offering expert advice and 4 charging accordingly should have been aware 5 that these bonds were not plain vanilla 6 offerings. 7 Again, the point is that the trade 8 press was offered to show that a participant in 9 the market should have known of the information 10 that was widely available to participants in 11 that market in widely read, or in this case 12 regularly read or occasionally read 13 publications. 14 In our case, similarly, we are trying 15 to show that the developers and other ISVs 16 should have known of the information that was 17 available. 18 Again, on whether we have offered 19 sufficient evidence, the publications are 20 widely read. We've offered it here with a good 21 faith basis, and we can bring in evidence that 22 people in the industry widely read these and 23 that consumers widely read them and they were 24 considered very important to sales success. 25 And as I said at the outset, 3676 1 regardless, we certainly should be able to 2 discuss these trade press articles in opening 3 because we have a good faith basis that they 4 will be either admissible through fact 5 witnesses or experts or relied upon by the 6 experts in their testimony. 7 THE COURT: Thank you. Anything else? 8 MR. CASHMAN: Well, I guess just a 9 couple quick comments. It looks like we'll 10 have to address the specifics afterwards, but 11 just a couple of real quick comments. 12 As I stated yesterday, Ms. Conlin did 13 not show any trade press, and that's all we're 14 really seeking here, no trade press in the 15 opening statement. 16 Then Mr. Neuhaus said he thought 17 Ms. Conlin was making the statements in opening 18 to freeze the market, and that's why they want 19 to use this information. 20 If that's the case, that's a truth 21 issue because then the issue would be about 22 whether or not the market was frozen and you'd 23 have to believe that these trade press articles 24 as being true. 25 So when we go through that, I think it 3677 1 will become apparent that you have to believe 2 them as being true to make them relevant, which 3 means that they're hearsay. 4 Next, he says well, there is going to 5 be some people who they would try to get this 6 in through, and that's fine. That's why we 7 have limited our motion to the opening 8 statement. Let's see if they can get these in 9 through those witnesses. 10 I don't think they can, but let's see 11 it at the time. 12 Next, Mr. Neuhaus says that good faith 13 is the standard, and that's wrong. 14 The question first is whether they're 15 relevant, and that means was there actual 16 notice, were they read, and were they actually 17 relied upon, did it cause the reader to take 18 any kind of action. 19 And next, good faith isn't the 20 standard because we -- I'm sure the Court 21 doesn't want to admit hearsay. If this 22 evidence is hearsay, it simply cannot be 23 permitted. 24 Mr. Neuhaus totally glosses over the 25 issue of prejudice, which is discussed in a 3678 1 number of the cases, but most pertinently the 2 Gacke case, and one that recently follows it 3 that is quite probative, and I'm -- I have 4 copies for the Court of the Gacke case. 5 And the one that I have in mind, which 6 is called Morrill versus Cedar Valley Pro 7 Fitness and Martial Arts Club. 8 The Morrill case concerns a magazine 9 article, which the proponent alleged should be 10 admitted into evidence for nonhearsay purpose 11 of showing where the -- where certain opinions 12 came from, and the Court in that case had said 13 clearly you would have to have believed those 14 magazine articles as true to make them 15 relevant. Therefore, they're hearsay. 16 And they further went on to underscore 17 that the admission of hearsay evidence is 18 prejudicial. 19 So Mr. Neuhaus is wrong in that 20 standard. 21 And then lastly, I just want to 22 comment briefly on Coyne and Associated 23 Randall. 24 As I said yesterday, those are both 25 standard of care cases, and significantly on 3679 1 the standard of care issue, I believe that 2 there's a recent Iowa Court of Appeals case, 3 and if I recall correctly, I think it's called 4 McCoy, in which the Iowa Court of Appeals said 5 that no Iowa case has allowed -- if I recall 6 the holding correctly, they say that no Iowa 7 case has allowed the use of journal articles 8 and such to establish the standard of care in 9 that case for a doctor, as I recall. 10 And they said, the Iowa Supreme Court 11 hasn't permitted it, and so the Iowa Court of 12 Appeals wasn't going to be the first one to 13 allow the use of evidence like journal articles 14 and such to establish a standard of care for a 15 doctor. 16 So I believe that pretty much runs 17 counter to what is being claimed as the 18 proposition for both the Coyne case and the 19 Associated Randall case, and I also believe 20 those are distinguishable on the facts. 21 So that authority, I believe, should 22 be rejected. 23 And that's all I have to say as far as 24 general comments, and we can take up the 25 specifics this afternoon. 3680 1 MR. NEUHAUS: Your Honor, do you want 2 to just finish this? Should we try to get this 3 done? 4 THE COURT: I don't want to keep the 5 jury waiting. 6 MR. NEUHAUS: If I could, Your Honor 7 as you know, she did show the Z-NIX article. 8 There is another one, too, that she 9 showed to the jury, another piece of trade 10 press that I'll hand up right now. 11 They called it a press release. It is 12 not a press release, it's a piece of trade 13 press that she flashed to the jury and kept on 14 the screen. Here's the excerpt from the -- her 15 opening in which she did so. 16 As I say, they called it a trade press 17 article. That's just false. It's an article 18 from News Bites, a trade press publication. 19 And these News Bites, it says at the top, 20 Microsoft has released a statement, but it 21 clearly is trade -- which is why they were able 22 to claim to the jury that it was a press 23 release, but it isn't at all. 24 If you read down into the article, it 25 says, a third bug has been reported by Stac 3681 1 Electronics, Microsoft's largest competitor in 2 data compression products. That's obviously 3 not Microsoft talking. 4 The next page, Stack's technical 5 evangelist, Bruce Bamer told News Bites that 6 the company has been running upwards of 30 7 million iterations a day of test suites on 8 double space. 9 The question is, you know, are -- it's 10 about bugs in various products. 11 Then further down, Infoworld reported 12 further down, Microsoft says Infoworld first 13 contacted technical support people at a certain 14 time. Then they report what Microsoft's DOS 15 general manager, Brad Chase, told News Bites. 16 Next page. All of this goes to show 17 that this is in fact trade press. That News 18 Bites called the support line. 19 And if you look at the tag line at the 20 end, Mr. Cashman at one point has argued that 21 this is not trade press, it's a press release 22 because it has a contact at the end, but it has 23 contacts for both Microsoft and Stac 24 Electronics. 25 News Bites practice apparently is to 3682 1 provide contacts for the various companies 2 mentioned in the stories that it publishes. 3 So she published this to the jury as 4 well. It's a piece -- and it is a piece of 5 trade press. So she's twice published trade 6 press to the jury, Your Honor, and this one was 7 also admitted in the same way as the Z-NIX 8 article was the morning of the argument under 9 the agreement that said if you have a good 10 faith basis for getting it in, we said if, you 11 know, this is trade press and it's offered for 12 notice purposes, it can be admitted, and under 13 that basis, it was admitted. 14 So that's it, Your Honor. There's -- 15 on Morrill, Morrill, as I read the case, was a 16 case in which the proponent of the articles 17 offered it for the truth. That is, that it 18 could be believed by the Court that back squat 19 machines could be used in that particular way. 20 Thank you, Your Honor. 21 THE COURT: How long do you think it 22 will take to go through the -- I want to make 23 sure I have enough time to go through this. 24 MR. CASHMAN: Maybe 30, 45 minutes, I 25 hope. 3683 1 MR. NEUHAUS: I will only react to 2 what he does. 3 THE COURT: We'll do it then. 4 MR. CASHMAN: Thank you, Your Honor. 