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Novell v. MS Trial Transcripts as text - Day 2, October 18, 2011, Opening Statements ~pj
Sunday, June 03 2012 @ 12:02 AM EDT

Here is the transcript, as text, of day two of the Novell v. Microsoft antitrust trial over WordPerfect. That would make it October 18, 2011, and it was the official beginning of the trial, starting with opening statements from both Novell and then Microsoft, and then Novell began presenting its evidence. The opening statements are not evidence, but they are the attorneys letting the jury know what each hopes to present and why each thinks it is right in this dispute. For Novell, the opening statement was handled by Jeff Johnson of Dickstein Shapiro. For Microsoft, it was David Tulchin of Sullivan & Cromwell.

Interestingly, this was a case about APIs, with Novell accusing Microsoft of promising to provide the necessary APIs for Novell to be ready with its WordPerfect products when Windows 95 shipped, providing them in beta and encouraging Novell to build its products around them, but that Microsoft then shifted gears, telling Novell that the APIs were no longer available after Novell was 80% finished with its coding, while Microsoft secretly continued to use the APIs themselves, leaving Novell high and dry, with no way to ship in a timely fashion, so as to benefit from the Windows 95 launch. If you think about the Oracle v. Google trial, which recently established the functional code like the 37 APIs Google used from Java can't be copyrighted, you can see as we go through the evidence in this trial what an advantage an established vendor has if it can control and monopolize APIs.

Groklaw's Chris Burns was at the courtroom that day, and if you'd like to compare the transcript with his report, it's here.

This day is represented by two PDFs, 398 and 399. All the trial transcripts, as PDFs, are here.

Our thanks to bugstomper, for coming up with the script that made it possible to do these PDFs as text, while also removing the line numbers.

*********************

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
CENTRAL DIVISION

In re:
NOVELL,

Plaintiff,

vs.

MICROSOFT,

Defendant.

_____________

Case No.

2:04-CV-01045JFM

_____________

BEFORE THE HONORABLE J. FREDERICK MOTZ

DATE: October 18, 2011

REPORTER'S TRANSCRIPT OF PROCEEDINGS

JURY TRIAL

VOLUME II

Reporter: REBECCA JANKE, CSR, RMR
KELLY BROWN HICKEN, CSR, RMR

20

A P P E A R A N C E S

FOR THE PLAINTIFF: DICKSTEIN SHAPIRO
BY: PAUL R. TASKIER, ESQ.
JEFFREY M. JOHNSON, ESQ.
MIRIAM R. VISHIO
[address]

WILLIAMS & CONNOLLY
BY: JOHN E. SCHMIDTLEIN, ESQ.
[address]

SNOW, CHRISTENSEN & MARTINEAU
BY: MAX D. WHEELER, ESQ.
[address]

NOVELL
BY: JIM LUNDBERG, ESQ.

FOR THE DEFENDANT:
SULLIVAN & CROMWELL
BY: DAVID B. TULCHIN, ESQ.
STEVEN L. HOLLEY
SHARON L. NELLES
[address]

MICROSOFT CORPORATION
BY: STEVE AESCHBACHER, ESQ.
[address]

RAY, QUINNEY & NEBEKER
BY: JAMES S. JARDINE, ESQ.
[address]

21

OCTOBER 18, 2011 SALT LAKE CITY, UTAH

PROCEEDINGS

* * *

THE COURT: Okay. The jurors are here. We are all set to go. The first thing that I would do is to read the instructions that from yesterday.

MR. TULCHIN: Thank you, Your Honor.

THE COURT: Yes, sir

MR. JOHNSON: Your Honor, just to give you an idea of how I think we see things going today, obviously we are going to do the openings. I don't know if Your Honor has a preference of giving them -- given the length of the opening, giving them a short break.

THE COURT: I'm glad you asked that, because I think there is a schedule which the Court wants to follow of taking a short break around 10:00 o'clock, and then I think they are actually going to have a light lunch, so we will break around 12, so we will see how it goes. Whichever. And I also told Theresa if the jurors feel uncomfortable, if they want a bathroom break before 10:00 o'clock, to raise their hands.

MR. JOHNSON: Okay. And I think given the advertised sort of lengths, that actually might work out well, where we're going to be done to probably somewhere around ten.

THE COURT: Actually, it sounds about right.

22

MR. JOHNSON: After that, I think the only thing we anticipate doing, after, given the length of the day, is we are going to have the collateral estoppel findings, we're going to read those in.

THE COURT: Okay.

MR. JOHNSON: And I have -- if I can approach, we have agreed upon -- we talked yesterday about the sentence you're going to read about it and, as you may remember, there was an issue on timing, given there's references to timing in those facts currently, and so we have added in, "in 1999 to," I think it will solve that.

THE COURT: You all are making it too easy for me. Although, I suspect that from now on --

MR. JOHNSON: The only other last housekeeping thing, Your Honor, is I did confer that you can get the same streaming transcript over the internet back in Baltimore, and what we will do is we will e-mail to the clerk --

THE COURT: That's all right.

MR. JOHNSON: -- that information, and the parties have agreed that -- you will still have to, you know, set up a user name and a log in, but the cost of that comes to us, and the parties are going to split that cost.

THE COURT: Well, if it's expensive, let me know, and I will --

MR. JOHNSON: It's $75 a day or something like that,

23

so we will split that. So, they don't have to log in every day, but any day they want to log in, we will handle it.

THE COURT: Okay. And then, Theresa, actually, I'll come down and start and get this --

THE CLERK: Or Larry it is here.

THE COURT: Oh, there you are. We might as well do it now and bring in the jury.

Are you still about two hours?

MR. JOHNSON: I think so, Your Honor. I'm going to try to -- (Phone rings.)

SECRETARY: Judge Moffat's chambers.

THE COURT: Here we are, and we will have the opening statements soon.

SECRETARY: Thank you, Judge. I'll hold on.

THE COURT: If she knew she was speaking to the entire courtroom -- actually, she does know. I called her up before and said, "Did you know you're speaking to the entire courtroom?" And she was mortified.

(Jury brought into the courtroom.)

THE COURT: Good morning everybody. Please be seated. Thank you all for being so prompt. We very much appreciate it. I'm sure Theresa has told you -- (loud noise) -- are being serviced. I apologize for that.

I'm sure Theresa has told you what the basic

24

schedule will be. We'll take a break around 10:00 o'clock. Mr. Johnson is going to give an opening statement, and at the end of his opening statement, we will have some food and a bread and then Mr. Tulchin is going to give an opening statement, and we'll take another short break, and then we will have the trial go on. If, at any time, any of you feel uncomfortable and you need a break before 10:00 o'clock, just raise your hand. Don't be embarrassed. It happens sometimes. It's much more important that you are comfortable and listen to what's going on, so don't be embarrassed if you want a short break.

One thing I forgot to tell you yesterday in my preliminary instructions was that -- and I'll just read this to you. In the process of producing documents in this case during discovery, which I described yesterday, the lawyers from Novell and Microsoft may have placed stamps or other indications on documents for identification purposes. For example, you may see the word, quote, confidential, unquote, or the words, quote, highly confidential, unquote, on certain documents. Those stamps may not have been made on the documents when -- they may not have been made -- been on the documents when they were originally created by Novell or Microsoft but were added later by the lawyers when they exchanged documents during discovery.

You may also see documents containing markings with

25

one or more letters followed by a series of numbers, often near the bottom right corner of each page. For example, some documents contain the marking, quote, MS, unquote, followed by a number. Others contain, quote N-O-V, end quote, followed by a number. These markings were also not on the documents when they were created. Finally, some of the Novell documents contain some dates in 2008. These dates are incorrect and do not reflect when the documents were actually created or edited but are on those documents because of the way they were kept by the company. That happens once in a while.

And I might add, I suspect you may hear the number Bates number or something of that nature. Bates is simply a way of numbering documents. So if they say Bates stamp or Bates number during deposition testimony, they are just referring to the number on the bottom right-hand of the page.

Mr. Johnson.

MR. JOHNSON: Thank you very much, Your Honor.

Ladies and gentlemen of the jury, good morning. My name is Jeff Johnson. I am an attorney for Novell. Under the rules of the Court, I get to talk to you about the evidence you will hear and see in this case.

During the course of this trial, I will be assisted by other attorneys from Novell. Let me first introduce Mr. Max Wheeler, with the firm of Snow, Christensen &

26

Martineau here in Salt Lake City. John Schmidtline from the firm of Williams & Connolly in Washington, D.C., and my colleague, Paul Taskier and Marian Vishio, of the firm of Dickstein Shapiro. I would also like to introduce to you Mr. Jim Lundberg. Jim. Jim works for Novell here in Provo, Utah, and he was also employed by WordPerfect for many years prior to coming to Novell. He will try to be with us throughout the trial, although he may be called away, from time to time, on other business.

As you know, this is an antitrust case. Judge Motz gave you some preliminary instructions about the case yesterday. Before we get into all the evidence, I tried to think of a way to simply summarize what this case is all about. And the best way to do that is to tell you that this is a case about fair play. This is not a case where Novell is wanting some special treatment from Microsoft.

Novell wanted nothing more than to compete on the merits of its products. Microsoft, however, had other plans. Microsoft, as you were told yesterday, has a monopoly in operating systems. The evidence will show that Microsoft was threatened by Novell's applications and middleware products and took anticompetitive actions against those products in order to protect its operating systems monopoly.