5 THE COURT: Sorry about that. I 6 really don't want to keep the jury waiting. 7 (The following record was made in the 8 presence of the jury.) 9 THE COURT: Everyone else may be 10 seated. 11 Ms. Conlin. 12 MS. CONLIN: Thank you, Your Honor. 13 Good morning. I think that you'll 14 hear another voice today, and thank you for not 15 groaning out loud. 16 I know this has been a long haul. I 17 hope that by -- I hope that at some point, you 18 will think that this was a useful exercise. 19 The stories for today are all pretty 20 brief, Real, Be, Linux, and then as I 21 indicated, I'm going to talk a little bit about 22 spoliation. 23 So I'll begin with Real. 24 Real is a streaming media company. 25 And this is about what Real suffered at the 3684 1 hands of Microsoft. 2 As you hear about RealNetworks and 3 Microsoft, you will notice a familiar pattern. 4 Microsoft, the evidence will show, 5 breaks the rules to protect and to extend its 6 monopoly. 7 What Microsoft does with regard to 8 RealNetworks, once again, it uses a wide 9 variety of tactics to accomplish its aim of 10 monopolization of the operating system market. 11 Among the tactics it uses against Real 12 are those that we have seen in other cases; 13 buying out the competition, dividing the 14 market, threats, intimidation, tying, bundling, 15 exclusionary contract terms -- these will be 16 new exclusionary contract terms -- technical 17 sabotage, and undocumented APIs. 18 First we're going to very briefly 19 discuss some of the technology involved in this 20 area. 21 RealNetworks software involves digital 22 media. PCs can be used, of course, to listen 23 to audio content like music to view pictures, 24 to watch movies, TV programs. This content is 25 stored in digital form, which means that the 3685 1 visual and audio content has been translated 2 into numbers. 3 That numerical information gets 4 translated back into audio and visual content 5 when the user plays it. 6 Digital images, audio and video 7 together, are referred to as digital media. 8 Digital information is stored in a 9 file. The picture or song or movie in a 10 digital file is called content, and content can 11 be delivered over the network in different 12 ways. 13 One approach -- the old approach was 14 downloading in which the user first goes out 15 and gets the content and it comes onto the 16 computer via the Internet, and you have to wait 17 till all of it downloads before you can watch 18 it. 19 Here is a little demonstration of 20 downloading. 21 You see that bar? Nothing's happening 22 except the bar. And using this approach, the 23 user may have to wait a long time before 24 playing the content. 25 With a large file or a slow Internet 3686 1 connection, transferring the digital file can 2 take quite a long time, minutes, even hours. 3 Okay, let's -- now, another approach, 4 the approach most frequently used now is the 5 streaming media. It uses specialized 6 technologies to let the user begin watching or 7 listening as the digital content is arriving on 8 the computer. With streaming, the user doesn't 9 have to wait until the entire file is 10 downloaded. 11 Darin, let's show streaming. 12 Can you see that little white -- the 13 little white thing there? 14 While you're watching -- while you're 15 watching, the rest of the digital file is 16 coming. 17 With the arrival of Netscape 18 Navigator, more and more people began using the 19 Internet. Most people got the Internet with a 20 dial-up modem using ordinary telephone lines. 21 Modems are limited to receiving data 22 at speeds of 14.4 to 28.8 kilobytes per second, 23 which means really not too fast. 24 Rob Glaser, a former Microsoft 25 employee, founds RealNetworks. 3687 1 First it is known as Progressive 2 Networks. Now it is known as RealNetworks. 3 He founded it in 1994. 4 RealNetworks applies what is known as 5 realtime streaming technology, first to audio 6 files and then to video files. Beginning in 7 1997. 8 And in 1997, when you tried to watch a 9 video on your computer, it -- little 10 postage-sized screens and jerky motion and not 11 too grand. But that regularly improves. 12 And RealNetworks becomes the first 13 company to offer Internet streaming media 14 players and servers commercially and becomes 15 very quickly the leader in the field. 16 And again, as with the Internet and 17 the web browsers, Microsoft is caught 18 flatfooted. 19 Microsoft sees RealNetworks' success 20 as a threat, and one of the findings of fact 21 from the Department of Justice and government 22 cases describes the threat that Microsoft sees 23 to its monopoly from middleware technology like 24 RealNetworks, like the browser, like Java, the 25 streaming media exposes APIs. 3688 1 And as a result, Microsoft sees it as 2 a potential threat to the monopolization of the 3 operating system market. 4 Let's look at the middleware again. 5 Boy, you've seen that a lot, and I know that 6 you understand the concept. 7 Of course, with the middleware, it can 8 work on Linux, it can work on Sun Solaris. 9 RealNetworks provides the APIs on 10 which applications developers can build and 11 serves as the way to get from the application 12 to the operating system, and it doesn't matter 13 what operating system. 14 Let me show you a strategic review 15 from December 2000 by Microsoft's RealNetworks 16 strategic team led by a man named Rich 17 Lappenbusch. 18 In his presentation, the Microsoft 19 team asked the question -- and this is 20 Plaintiffs' Exhibit 6901. 21 And as I said, this is in December of 22 2000. 23 Why does Microsoft care about 24 RealNetworks? Real threatens Windows desktop 25 relevance and usage. That's what we talked 3689 1 about. That might not matter anymore what the 2 operating system was. 3 And it also says digital media is the 4 next big thing on business and consumer 5 desktops, pushing OS PC upgrades and 6 excitement. Once a user is in Real, you don't 7 need Windows for media. 8 Really threatens Windows growth 9 opportunities. In other words, as more and 10 more content is -- songs, movies, TV programs 11 are available using RealNetworks software, the 12 less important Windows becomes. 13 People can listen to or watch really 14 -- using RealNetworks software, they can do so, 15 watch content on any operating system. 16 One big difference between 17 RealNetworks and Netscape, which is a -- 18 presented a similar threat to Microsoft is that 19 Microsoft recognizes this threat much earlier. 20 In an E-mail from June 5, 1997, 21 Microsoft employee named Jim Durkin describes a 22 meeting with Bill Gates, Paul Maritz, and Bob 23 Muglia. 24 This is Plaintiffs' Exhibit 4483. 25 Basically Bill G. and Paul Ma. made 3690 1 the decision that one, we need to win the 2 streaming media battle against Progressive 3 Networks. 4 Two, gave the approval for me to go 5 buy a $65 million company, fifth largest 6 Microsoft acquisition ever, in order to win the 7 battle. 8 Bill's comment was this is a strategic 9 area and we need to win it. 10 Muglia's comment was, PN, Progressive 11 Networks, now RealNetworks, is like Netscape. 12 The only difference is we have a chance to 13 start this battle earlier in the game. 14 Microsoft embarks upon a course of 15 conduct similar to its campaign against 16 Netscape, and the pattern emerges. 17 First, as it does with Apple -- we 18 talked about this yesterday. As it does with 19 Apple and as it does with Netscape, the first 20 approach is Microsoft just tries to get 21 RealNetworks to stop competing. 22 When that doesn't succeed, Microsoft 23 begins bundling its own player with the 24 operating system. Just as it bundled Internet 25 Explorer with the operating system, it does the 3691 1 same thing with its media player. 2 Some of Microsoft's conduct with 3 respect to RealNetworks is established in the 4 government case. One of those facts which I 5 skipped yesterday, and which I will -- because 6 I wanted to talk with you about it today. 7 This is Finding of Fact 111. 8 RealNetworks is the leader in terms of 9 usage share in software that supports the 10 streaming of audio and video content from the 11 web. 12 RealNetworks' streaming soft solution 13 -- streaming software presents a set of APIs 14 that competes for developer attention with APIs 15 exposed by the streaming technologies in 16 Microsoft's DirectX. 17 This, of course, is what makes 18 middleware a threat. 19 In 1977, senior Microsoft executives 20 viewed RealNetworks' streaming software with 21 the same apprehension with which they viewed 22 Apple's playback software, as a competitive 23 technology that could develop into part of a 24 middleware layer that could, in turn, become 25 broad and widespread enough to weaken the 3692 1 applications barrier to entry. 2 And as you will recall, it is the 3 applications barrier to entry that protects the 4 operating system monopoly. 5 RealNetworks software is a platform 6 supporting millions of content files and Web 7 sites. It is cross-platform. Consumers can 8 enjoy those files on any operating system, not 9 just Windows PC. 10 In March of 1998, Microsoft's Gary 11 Schare writes in a memo about Net Show. Net 12 Show was at the time the name of what became 13 Windows media player. Microsoft's -- and it is 14 the competing software to Real. 15 This is Plaintiffs' Exhibit 6337. 16 Browser -- at the top, what's at 17 stake, browser wars two. Mr. Schare, and many 18 of the other documents you will see 19 specifically say, this is like the browser. 20 This is like the war we fought against 21 Netscape. 22 Data types beyond text and graphics, 23 audio/video scripts, URL's animations, and 24 content leads to control. 25 He's saying Real can't be permitted to 3693 1 win. If Real wins, our operating system 2 monopoly is in danger. 3 Just like the battle with Netscape, 4 it's about keeping the operating system 5 monopoly. 6 In September of 1999, Microsoft's 7 Anthony Bay writes in Plaintiffs' Exhibit 8 6644 -- this is September '99. 9 Can you make that any bigger? Good. 10 We are in a platform battle at a 11 corporate level for the next generation of 12 Internet technology; namely, Rich Digital 13 Media. Losing this would be worse than having 14 ceded control of HTML, http to Netscape. 15 Microsoft creates a new division. It 16 gets lots of different names. Sometimes it's 17 called the streaming media division. 18 One of the findings from the 19 Department of Justice and government case is 20 Finding 132. 21 It says, Microsoft's interactions with 22 Netscape, IBM, Intel, Apple, and RealNetworks 23 all reveal Microsoft's business strategy of 24 directing its monopoly power toward inducing 25 other companies to abandon projects that 3694 1 threaten Microsoft and toward punishing those 2 that resist. 3 This refers to Microsoft's first 4 response to the threat presented by 5 RealNetworks. 6 As it did with Netscape and Apple, 7 Microsoft tries to convince RealNetworks just 8 to stop competing at the platform level. 9 In 1997, Microsoft, the vice 10 president, Robert Muglia, tells Bruce Jacobsen, 11 who is the chief operating officer for 12 RealNetworks, that Microsoft will injure 13 RealNetworks' business if Real continues to 14 compete in the fundamentals of audio/video 15 streaming. 16 Mr. Jacobsen took notes of his meeting 17 with Mr. Muglia. And this is in August of 18 1977. It's Plaintiffs' Exhibit 2725. 19 And, as I said, this is Mr. Jacobsen's 20 recounting of his meeting with Mr. Muglia. 21 Mr. Muglia with Real. 22 His basic message was the, and I think 23 that's they, wanted us out of core AV, 24 audio/visual. 25 That in fact Office and Windows were 3695 1 one, since if what an operating system did was 2 to display things, then Word, Excel, Office 3 were part of the OS. And since the world was 4 going networked, that applied to browsers. 5 He said that he thought video was one 6 of the most exciting data types since monitors 7 were visual things. Video had to be thought of 8 like words. And Microsoft had to control this 9 franchise. He said that anyone who competed 10 against Microsoft in the operating system lost. 11 So the message was that if we wanted 12 to do value add on top of their video, fine. 13 If not, we were an operating system contender, 14 and Microsoft would target us for obliteration. 15 Two things are important with this. 16 First, what -- this is very like the 17 June 21, 1995 meeting with Netscape where 18 Microsoft says to Netscape, we'll be the basis 19 -- you can build what you want to on top, but 20 you can't expose APIs because that would make 21 you an operating system contender. That would 22 mean that applications vendors could build on 23 top of you. Can't have that. Threatens the 24 monopoly. 25 The second thing of importance in 3696 1 connection with this is this confirms that 2 Microsoft treats Office as part of the 3 operating system as Windows and Office are one. 4 On April 27, Microsoft's Bob Muglia 5 writes to David Cole and Anthony Bay. This is 6 an internal Microsoft communication. 7 Plaintiffs' Exhibit 5978. 8 My opinion is that we should not kid 9 ourselves. We are in competition with PN. Rob 10 Glaser has been way smarter than Netscape. 11 Netscape openly announced that their goal was 12 to replace our key asset. 13 I'm pretty sure what Rob is doing is 14 building an asset that he knows Microsoft must 15 own. Video is going to be a killer application 16 for computers, and it is critical that 17 Microsoft build the base infrastructure upon 18 which these applications are enabled. 19 My bottom line is that this is not 20 some optional area we can decide we don't 21 really care about. This is a fundamental part 22 of the computing platform for the 21st century. 23 We need to own this. 24 At the end of May, 1997, Bill Gates 25 tells a group of Microsoft executives that 3697 1 multimedia streaming is strategic ground that 2 Microsoft needs to capture. 3 Gates identifies RealNetworks as the 4 adversary and authorizes the payment of up to 5 65 million for a streaming software company. 6 You know, to just buy a streaming software 7 company to accelerate Microsoft's effort to 8 seize control of the streaming standards. 9 On June 5, 1997, Microsoft's Jim 10 Durkin reports an internal Microsoft strategy 11 meeting attended by Gates, Maritz, and Muglia. 12 And this is 4483. 13 And again he says, the battle against 14 RealNetworks is like Netscape. The only 15 difference is we have a chance to start this 16 battle earlier in the game. 17 On the same day, in an E-mail to his 18 direct reports, Mr. Durkin remarks about 19 Progressive Networks. 20 We should use our mandate from God, or 21 at least Bill G., to characterize this as an 22 all-out, full frontal assault decision to go to 23 war. 24 Let me stop just for a moment. I 25 don't want you to get confused about what the 3698 1 case is about. 2 As unpleasant as it may be to see all 3 of these documents that talk about war and, you 4 know, death spirals and things like that, 5 that's how some companies talk. That may be a 6 part of their rough-and-tumble competition. 7 We didn't sue Microsoft because they 8 use war metaphors. We sued them because they 9 monopolized the three markets that matter to 10 Iowa end users. So it's not about war 11 metaphors or, you know, the bad language that 12 you've seen. 13 So this -- but the decision to go to 14 war matters in terms of Microsoft because then 15 they start all of the tactics that we have 16 talked about. 17 Two weeks after Bill Gates authorizes 18 the purchase of a streaming media company, 19 Microsoft signs a letter of intent to buy 20 VXtreme. 21 Right after that, executives at Real, 22 perhaps sensing some impending disaster, call 23 up Microsoft and propose that the two companies 24 enter a strategic relationship. 25 Microsoft's Paul Maritz reports on 3699 1 June 16, 1997, in Plaintiffs' Exhibit 2722, we 2 signed a somewhat unorthodox deal with Rob 3 Glaser, Progressive Networks last night. 4 Rob's stated plan is that he will get 5 out of the base streaming media platform 6 business and focus on higher level solutions. 