Instead of competing with Novell on the merits, Microsoft engaged in deception, a classic bait and switch,

27

where Microsoft offered Novell and other application developers some very exciting and important technology and then pulled the rug out from under them. Microsoft did this in order to tilt from the playing field in Microsoft's direction.

Now, you may ask, how could Novell, who owned the popular word processing application, WordPerfect, and the spreadsheet, Quattro Pro, threaten Microsoft's monopoly in operating systems? Here's the answer. In the mid-1990's word processing applications and spreadsheets were the primary reason people would go by computer software. People don't go out looking to by an operating system. You go shopping for the applications that will do something for you. You simply need the operating system to run the applications.

WordPerfect was historically one of the most popular word processing applications available. It worked on a number of different operating systems. The fact that an application as popular as WordPerfect worked on a number of different operating systems was a threat to Microsoft's operating systems monopoly. The evidence will show that Microsoft took anticompetitive actions against Novell so that Microsoft could control these key franchise applications and ensure that Microsoft Windows remained the dominant operating system.

Microsoft's monopoly was further threatened because

28

Novell -- threatened by Novell because WordPerfect was a form of middleware. Later today I will explain in detail to you what middleware is, but, generally, it's technology that allows application developers to write their applications to the middleware instead of to the operating system. This has the effect of making the operating system a lot less important. Moreover, if the middleware works on multiple operating systems, like WordPerfect did, then the application developers really don't care what operating system is underneath.

From the consumer perspective, your perspective, this would mean that your favorite applications would work with any operating system, whether it was Microsoft's or a competitors. To combat the threat that Novell's applications and middleware products posed to Microsoft's operating system monopoly, the evidence will show that Microsoft engaged in a number of anticompetitive acts that injured Novell.

Today I'm going to primarily focus on the most important anticompetitive act, the bait and switch I have alluded to earlier, but you will hear about other anticompetitive acts throughout the course of this trial.

As you will see today, most of the evidence of Microsoft's conduct comes out of the mouths of Microsoft's own executives, including Mr. Bill Gates, as recorded in their e-mails and other documents at the time of the events

29

in question. One of the things that you're going to have to do in this case is to look at what the Microsoft executives said at the time and compare that with what some of them will tell you today. As Judge Motz told you, you are the sole judge of the facts.

Today, I'm going to share with you pertinent parts of some of those contemporaneous documents. And don't worry that I'm only showing you parts of those documents today. At the end of the case, you will get complete copies of all the documents I am going to show you. Let's get started.

WordPerfect Corporation and Novell are both Utah companies. Many of you have probably heard of them. Back in the 1980's and early 1990's WordPerfect was the leading word processing application in the world. The original application was written by the leader of the marching band at B.Y.U. Novell was also a leading software company back then, best known for its server operating system called Netware. Novell continues to exist today and is headquartered in Provo, Utah.

In June of 1994, Novell acquired WordPerfect, the maker of the WordPerfect word processing application. It also acquired a spreadsheet application called Quattro Pro. As you will learn, Novell was not the only bidder for WordPerfect. Another applications developer called Lotus also wanted to buy WordPerfect. I mention Lotus not only for

30

their interest in WordPerfect, but also because you will see Lotus' name come up quite a bit in the documents.

Lotus was also an applications company. Their suite of office productivity applications was called Lotus Smart Suite. And they also sold a document and e-mail collaboration application called Lotus Notes. Some of you may have heard of those applications. As the evidence will show, Microsoft executives often spoke of Novell WordPerfect and Lotus together.

You will learn why as we go along. Novell's vision was to combine WordPerfect and Quattro Pro with other Novell applications and technology to produce a suite of network-aware applications called PerfectOffice, shown on the screen on the right.

Bob Frankenberg, the former CEO of Novell, will be a witness in this case, and he will talk to you about Novell's vision of network-aware applications. Now, everyone across the country and across the world knows Microsoft. Some of you may remember the Microsoft operating systems, Windows 3.1, Windows 95 and Windows 98. We will be talking primarily about Windows 95 in this case. During this time period, Microsoft also produced a server operating system called Windows NT. It competed with Novell's Netware operating system.

During this mid-'90's period, Windows NT had a very

31

small market share. It wasn't very popular, but I mention it because we will hear about Windows NT again this case. Now, Microsoft also produces a suite of office productivity applications calls Microsoft Office, which contains the word processor Word and the spreadsheet Excell. So that's three suites of office productivity applications that you will hear about in this case, Novell's PerfectOffice, Microsoft's Office, and Lotus' SmartSuite.