7 They'll do the base layer and they'll 8 build on top, but no APIs. 9 In the first of the two agreements 10 between Progressive Networks and Microsoft, 11 Progressive Networks agrees to license its 12 streaming media product to Microsoft. 13 By early July, Microsoft agrees to 14 distribute that Real media player with Internet 15 Explorer. Microsoft also agrees to make an 16 investment in Progressive Networks. 17 They also agree that they will keep 18 working toward an agreement to align media file 19 formats and client technology, and Microsoft at 20 least believes that will get Progressive 21 Networks out of the platform business and only 22 building solutions on top of Microsoft's 23 platform. 24 Microsoft and Real -- there are two 25 deals. There are two contracts. And they come 3700 1 very close together in July of 1997. 2 Microsoft and Real continue their 3 negotiations after the first agreement toward 4 what becomes known as the Chris Phillips deal, 5 and that's the name of one of the Microsoft 6 employees who's negotiating. 7 6077 is a July 3, 1997 memo -- E-mail 8 from Anthony Bay to Muglia and Cory Van 9 Arsdale, and he says Bob, in addition to 10 getting very involved in the second PN 11 contract, the Chris Phillips deal it is called, 12 I think you may also have to play a role in 13 sorting out final resolution of some other 14 related things. 15 And shortly thereafter, on July 21, 16 Microsoft and RealNetworks enter into the 17 second agreement. 18 Microsoft agrees to distribute a copy 19 of RealNetworks' media player with each copy of 20 Internet Explorer, to make a substantial 21 investment in RealNetworks, to license the 22 source code for certain RealNetworks streaming 23 technologies, and to develop, along with 24 RealNetworks, this common file format for audio 25 and video content. 3701 1 Muglia signs the agreement on 2 Microsoft's behalf, and Microsoft believes that 3 RealNetworks has, in turn, agreed to 4 incorporate Microsoft's streaming media 5 technologies into its products. 6 RealNetworks sees the agreement 7 differently. A few days after it signs this 8 deal, RealNetworks continues its plans to 9 continue developing the fundamental streaming 10 media software. 11 And there are more negotiations in the 12 midsummer and the fall, but they do not lead to 13 the result that Microsoft was hoping for. 14 So Microsoft withdraws from its 15 investment in RealNetworks in 1998 and 16 introduces the successor to their Net Show 17 player, which is now called the Windows media 18 player. 19 Microsoft offers the window media 20 player initially as a stand-alone product. You 21 know, not as a part of the operating system, 22 but as a stand-alone product that you can 23 download from the Internet. And that's how it 24 is offered during the time of Windows 95, 98, 25 and Windows NT. 3702 1 It is not successful as a stand-alone 2 product. In fact, so unsuccessful that in 3 December of 1997, MSNBC, which was the joint TV 4 cable network between Microsoft and NBC, 5 intends to sign a deal with RealNetworks to use 6 their streaming media technology. 7 On being informed of this, Bill Gates 8 writes in Plaintiffs' Exhibit 6265, I will jam 9 this home because I have to. However, we must 10 have a terrible product group for this issue to 11 get to this level. 12 So even though Microsoft is an owner 13 of this TV network, it has to force it to use 14 the Windows media player. 15 So Microsoft does the tying, bundling 16 tactic. It joins the media player with the 17 operating system. And this happens in June of 18 1998. 19 There is an Exhibit 9458. These are 20 the backup slides -- June 11, 1998 -- the 21 backup slides for Bill Gates, Bill G., and this 22 -- did I tell you 9458? 23 Lists as one way for winning versus 24 RealNetworks. Full client integration with 25 Windows. 3703 1 The same tactic of tying and bundling 2 that we saw with Internet Explorer, which 3 ultimately defeated Netscape Navigator and 4 protected Microsoft's monopoly power. 5 In January of 1999, Microsoft 6 executive Anthony Bay -- I believe at this time 7 he is the head of the digital media or 8 streaming media division at Microsoft. He 9 sends Bill Gates an E-mail outlining a plan for 10 Microsoft to dominate streaming media. 11 He does not recommend that Microsoft 12 compete by improving its streaming product. 13 Instead, he recommends the following. 14 And this is Plaintiffs' Exhibit 6523. 15 Our strategy. Change the rules, 16 reposition streaming media battle from Net Show 17 versus Real to Windows versus Real. Follow the 18 IE, Internet Explorer, strategy wherever 19 appropriate. 20 The net take-away we want customers 21 and analysts to have is that streaming media is 22 like the web a couple of years ago. 23 So the battle will not be Real media 24 player versus Windows media player. That 25 didn't work. It will be Real media player 3704 1 versus Windows versus the Windows operating 2 system. 3 That does work. Real no longer faces 4 the unpopular and not very good Windows media 5 player stand-alone. It faces the Windows 6 operating system, the ubiquitous Windows 7 operating system. 8 In May of 1999, Microsoft launches 9 Windows 98 SE, second edition, and that 10 includes a bundled copy of the Windows media 11 player. Out of the box, users have Windows 12 media player whether they want it or not. 13 For the launch of -- from the launch 14 of Windows 98 SE until today, Microsoft 15 distributes its Windows desktop operating 16 system bundled with a digital media player. 17 All versions of Microsoft's PC 18 operating systems licensed in the United States 19 come with the Windows media player bundled. 20 And tying the Windows media player to 21 the operating system gives that Windows media 22 player almost universal distribution. 23 Microsoft is using its monopoly power 24 in operating systems to make the Windows media 25 player as ubiquitous as Windows itself. 3705 1 Approximately 95 percent of all PCs 2 are shipped with Windows, so that means 3 approximately 95 percent of all PCs are shipped 4 with the Windows media player. 5 Neither Real media -- RealNetworks or 6 any other maker of media player software can 7 offer the universal permanent installation that 8 Microsoft achieves through this tying 9 mechanism. 10 Microsoft achieves its distribution 11 not by winning a competition on the merits, but 12 by exploiting the operating system monopoly to 13 protect the operating system monopoly. 14 And the other side of the coin is 15 content providers, people who produce the 16 content played on the media player. 17 They -- Microsoft says to them, use 18 our media formats and Codex and use our media 19 servers because only the Windows media format 20 is playable by the software certain to be 21 installed on every Windows PC. 22 Microsoft again, as we saw with 23 Internet Explorer, Microsoft claims that the 24 Windows media player is just a part of the 25 operating system. 3706 1 And you will see the evidence will 2 show it is no more true of the media player 3 than it was of the browser. 4 Having achieved near universal 5 distribution of its media player by bundling it 6 with Windows, Microsoft then uses contractual 7 restrictions to make it even more difficult for 8 PC makers to preinstall or promote competing 9 digital media players such as RealNetworks. 10 We know that OEMs in the period 11 mid-'95 to mid-'99 have no choice but to 12 preinstall Windows if they want to stay in 13 business. 14 That's Finding 54 from the government 15 case. 16 Microsoft has imposed what it called a 17 free system requirement on OEMs as a condition 18 of loading the Windows PC. 19 This means that when Windows is loaded 20 and the PC is turned on, there must be a 21 certain amount of memory that -- memory 22 resources that remain unused after the window 23 loads. 24 And remember, Microsoft is bundling 25 Windows media player with Windows at this time. 3707 1 It's making, of course, the Windows media 2 player the default player, the one that will 3 automatically be used. 4 David Richards from RealNetworks will 5 be here -- we expect him to be here, and he 6 will talk about these free system requirements 7 imposed by Microsoft. 8 They are so restrictive that loading 9 any other media player with Windows and making 10 the other media player the default player is 11 precluded. 12 This forces, he will tell you, a 13 number of OEMs with whom RealNetworks had 14 contracts to cancel the contracts. 15 Mr. Richards will also testify how 16 RealNetworks responds by developing Tinkerbell, 17 which is a smaller media player that does not 18 violate Microsoft's contractual free system 19 requirements and that would automatically 20 launch after the boot sequence. You know, when 21 it first starts up, then Tinkerbell would 22 launch. 23 The Windows license, however, prevents 24 OEMs from including any automatic launch of any 25 competing software. 3708 1 Again, Microsoft's OEM license 2 restrictions make it difficult, if not 3 impossible, for PC makers to distribute 4 competing software to consumers, even where the 5 OEMs believe consumers want it and where the 6 OEMs are willing and want to make it available 7 for consumers. 8 These actions make it more likely that 9 customers would only be able to get 10 RealNetworks by downloading it off of the 11 Internet. And Dr. Noll and others will tell 12 you that that is not likely to happen, just not 13 likely to happen. 14 In addition to the tying and bundling 15 and the restrictive contracts, Microsoft also 16 gives its media player an unfair competitive 17 advantage over others by using the undocumented 18 APIs. The sockets that programs use to plug 19 into the operating system. 20 These sockets provide access to the 21 functions and features. 22 In order to use the API, of course, a 23 developer needs to know it's there, it needs to 24 know what it does, and needs to know how to use 25 it. 3709 1 Microsoft allows the Microsoft 2 programmers who write Windows media player to 3 use APIs not available, not available to other 4 media player programmers such as people at 5 RealNetworks. 6 One of the APIs was called SH -- these 7 named are -- Sh Get View State Property Bag. I 8 don't know what it does for sure. Mr. Schulman 9 will tell you. But what a name. SH Get View 10 State Property Bag. 11 This is an important API. It has to 12 do with a display of screen arch, album arch. 13 Microsoft does eventually document it 14 in 2003 along with 290 other APIs that have 15 been previously undocumented. And this is in 16 2003. 17 As I mentioned, in 1997 Microsoft has 18 virtually no presence, none in the streaming 19 media business, but once we entered the 2000s, 20 Microsoft has become far more pervasive based 21 not on the superiority of its product, but on 22 tying and bundling, restrictive contracts, and 23 on the use of undocumented APIs. 24 You will hear likely Microsoft say 25 that Windows media is part of Windows. We've 3710 1 heard that before in terms of the Internet 2 Explorer and the browser. 3 In Finding 154 of the government case, 4 the finding of fact says the browser and the 5 operating system, two separate products, just 6 like Internet Explorer, is not a part of 7 Windows. The evidence will be that neither is 8 the Windows media player. 9 Microsoft's own licensing promotional 10 and marketing material treats the product 11 separately, plus Microsoft has released 12 versions of Windows media player to run on 13 Apple Macintosh, and maybe another one as well. 14 And they produce a version of Windows 15 in Europe that -- called Windows XPN that does 16 not include the Windows media player. 17 You might also hear them say they have 18 to include the Windows media player to protect 19 the integrity of the operating of the Windows 20 platform. There's no technical justification 21 for doing that. Mr. Schulman will talk to you 22 about that. 23 And you are -- you may also hear them 24 say how can it be bad for consumers when 25 Microsoft gives away free a media player? How 3711 1 can that possibly result in overcharging? Why 2 is that bad for consumers? 3 Well, it's bad for a number of 4 reasons. It permits Microsoft to maintain its 5 monopoly. It permits it to maintain the 6 monopoly by protecting the applications barrier 7 to entry from erosion by competing products 8 that expose APIs. 9 And if Microsoft can illegally 10 monopolize the operating system, it can 11 continue to charge its monopoly price, the 12 monopoly overcharge, without worrying that OEMs 13 will stop buying Windows and that independent 14 software vendors will find another platform 15 attractive and begin developing for it. 16 The evidence will show that Microsoft 17 is protecting the ABTE, applications barrier to 18 entry, by engaging in the same conduct toward 19 Real that it engaged in toward Netscape and 20 with the same results. 21 Real story, the end. 22 Be. I would think that not very many 23 people have ever heard of the Be operating 24 system, but there was such a thing. 25 The evidence will show that 3712 1 Microsoft's -- Be, the Be operating system. 2 It is -- the evidence will be that 3 these short names like GO and Be, they don't 4 make the product necessarily successful, but 5 they're fun. 6 Microsoft's contracts have several 7 anticompetitive terms. Some have already been 8 proven. But rather than middleware, some are 9 directed toward any potential operating system, 10 right at any potential operating system 11 competitor. 12 Here are a few of them. OEMs' PCs 13 must start up by going directly to Windows. 14 OEM PCs must start up by displaying 15 the Windows desktop. 16 They must use a no operation boot. 17 They must use Microsoft's OEM 18 preinstallation kit. That's called the OPK. 19 OEMs cannot delete or change any part 20 of the Windows installation once it's on the 21 hard disk in the OEM preinstallation kit. They 22 can't change the startup sequence. 23 And they can't launch any program 24 prior to booting Windows. 25 Microsoft uses these terms, which the 3713 1 evidence will show are anticompetitive, to 2 prevent computer manufacturers from using the 3 BeOS, the BeOS, an attractive competitive 4 operating system product. 5 There are three OEMs about whom we 6 have details, some details about their 7 interaction with Be. They are Hitachi, Compaq, 8 and Fujitsu. 9 I want to show you a screen shot of 10 Be. This is the desktop. This is what a Be 11 operating system desktop can do. 12 It is multitasking, it is 13 multithreaded. It can -- it was designed from 14 the very beginning to be a media operating 15 system and to handle the vast streams of data 16 unleashed by the multimedia revolution. 17 What makes it different is this 18 multithreaded multitasking memory protection 19 kind of a thing that you see displayed there. 20 It is particularly designed for people 21 who want to do high-end audio and video 22 production. 23 In collaboration with Intel, Be 24 creates a version of the BeOS for Intel 25 compatible PCs. 3714 1 But despite Intel's support and the 2 technical superiority of Be for such multimedia 3 applications, the evidence will be that 4 Microsoft prevents even a single major United 5 States OEM from preloading it. 6 Microsoft uses those anticompetitive 7 contract clauses, it uses threats and 8 intimidation and FUD, and despite the fact that 9 Be eventually offers this operating system for 10 free, it still cannot get on to the desktop 11 that Microsoft controls. 12 At this time, this is '98, this is an 13 emerging platform. It doesn't have a lot of 14 applications so Be devises an innovative 15 approach to surmounting the applications 16 barrier to entry. 17 Be tries to enter the market by 18 positioning Be as a complement to Windows. 19 Be offers to license its operating 20 system to computer manufacturers for 21 preinstallation in a dual boot configuration. 22 In other words, two operation -- two 23 operating systems would sit side by side, and 24 the user would decide, either at the beginning 25 using the boot loader, or at any time in the 3715 1 operation which operating system to use. 2 The boot Be produces a thing called 3 the boot manager software for Be, and that 4 allows the user to select which operating 5 system to launch after the computer is turned 6 on. 7 Rather than booting directly into 8 Windows, dual boot allows the user to choose. 