It's hard to avoid Microsoft products today. Most people use Microsoft's operating system Windows and its application products that run on top of it, including Microsoft Office. The evidence will show Microsoft understood early on that, in order to strengthen its position in operating systems, it was important to control the office productivity applications that ran on top of the operating system Windows.

Here we see an internal Microsoft e-mail. It is from Bill Gates to other Microsoft executives. The subject is Microsoft's operating system strategy. Here, going all the way back to 1989, Mr. Gates recognized that a strong applications business would be extremely helpful to Microsoft's system strength and operating systems, and the applications discussed in this e-mail by Mr. Gates include the word processing and spreadsheet applications that are contained in the office productivity application suites that

32

we will be talking about.

So, why is a strong applications business extremely helpful to Microsoft's strength in operating systems? That question is answered by Jeff Raikes. Mr. Raikes was a top Microsoft executive in the 1990's. Mr. Raikes is sending an e-mail to Warren Buffett here, one of the richest men in the world. Mr. Raikes is trying to get Mr. Buffett to understand Microsoft's business and why it was a good investment.

Mr. Raikes states: "If we own the key franchises built on top of the operating system we dramatically widen the moat that protects the operating system business."

Now, you will get to see portions of Mr. Raikes' deposition where he explains that the key franchises he is talking about here are the office productivity applications that run on top of Windows. So, if Microsoft owns all these key franchises, it dramatically widens the moat protecting Microsoft's operating systems monopoly. It is Novell's contention in this case that Microsoft took anticompetitive actions against Novell WordPerfect in order to advantage Microsoft's Office, its key franchise suite of office productivity applications and that it took those actions for the reasons stated here by Mr. Raikes, to widen the moat protecting Microsoft's operating systems monopoly.

Now, in the software industry, which we are going to be talking about throughout this case, it is absolutely

33

critical that your new applications be on the shelf and available to consumers at or near the time of a new operating system release. Here we see a Microsoft document talking about the importance of time to market and their desire to exploit system releases to advantage their own office productivity applications.

Microsoft wants to time its applications releases with its operating systems releases.

Time to market is so important that here we see Steve Ballmer -- he's Microsoft's current CEO, indicating that he was prepared to delay the release of Windows 95 if Office 95 was not available in quantity in the stores at that time. He says: "Let me be clear, though. If we can not get office in the stores, we will need to move the Windows 95 street date. I will not want to move forward with Windows street if we can not have office in quantity in stores. That is an absolute requirement for me."

Now, time to market is equally important for independent software vendors. That's one of those terms that's going to be an acronym throughout this case. Independent software vendors are called ISV's in the industry. Novell, WordPerfect and Lotus are all ISV's. The evidence will show that one of Novell's primary objectives was to have PerfectOffice for Windows 95 on the store shelves within 30 to 60 days of the release of Windows 95. The

34

evidence will show that Novell's office productivity applications did not meet this goal because of the anticompetitive conduct of Microsoft.

Now, Judge Motz told you, in his preliminary instructions yesterday, that during the time period relevant to this case, Microsoft had a monopoly in the market for PC operating systems. Microsoft can not dispute that fact in this case. That's important because that's one of Novell's burdens in this case, to show that Microsoft had a monopoly. That burden is satisfied.

The conclusion that Microsoft had a monopoly in PC operating systems was the result of a case against Microsoft in Washington, D.C. that was filed in 1998. This case against Microsoft also resulted in a large number of additional factual findings that Microsoft cannot dispute in this case.

At the conclusion of Microsoft's opening statement later today, Mr. Taskier, who I have introduced to you earlier, will read to you some of those undisputed facts. And I apologize right now for their length and their complexity, but they are important for you to hear. We will talk about some of those undisputed facts this morning. You should also keep in mind that those undisputed facts were written in 1999. So, when you hear a finding that says currently or talks about today, it is talking about the world

35

in 1999.

Now, as Judge Motz also told you, a monopoly, in and of itself, is not illegal. But the law imposes an obligation on a monopolist not to engage in anticompetitive or predatory conduct in order to maintain that monopoly because the law favors competition. Competition is good for consumers like you and me. It leads to more choices. It leads to lower prices. In this case, the evidence will show that Microsoft's conduct was predatory. It did not encourage competition. It stifled it.

One of the facts found in the case against Microsoft was that its Windows monopoly in operating systems was protected by what is called the applications barrier to entry, shown on your screen. Some of the findings which we will read to you later talk about this applications barrier to entry that protects Microsoft's operating systems monopoly. This barrier exists because of two characteristics of the software market. Number 1. Most consumers prefer operating systems for which a large number of applications have already been written. That sounds complex, but it really isn't. As I mentioned at the beginning. People don't generally go shopping for operating systems. They shop for applications to do something, to create a document, to play a game, to run a spread sheet. So consumers naturally favor an operating

36

system that has many applications available.