9 Am I going to do multimedia today or do I want 10 to type a letter using Office? And you're 11 going to type your letter using Office, you 12 boot into Windows, and if you're going to do 13 your multimedia audio/video production, you 14 boot into Be. 15 And preinstallation, of course, as we 16 know, is the most effective way of getting an 17 operating system or any other kind of software 18 basically into the hands of computers, and here 19 is why. 20 After-market installation is 21 intimidating, complex to end users, data can be 22 lost, computers can be broken. 23 Most end users don't want to tamper 24 with their computer. And delivering the many, 25 many megabytes of software code for 3716 1 installation of the Be operating system over 2 the Internet just -- it costs more, very slow, 3 and again, people just aren't likely to do it. 4 They're just not likely to do it. 5 Microsoft is keeping very close track 6 of what's going on with Be. A particular 7 concern to Microsoft during this time frame is 8 they do not have a competing product. 9 They don't have anything that does 10 what the Be operating system can do. 11 Here is a document from David 12 Williams. It is Plaintiffs' Exhibit 9876. 13 November 2, 1998, Mr. Williams writes 14 to Carl Stork, who is general manager of PC 15 hardware strategy and evangelism. 16 He says, we are continuing to realize 17 that the BeOS dual boot with Windows 95 on PCs 18 is progressing rapidly inside OEMs. The 19 premise still being that high-end audiovisual 20 apps are better on Be than Windows 98. 21 Intel is positioning OEMs against each 22 other to generate a little fear that this -- 23 that the competitors are going to ship 24 something and get a jump on the consumer 25 market. 3717 1 Problems getting data from OEMs is 2 that some of the key folks at Compaq and HP 3 driving this work are not members of the 4 Microsoft fan club. 5 The reason OEMs can entertain this 6 functionality has several factors. 7 One, Intel and Be are positioning 8 Windows 98 lack of support in these areas as 9 the reason Be is better. 10 The mail you sent around on the 11 changes we need for DV, which means digital 12 video, capture support in WDM, Win 32 driver 13 model, is an excellent example. 14 No concrete follow-up plans from 15 Microsoft on how we are resolving these user 16 scenarios, clarity. 17 3. What I call the screw MS factor. 18 We have received proposal from Compaq telling 19 us they want now -- what they want now and in 20 the future. They think we are screwing around 21 with their product plans and are tired of 22 betting on our ability to deliver. 23 A little later, November 13, 24 Plaintiffs' Exhibit 9875, this is from 25 Mr. Stork to Jim Allchin, whose name you've 3718 1 heard often, David Cole, Brad Chase, David 2 Williams, Paul Maritz, and Eric Rudder. 3 This says, the key feature that Be is 4 leveraging is that BeOS is a far better AV 5 editing environment than Win 98 or NT. 6 One telling example is that multiple 7 OEMs have pointed out problems to us with our 8 DV, digital video capture support in WDM for 9 Win 98. 10 We have not committed to fixing them 11 or given people a time line they can count on. 12 We are hearing from OEMs that they don't think 13 they can count on us. 14 Hence, Be's product is very appealing 15 as a consumer AV editing environment. Intel is 16 very actively encouraging this. 17 Note that today Intel -- note that 18 Intel today announced a 5 percent equity 19 investment in Be. 20 So the reading of these and other 21 documents indicates that Microsoft does not 22 have a product that matches this competitor's 23 product. 24 We will look at the three examples 25 that I talked about, Hitachi, Compaq, and 3719 1 Fujitsu. 2 And in each case what happens is the 3 OEM evaluates Be on its merits and decides that 4 it wants to offer Be to its customers. 5 Then Microsoft uses its contract terms 6 coupled with its MDA, market development 7 agreement, and threats and intimidation to put 8 pressure on the OEM. 9 And then the OEM changes its plans. 10 It either abandon's Be altogether or it's 11 forced to use it in a way that prevents 12 consumers from buying a PC with Be installed in 13 a way that's easy to use that's accessible to 14 the consumer. 15 And that virtually guarantees Be's 16 failure. 17 The evidence will show Microsoft 18 forces the OEMs to abandon its plans or 19 truncatel them or discontinue them. 20 Let's start with Hitachi. 21 In early 1998, Hitachi representatives 22 enthusiastically approach Be about including 23 the Be operating system in one of its FLORA 24 models, the Prius it's called. 25 By September 1998 Hitachi has made its 3720 1 decision. 2 This is Plaintiffs' Exhibit 9133. 3 I had mastered this pronunciation, but 4 I'm going to give it a shot. 5 Hiroaki Aotsu, obviously a person in 6 power in Hitachi, writes to Jean Calmon, who is 7 a Be vice president. 8 Jean, greeting. We are planning to 9 launch Hitachi PC, FLORA series bundled with 10 BeOS, Japanese version coming this Christmas. 11 So what Be understands is the BeOS 12 would share the hard drive on the Hitachi 13 computer along with the Windows operating 14 system from Microsoft. 15 Be agrees to deliver to Hitachi both a 16 boot manager where you would -- you could boot 17 up into either operating system, depending on 18 what you wanted to do, and a desktop BeOS 19 launcher. And that's -- it's an icon on the 20 desktop. 21 You're working along in Windows, 22 you're typing your letters, and you want to 23 launch Be, because now you feel like making 24 some kind of a movie, and so you just press the 25 icon and the Be operating system launches on 3721 1 the desktop. You know, just back and forth you 2 can go easily with this icon. 3 On November 11, 1998, Hitachi publicly 4 announces in Tokyo that it is including the 5 BeOS along with Windows on one model of its 6 FLORA series of desktop PCs. 7 From Be's standpoint and from Hitachi, 8 the launch is a very successful event. 9 So what happens? Hitachi eventually 10 ships a line of computers with BeOS installed 11 on the hard drive. However, those computers 12 are not configured to allow the user to boot 13 into Be. Indeed, nothing in the computer 14 startup sequence indicates that Be is on the 15 computer. 16 To start Be, the user has to start the 17 computer, start the whole computer from a 18 floppy disk and follow an involved procedure to 19 install the boot loader software and the 20 launcher -- the boot, you know the launcher, Be 21 launcher manually. 22 The packaging for the FLORA Prius does 23 not identify the Be operating system as an 24 available preinstalled operating system, and 25 there's not even a Be sticker on the machines. 3722 1 There is a sticker apparently in the bottom of 2 the box. 3 The instructions for launching the 4 BeOS on the FLORA Prius are 11 pages long. 5 Here's just the cover. This is 6 Plaintiffs' Exhibit 9137. You'll have this to 7 leaf through perhaps. 8 Even some experienced PC users cannot 9 -- they purchase the FLORA and they can't 10 figure out how to get this BeOS booted up. 11 The utilities and applications needed 12 to configure BeOS in a dual boot configuration 13 are in Hitachi's hands. 14 In November 1998, the Hitachi 15 representatives tell the Be representatives 16 that BeOS will have to be launched in this 17 floppy diskette arrangement, and Be says why? 18 Why do you no longer intend to do what you 19 planned to do, what you said that you were 20 going to do? Hitachi says it has talked to 21 Microsoft. 22 In 1998, Hitachi's license from 23 Microsoft for Windows contains a number of 24 interlocking restrictions that effectively 25 prevent it from preinstalling any competing 3723 1 operating system in a dual boot configuration, 2 which doesn't affect Windows at all. 3 We believe that the evidence will be 4 that Microsoft's standard OEM licenses all 5 contain these provisions. 6 Hitachi changes its plans and uses Be 7 in a way that is not very attractive to 8 consumers. Eleven pages of complicated 9 instruction in order to boot up is pretty 10 discouraging to most users. 11 Hitachi, we believe the evidence will 12 show, had no real choice but to not install the 13 BeOS boot manager or the boot launcher. 14 Under the terms of Hitachi's OEM 15 license with Microsoft, Microsoft conditions 16 the level of Windows discounts on whether the 17 computer shipped by the OEM start up by going 18 directly to Windows and displaying the Windows 19 desktop. 20 In order to receive these rebates from 21 Microsoft, all Hitachi machines must use what's 22 called -- and I mentioned earlier the no 23 operation boot. 24 This means the user performs no 25 operation on his or her own when the computer 3724 1 is turned on. It boots straight into Windows. 2 Hitachi's companywide discounts and 3 rebates may be in danger if it installs any 4 boot manager that would intervene in this no 5 operation boot. 6 Microsoft's licenses also require OEMs 7 to install Windows by using only Microsoft's 8 OEM preinstallation kit. That's the OPK. 9 And that automatically wipes off any 10 operating system that happens to be on the -- 11 already on the computer hard disk. And also 12 installs Windows boot loader, which can only be 13 used with Windows. 14 Microsoft's licenses also prohibit 15 OEMs from deleting or changing any part of the 16 Windows installation once it's on the hard 17 drive. And also the licenses also say OEMs 18 cannot change the Windows startup sequence once 19 Windows has begun to boot. 20 These terms prevent any OEM with a 21 Microsoft license from preinstalling any boot 22 loader other than Microsoft, or even from 23 installing a program that would allow users to 24 install the boot loader themselves by clicking 25 on an icon rather than that floppy diskette and 3725 1 11 pages of instructions. 2 The whole concept of these dual boot 3 strategy is destroyed. 4 We talked a little bit about MDAs. 5 Microsoft grants discounts on Windows 6 to OEMs who meet certain criteria under the 7 market development agreement. 8 Achieving the highest level of 9 discounts from Microsoft on Windows is 10 important to major OEMs. We've already talked 11 about this. Hardware manufacturers work on 12 very narrow margins, and the MDAs become the 13 substitute for the per processor licenses. 14 Once per processor licenses are 15 discontinued, the MDAs come into effect, and 16 according to the testimony of Professor Noll, 17 they become -- they have the same 18 anticompetitive effect as the per processor 19 licenses. 20 Microsoft -- one feature that was 21 present in the MDAs is this. Microsoft grants 22 or withholds MDAs in its sole discretion. In 23 other words, Microsoft -- you can do -- if you 24 are an OEM, you can do everything you think 25 you're supposed to to get the maximum amount of 3726 1 the rebate, but Microsoft under the contract 2 can say well, no, you really didn't, we don't 3 think you did, and therefore, we're not going 4 to give it to you. And that's a bit of a club. 5 So OEMs do not want to risk that. 6 And under Microsoft's eligibility 7 criteria, Hitachi risks not only losing its 8 Windows discount, but the ability to display 9 the Windows logo, which OEMs think is a very 10 valuable thing. You know, the little thing on 11 the computer that says whatever it says about 12 Windows. 13 Hitachi therefore does not do with the 14 Prius what it says it wants to do, and these 15 computers ship with no indication that the 16 Prius is installed except for the complicated 17 floppy disk based installation kit. 18 Not surprisingly, it wasn't 19 successful. 20 Compaq. Compaq considers licensing 21 the BeOS for use on a dual boot Windows machine 22 also early in 1998. 23 Compaq representatives tell Be that 24 Microsoft's contractual restrictions make it 25 impossible for Compaq to preinstall Be's boot 3727 1 manager or the boot launcher, the BeOS launcher 2 or for Compaq customers to boot up the BeOS out 3 of the box. 4 Even though Compaq wants to give its 5 consumers, its customers a choice of a dual 6 boot computer, the evidence will show that 7 Microsoft would not permit it to do so. 8 Microsoft also talks to many other 9 OEMs about Be. You will see the documents that 10 support that, and most, if not all, of the 11 royalty OEMs, the big OEMs receive visits from 12 their account representatives, and the topic of 13 Be is a part of the discussion. It's therefore 14 not surprising that Be runs into these brick 15 walls, one after the other. 16 So they figure out another way to go. 17 Much like GO, you know, moves over to the 18 Hobbit, Be decides to develop its product for 19 use on something called an Internet appliance. 20 The idea here is a simple and 21 inexpensive and easy-to-use device that 22 delivers Internet access and application 23 functionality through a browser interface 24 without the need for Windows. 25 Although Microsoft is a competitor for 3728 1 Internet appliance operating systems with a 2 product called Windows CE, it doesn't have a 3 monopoly share of that market. 4 Nevertheless, Microsoft views these 5 Internet appliances as a threat to monopoly -- 6 to its monopoly on the Intel PC. 7 The Internet appliances, like 8 middleware, operating system independent. It 9 doesn't care about the operating system. 10 It is made on -- it is built on 11 cross-platform Java programming language. 12 You've heard about what Microsoft did 13 to Java in the government case in your findings 14 of fact. 15 So beginning in early 1998, Be and 16 Compaq enter into confidential discussions 17 regarding the use of the Be operating system on 18 this new Internet appliance for a street retail 19 price of under $500. 20 This is back in '98. Compaq hopes to 21 build an Internet access device with this 22 instant on capability featuring this new 23 non-Windows user interface. 24 Compaq has approached Be about using 25 Be's device, and Be's engineers devote hundreds 3729 1 of hours to building a working prototype and 2 getting ready to assist Compaq in launching 3 this new Internet appliance. 4 At the joint review meetings between 5 Be and Compaq, Be is told Compaq is absolutely 6 committed to the Be device, to the Internet 7 appliance, and to launching this new product. 8 But in November of 1998, Be's hopes 9 are dashed. First of all, Compaq vice 10 president, Trey Smith, forwards to Microsoft 11 all of Be's confidential information, all of 12 its data, all of its confidential information. 13 Later in November, the same guy, Trey 14 Smith, calls Be and tells Be that Compaq is no 15 longer interested. What's happened here? 16 Microsoft chairman Bill Gates visits Compaq 17 CEO, Eckert Pfeifer, as a part of a digital 18 appliance review. 19 Here is an E-mail from Mr. Gates about 20 that meeting. 21 Plaintifs' Exhibit 2973 dated 22 November 2, 1998. 23 Mr. Gates sends it to all of his 24 executives, Ballmer, Maritz, Kempin, Fade, Carl 25 Sittig, Pete Higgins, Brad Chase. 3730 1 This is on Monday, and he talks about 2 a meeting he has with Compaq on the preceding 3 Friday. 4 The consumer group is planning to ship 5 a portal PC in the second half of 1999. At 6 present, Microsoft is not, all caps, the chosen 7 OS vendor for this machine. I tried to probe 8 and understand why not as best I could. 9 Our relationship with Compaq should 10 avoid us being in this kind of come-from-behind 11 situation. Even if we can't meet all of 12 Compaq's needs, they should come to us first 13 and be clear about what they need. 14 I told Compaq that we should focus on 15 whether we can provide the OS. Rod feels -- 16 Compaq employee. Rod feels like Windows CE is 17 not at all focused on this kind of machine and 18 is missing the multimedia and other support 19 required. 20 So Rod tells Gates exactly what he has 21 been telling the Be people, which is CE is not 22 right for this Internet appliance. 23 Mr. Gates goes on. He is talking 24 about a machine that just does browsing. The 25 way he talked about it made me feel like maybe 3731 1 the BeOS is considered a favorite -- I'm sure 2 that's supposed to be choice. 