Number 2. Most developers prefer to write for operating systems that already have a substantial consumer base. That one is pretty obvious. If I'm an applications software developer, the larger the consumer base, the more money I can make there.

This application barrier to entry makes it very difficult for another operating system vendor to have any success against Microsoft. Now, as found in the case against Microsoft in Washington, D.C., two of the products that Microsoft targeted were Netscape's Navigator internet browser and Sun Microsystems' Java computer languages. Now neither Navigator nor Java are operating systems, so why did the Court, in a case against Microsoft in Washington, D.C. conclude that Microsoft targeted these companies?

That brings us to middleware, a subject I mentioned at the start of my remarks. To understand middleware requires a bit of knowledge about computer software, knowledge that some of you may already have. For those that don't, I will explain. The structure of a computer is like a layer cake. At the bottom is the microprocessor, the computer chip made by Intel.

Next up is the operating system. The applications are on top. These application programming interfaces -- here's another acronym for you if you're taking notes, API's.

37

That's what they are called in the industry, application programming interfaces, API's.

The operating system provides API's to application developers for certain functions and routines. Let's take a simple one. Say, for an example, an application developer wants to print a document. Well, rather than write all the thousands of lines of code to print a document, the application merely calls on the printer API in the operating system to print a document. An operating system has thousands of such API's.

Now we're going put a new layer between the operating system and the applications. This layer is called middleware. Middleware also provides API's for applications to use. With middleware, applications may start to become less reliant on the API's in the operating system. They can, instead, use the API's being offered by the middleware.

If enough API's are provided by the middleware and the middleware will run on many different operating systems, the application developers no longer care which operating system is at the bottom of the layer cake.

This is one of those long findings which Microsoft cannot dispute in this case. I'm going to see if I can break this down for you a little bit. I apologize again for its length. Let's take the top part. Middleware technologies have the potential to weaken the applications barrier to

38

entry. Microsoft was apprehensive that the API's exposed by middleware technologies would attract so much developer interest and would become so numerous and varied that there would arise a substantial, growing number of full-featured applications that relied largely or even wholly on middleware API's.

So, what have we established here? Middleware has the potential to weaken the applications barrier to entry. Microsoft was apprehensive that middleware would attract a lot of developer interest.

Next part. The applications relying largely on middleware API's would potentially be relatively easy to port from one operating system to another. The applications relying exclusively on middleware API's would run as written on any operating system hosting the requisite middleware, so the more popular middleware became and the more API's it exposed, the more the positive feedback loop that sustains the applications barrier to entry would dissipate.

So, what have we established here? Applications relying on middleware could potentially be used on many systems, and the more middleware became popular, the weaker the applications barrier to entry protecting Microsoft's operating systems monopoly becomes. The last part. Microsoft was concerned with middleware as a category of software. Each type of middleware contributed to the threat

39

posed by the entire category. At the same time, Microsoft focused its antipathy on two incarnations of middleware that, working together, had the potential to weaken the applications barrier severely, without have the assistance of any other middleware. These were Netscape's web browser and Sun's implementation of the Java technologies.

So, what is the takeaway here? Microsoft was concerned by the threat to their operating system monopoly posed by middleware. Each type of middleware contributed to the threat posed by the entire category. These are undisputed facts in this case. Both Netscape Navigator and Sun's Java computer languages were forms of middleware. They both exposed API's that application developers could use in their products.

The evidence will show that WordPerfect and other technologies owned by Novell also contained API's that application developers could use in their products. The evidence will show that WordPerfect contained middleware called PerfectFit that was shared by all the applications within PerfectOffice. PerfectFit, within WordPerfect, provided tool bars, menus, dialogs, spell checkers and many other functionalities. These functionalities could be used by other application developers to build new applications.

Thus, the PerfectFit technology within WordPerfect served as a middleware platform to third-party developers by

40

exposing its API's and allowing these third-party developers to use over 2,000 WordPerfect controls. PerfectOffice also contained AppWare. AppWare was a Novell technology. AppWare also served as a middleware platform to third-party developers by providing easy to use API's to create applications that were completely independent of the underlying operating system.

This allowed third-party developers to create applications on top of the PerfectOffice suite. Thus the combination of WordPerfect and AppWare constituted another category of middleware which posed a threat to Microsoft's operating systems monopoly and, as we just discussed, it is established in this case that each type of middleware contributed to the threat posed by the entire category.

Using the language of Microsoft's Mr. Raikes, WordPerfect and AppWare could help bridge the moat protecting Microsoft's operating systems monopoly.