3 It would be -- this is a long memo, 4 all of which you will have. 5 It would be a big disappointment for 6 us to have another OS to be chosen here. We 7 need to get on top of this. Trey Smith may 8 give us more insight into what is going on 9 here. 10 Trey Smith, of course, is the one who 11 ships over all of Be's plans, proposals, and 12 data which no doubt gives Microsoft more 13 insight. 14 Our OEM group needs to get to the 15 bottom of this ASAP. 16 This is an aside. I thanked Rose L. 17 for all of his trips to Seattle and his 18 willingness to distract -- I'm sure it must 19 mean something else -- a lot of time for the 20 lawsuit. 21 Mr. Rose was one of Microsoft's 22 witnesses at the government case. 23 The whole meeting included my 24 one-on-one with Pfeifer at the end was very -- 25 the whole meeting, including my one-on-one with 3732 1 Pfeifer, at the end was very friendly except 2 for my really probing Schrock on portal-related 3 issues. 4 However, we help -- however, we help 5 Compaq a lot with our front-line efforts. 6 There is tension over portable PC and appliance 7 server and portal in general. 8 In this same memo, in this same 9 exhibit Microsoft estimates the annual revenue 10 for this device at between 3 and $12 million 11 per year. 12 Shortly after the meeting with Gates 13 and Pfeifer, the BeOS device is canceled. Be, 14 just like GO before it, loses a contract that 15 it thought it had replaced by a Windows product 16 that is not appropriate for the device. 17 Compaq does eventually reengage Be in 18 -- on a line of Internet appliances. I think 19 it was late in 1999. But those appliances are 20 distributed only in Europe on a very limited 21 basis and ships the Windows CE in the model it 22 ships in the United States. 23 On January 29, 1999, Microsoft reviews 24 its Windows 98 strategy. 25 Carl Stork does the presentation and 3733 1 includes a discussion of Be guided by this 2 slide. 3 This is Plaintiffs' Exhibit 9140. 4 Here are the slides that I presented 5 today. This goes to Chris Jones and David Cole 6 and others. 7 Threat potential, BeOS, what we know. 8 Intel encouraging and supporting Be to fill 9 imaging hole we are leaving. 10 We believe that is an admission by 11 Microsoft that it has no comparable product to 12 Be. 13 Hitachi now offering BeOS imaging 14 system in Japanese retail outlets. 15 That's the Prius that I told you about 16 with the floppy diskette. 17 Compaq, HP, Gateway also considering 18 BeOS played off each other. 19 Whatever Be is showing it is 20 compelling to our OEMs. 21 Be doesn't yet have 1394 digital video 22 support. 23 Let's move to Fujitsu. 24 It evaluates Be on the merits; wants 25 to use it. This is a major OEM. 3734 1 It intends to use Be only in Europe 2 and on one small line of computers. But it is 3 a foothold for Be that has so far alluded it, 4 and so it's encouraging. 5 In March of 1999, Fujitsu agrees to 6 ship the Be operating system on its silver line 7 computers. This is a high-end slick machine, 8 got an aluminum case. You'll see the picture. 9 It is well-received at demonstrations done 10 throughout Europe. 11 And both companies know -- this is a 12 new idea -- it will take some time for the 13 computer to find -- this new operating system 14 to find its market. 15 Frank Arnold is the VP of silver line 16 for Fujitsu, and he gets a visit from Ms. 17 Natalie Aires of Microsoft who explains to him 18 that Fujitsu cannot do what it promised Be that 19 it will do. 20 He will tell you by deposition that 21 Ms. Aires expresses great disappointment with 22 Fujitsu for its disloyalty and tells Mr. Arnold 23 Microsoft does not consider Fujitsu a good 24 partner as long as it is shipping even on a 25 floppy disk the Be operating system. 3735 1 Microsoft suggests the possibility 2 that they will deny Fujitsu those valuable 3 marketing development funds. 4 Be and Fujitsu struggle to find some 5 way to work together, some way to let consumers 6 choose this operating system if they want to. 7 Fujitsu tells Jean Calmon, Be's 8 representative in Europe, who tells his 9 headquarters on July 13, 1999. 10 This is Plaintiffs' Exhibit 6669. 11 The rules concerning the 12 preinstallation of BeOS couldn't be accepted. 13 It is planted to install BeOS and Windows on 14 different partitions on the hard drive as they 15 are different systems. 16 Doctor Hein, who is a Fujitsu 17 technical person. Doctor Hein doesn't see a 18 possibility to switch between the two systems 19 without rebooting the PC. Therefore, we are 20 not able to fulfill point 4, Roman numeral III 21 of the letter of agreement. 22 According to our contracts with 23 Microsoft, the boot manager has to be installed 24 in such a way that after a certain time, 25 Windows 98 is booted automatically if the BeOS 3736 1 has not been chosen, referring to paragraph 4, 2 Roman numeral IV of the contract. 3 Be's response still in 6609, there are 4 several options to boot BeOS as Doctor Hein 5 knows. 6 In paragraph 41, the user has the 7 option to choose the system he wants to boot 8 during the boot process. 9 Windows consequently can be the 10 default system and boot automatically if there 11 is no user intervention within a specified 12 period of time. 13 Computer turns on, user make a 14 decision which to use, but if the user doesn't 15 choose Be, it boots automatically into Windows. 16 Paragraph 42. Receiving equal 17 placement means both systems are installed on 18 the disk in two separate partitions and both of 19 them -- we think this is are -- both of them 20 are listed at the time of boot on the screen 21 giving user the choice of the one he wants to 22 use, but Windows can be the default operating 23 system. 24 43. Be has also a small Windows 25 application called the BeOS launcher, which 3737 1 allows a user using Windows at any time, to 2 stop using it and launch BeOS from the Windows 3 screen without rebooting. 4 Once the user is using BeOS, he cannot 5 relaunch Windows without rebooting anyway. 6 We don't see the problem for Fujitsu 7 to preinstall and deliver this nice-to-use 8 little application which in any case is on the 9 BeOS CD. 10 If Fujitsu decides not to preinstall 11 the BeOS launcher app in any case, user will be 12 able to install it from the CD and use it. 13 There is a contract -- the contract is 14 dated July 26, 1999. 15 It is Plaintiffs' Exhibit 6697. 16 I have for the most part tried to 17 avoid reading directly to you from contracts 18 because they're very dense, they're written in 19 language that is difficult to understand, but I 20 thought you would want to see this. 21 This is a contract between Fujitsu and 22 Be, and it says Fujitsu agreed to preinstall 23 and run BeOS on the silver line computers in 24 such a manner so that, one, the user has the 25 option to launch BeOS during the boot process 3738 1 provided that such launch program is not based 2 on Microsoft files. 3 Two, BeOS receives equal placement 4 with Microsoft Windows and any other operating 5 system. 6 Three, BeOS application launcher is 7 delivered separately. 8 And, four, the Be supplied boot 9 manager is installed and run on the silver line 10 computer's hard drive. 11 In order to ensure equal placement, 12 Fujitsu agrees that the machine will not use a 13 no operation boot into Microsoft Windows. 14 Microsoft prevents Be from reaching 15 the consumer in the convenient way that Be 16 designs. 17 As with Hitachi, the end user has to 18 load the BeOS from a floppy disk. There is no 19 icon on the desktop and no easy way to use the 20 product. 21 And as would be expected, the silver 22 line doesn't do very well. 23 Shortly after Fujitsu begins shipping 24 the silver line, it merges with Siemens, and 25 Microsoft contracts have to be negotiated. 3739 1 Mr. Arnold, Mr. Frank Arnold, leaves 2 in the merger period, and Fujitsu abandons the 3 BeOS. 4 Here is Exhibit 6697 dated December 5 23, 1999. 6 This is from Be, Jean Calmon to 7 Fujitsu. 8 As you know, we had signed a letter of 9 intent on July 26 which was stipulating that 10 Fujitsu could get BeOS licenses for free until 11 December 31st, provided Fujitsu had signed a 12 final license agreement with Be, Inc. 13 The latest never happened. 14 After the visit I had on November 13,