Now, even before Novell purchased WordPerfect, internal communications between top Microsoft executives revealed their fear of the middleware threat presented by Novell. Here Jim Allchin, the vice-president of Advanced Windows Systems Group writes to Bill Gates and others, quote, they, meaning Novell, want to control the API's, middleware, and as many desktops as they can in addition to the server market they already own. We need to start thinking about

41

Novell as the competitor to fight against.

This is Mr. Paul Maritz, during the relevant time period. He was the man in charge of the development of Microsoft's server operating systems, like Windows NT. Mr. Maritz was deposed in 1994, in connection with that case against Microsoft in Washington, D.C. What's really important about this is he was deposed at the time of the relevant events in this case. And he was asked about Microsoft's views on Novell's AppWare:

Question: Could you tell us what AppWare is.

Answer: Yes. That's an explicit attempt by Novell to develop a layer that will provide all of the services required by applications.

Question: Do you regard AppWare as a competitive threat?

Answer. Very much so. Probably one of our, in the long-term point of view, most serious competitors.

You will get to see this part of Mr. Maritz's deposition in this case. I will show it to you on video later. Here's another Microsoft executive, John Ludwig, describing the threat of Novell Lotus middleware as Microsoft's worst nightmare. I mentioned before we would see Lotus in the documents.

Microsoft was also fearful of the middleware threat presented by Lotus, particularly the Lotus Notes product,

42

which was a form of middleware. These e-mails we are looking at, of course, are all internal to Microsoft. We got them in discovery in this case.

The public face that Microsoft presented to the independent software vendors, the ISV's, like WordPerfect and Lotus was quite different. Interaction with ISV's wanting to build software products to run a Microsoft's operating system was handled by the Microsoft's developer relations group. Here's another acronym for you, the DRG, Microsoft's development relations group.

The developer relations group's mission was to drive the success of Microsoft's operating systems by encouraging ISV's to write products for that system. Microsoft wants to attract a large number of applications to its new operating system, and ISV's want their products to run on the new operating system. This has the effect, of course, of making the applications barrier to entry even stronger.

Now, I have to tell you that Microsoft uses the word evangelism to describe the mission of the DRG. We usually think of that word as something more than pushing an operating system, but I bring it to your attention because you will hear that word used to describe the activities of the DRG.

Microsoft had various ways of encouraging ISV's to write software for the new operating systems. They held

43

these gigantic developer conferences where WordPerfect and hundreds of other ISV's were invited to learn of the new features and benefits of the upcoming operating system.

There were Alpha and Beta releases of the operating system's software before the final release. These were given to the ISV's so that they could create applications for the new operating system in advance of its public release. There were software developer kits, another acronym, SDK's as they are called in the industry. They came with the Alpha and Beta releases which provided the documentation of the API's that the software developers were being urged to support.

There were first wave agreements with top ISV's, providing extra levels of support for those targeted on getting their applications to market within that critical time in the market window of 30 to 90 days of the new system release.

There were online developer forms. I don't know if any of you remember Compuserve -- that goes back a ways -- where ISV's could pose questions over the internet to Microsoft developers about the new operating system. There was the premier support line. This one cost a little money, but here you could actually call Microsoft and get to speak with Microsoft developers about the new API's in the planned operating system. The evidence will show that WordPerfect was a first wave participant and had access to the premier

44

support line.

Now, the development of Windows 95 went back to 1993. Wasn't called Windows 95 then. Its code name was Chicago. Chicago was designed to be a huge advance in the (loud noise ). Excuse me.

I might get rid of this, my voice is loud enough without it. That's annoying.

Chicago was designed to be a huge advance in the user interface or shell of the operating system.

THE COURT: Is that on?

MR. JOHNSON: As I was saying, Chicago was designed to be a huge advance in the user interface or shell. That's what you see when you turn on the computer. The old user interface of Windows 3.1, the predecessor to Windows 95, was a series of manager screens like the one shown here. This one was the program manager. It was pretty simplistic. The planned user interface for Windows 95 was much more sophisticated. It's shown here on the right. Some of this will appear familiar to us today.

At the heart of the new user interface was the Chicago explorer shown here on the screen. The explorer is fairly familiar to us now, but it was a big deal back then. As described by Microsoft, it was the eyes of Chicago, enabling a user to view all of the computer's resources, whether local or remote, in one place, from 10 thousand feet

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down to ten inches. Now, the explorer, as you can see has two panes, one on the left and one on the right.

The left pane is often called the tree view because you start with the trunk, which, in this case, is my computer, and work downward with the limbs and branches of my computer. You will also see this left pane referred to as hierarchical view or the scope pane. The right-hand pane is a little easier to understand. It is usually called the contents pane. It displays the contents of what you have clicked on from the tree view. Each of the items within the tree view of the Chicago explorer are called name spaces.

Three name spaces, which were new to Windows 95, are shown here, network neighborhood, recycle bin and my briefcase. Network neighborhood brought the resources of all the documents and information sitting on remote servers directly to your desktop. That was a big deal. Back in the old days, you had to map to a server and it was a very complicated procedure to get to the network. What enabled Microsoft to extend the explorer to include these additional stores of information were some very special API's called name space extensions.

In the documents we see today, you will sometimes see these name space extension API's called shell extensions.

Now we are in June of 1993 in the documents, about the same time period as those e-mails we looked at earlier

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about the middleware threat presented by Novell and Lotus. Microsoft held an executive retreat at Hood Canal. And that's the name of Mr. Gates' personal residence compound. This was attended by Microsoft operating systems executives and executives that built applications for Microsoft to address the crucial issue of leveraging system and applications from a functionality and features point of view. By the way, when you see Bill G in these e-mails, like you do in the first highlighted line there in discussing this with Bill G, it says, that's Bill Gates. And you'll see that acronym used for him -- or alias used for him in a lot of the documents that you will be looking at.

At the Hood Canal Retreat, the group 1 team, composed of executives within systems and applications, devised a strategy to gain access to the operating system API's in order to shut out competing applications, entitled the radical extreme. The group proposed the creation of an Office shell containing extensibility features that would be for the sole benefit of Microsoft Office, it's application of office productivity applications cutting out WordPerfect and other competing ISV's.

As we had earlier discussed, Office was the suite that Microsoft had of office productivity applications. The extensibility features being discussed include the name space extensions. The basic approach proposed was to hold the

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extensible shell for Office, to make the Chicago shell -- that's Windows 95 -- non-extensible and to provide, as an excuse for this action, quote, we couldn't get it done in time. Dot. Dot. Dot.

As we will see, this proposed excuse is pure spin. Microsoft was already using the name space extensions in Chicago in June of 1993. Notes from that retreat reflect Bill Gates' personal adoption of the radical extreme plan. As Mr. Adler states here: "Shift extensible shell in Office. Bill G says do it."

Now, other Microsoft executives offered support for the idea of denying ISV's the extensible shell within Chicago. Here we see an e-mail from Bob Muglia. He was the director of program management for Windows NT. Remember what I said earlier, we would be hearing about Windows NT again. He believes allowing ISV's the extensibility afforded by Chicago is a bad option no matter how you view it, he says. Mr. Muglia writes that providing the extensibility to ISV's would mean that, quote, Word and Excel are forced to battle against their competitors on even turf --

What a horrible thought, battling against your competitors on even turf.

-- given that Lotus and WordPerfect have largely caught up, they, meaning Microsoft Word and Excel, almost certainly lose ground if not market share and margins.

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The evidence will show that's all Novell wanted to do, to battle against Microsoft on even turf. The evidence will also show that Microsoft was not willing to allow competition on even turf. Note here, too, a top Microsoft executive is reflecting that, by July of 1993, WordPerfect and Lotus had largely caught up. You will see other statements from Microsoft executives like this, that WordPerfect and Lotus both had good products on Windows that had caught up with Microsoft's applications by 1993 and 1994.

You should compare those statements made at the time with what Microsoft will tell you today, that WordPerfect was late to Windows and was doomed to failure. You will have to decide what is more credible, what Microsoft's executives said at the time of the events in question or what they say now in defending this lawsuit.

Now, not everybody within Microsoft was happy about Mr. Gates' plan, particularly those responsible for Chicago. Here, Tandy Trower, the executive responsible for architecting the user interface in Chicago, told Mr. Gates directly that the proposal to withhold the functionality from the ISV's was a bad idea. Mr. Trower goes on. Quote: This stinks of proprietaryness, something that we have been critical of others for embracing. In the 12 years I have been here, I have always taken pride in the fact that we excelled by doing things better than our competition, not by

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withholding some functionality that we might uniquely leverage."

As you will see later that is exactly what Bill Gates did. He withheld functionality from the ISV's so that Microsoft could uniquely leverage it.

Let's return now to the public face of Microsoft as presented to ISV's like WordPerfect. As a part of Microsoft's evangelization of Chicago, this Novell trip report memorializes a Chicago user interface design for preview held in early July of 1993. Brad Silverberg, Microsoft's head of the Chicago development, attended part of this session. Mr. Silverberg reports the results of that session to Jim Allchin.

They, meaning the ISV's, quote, really want extensibility. They continue to press for that in every way. What's more, they were afraid and angry that Microsoft would use the hooks for its own purposes, apps, meaning applications, mail, etc., but not provide the hooks to ISV's. This was a very hot button.

As Mr. Silverberg acknowledged in his deposition, the hooks he's talking about here are the API's used for extensibility. The ISV's had good reason to be angry. Microsoft was already planning on using the name space extensions to help Microsoft's e-mail application achieve dominance over other e-mail applications in Chicago.

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Capone is the code name, another code name for an e-mail application created by Microsoft. Someone from Microsoft was obviously from Chicago. Gates planned to bundle the Capone application within Windows 95 in order to dominate the e-mail applications market. That's not my allegation, it comes right out of the mouth of Microsoft.

As shown in this April 22, 1993 e-mail from Microsoft executive John Ludwig, quote: The only reason mail is in Chicago is to help WGA -- that's Microsoft's work group applications, achieve dominance in the mail market. Bill's words, not mine.

The evidence will show that Capone, Microsoft's e-mail application, was using the name space extensions provided by Chicago to integrate directly into the Chicago shell. Now that raised a flag for some at Microsoft. Here we see Tom Evslin. He was in charge of Microsoft's work group applications division, asked if there was anything being done in integrating Capone with Chicago that a third party, Lotus, for example, won't be able to do. Joe Belfiore, Microsoft's program manager for Chicago, responded that it was unclear whether these API's would be published ISV's, like Lotus, but that Bill, meaning Bill Gates, was very aware of this issue.

As you will see during the course of this case, there were executives in Microsoft that wanted to be fair to

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the ISV's. Here John Lazarus, the vice-president of systems strategy in Microsoft, expressed his view that if Microsoft used the extensions they had to be published. This concept of publishing is important for you to understand. Application developers are totally dependent on Microsoft to provide the technical details needed to use the API's in the operating system.

When Microsoft publishes an API, it is providing the documentation needed by the ISV's to actually code their applications to those API's. Such documentation usually comes in those software developer kits that we talked about earlier.

Here Doug Henrich, the head of Microsoft's DRG, developer relations group, felt that withholding the name space extensions being used by Capone was problematic from a PR and an ISV perspective. As he states, "This will play out as an unfair advantage issue with the press."

Mr. Lazarus was more want.

Again, WordPerfect and the other ISV's knew nothing about this internal debate going on within Microsoft, but what is important to remember from this series of e-mails is that Bill Gates is very aware of this issue. The evidence reflects that, by -- that in mid-September of 1993, agreement was reached within Microsoft to publish the name space extension API's.

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This e-mail summarizes a meeting between Brad Silverberg, David Cole, Bob Muglia and Jim Allchin. This lineup is important. Mr. Silverberg was the head of Chicago development. David Cole was the program manager for Chicago. Jim Allchin was the head of Microsoft's NT development, which included Cairo, the planned future Windows NT, and Bob Muglia was the program manager for NT in Cairo.

So, what we have here is the top executives within Microsoft responsible for all operating systems development within Microsoft. According to this e-mail these four top Microsoft executives have agreed to document the name space extension API's being used by Capone within Chicago. As spelled out by this e-mail, those API's would be on the A-list, documented and published to the ISV's.

About a month later -- we're now in November of 1993 -- WordPerfect got the good news about the name space extension API's from Microsoft's DRG. This occurred in a meeting between WordPerfect developers and some top Microsoft executives who had come to WordPerfect to talk to them about producing a good Chicago application.

Here David Cole, the group manager of Chicago, the same David Cole who decided to document the name space extensions, reported on their visit to WordPerfect, stating these guys at WordPerfect, quote, will bet on Chicago. They never had any doubts about that.

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At the bottom, Mr. Cole notes how enthusiastic WordPerfect was about Chicago, much in contrast to the ho-hum attitude of Microsoft's own applications group. We are going to meet and hear from Adam Harral, one of the WordPerfect developers who attended this meeting on November 15, 1993. We will come back to Mr. Harral in just a little bit.

This is another e-mail to remember. Microsoft is going to present evidence to you, from years earlier, back to the early days of Windows. That evidence will show that WordPerfect was slow to develop for Windows in the late 1980's and early 1990's. Microsoft will point to that ancient history as a cause of WordPerfect's downfall. Now there is evidence that deception from Microsoft was part of the reason that WordPerfect didn't initially develop for Windows, which we may have to get into in this case, but the point to remember here is, by 1993, WordPerfect was totally sold on Windows, and Microsoft knew it, as Mr. Gates -- Mr. Cole states, these guys will bet on Chicago. They have never had any doubts about that.

The e-mail from Mr. Cole goes on: "They," meaning WordPerfect, "were very happy about us deciding to document the shell extensions. I explained conceptually how the extensibility would work and what controls they would have. Since they just acquired a document management system, I forgot from whom, I assume they will want to plug that in,

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plus WP mail," which is WordPerfect mail, "and the other parts of WordPerfect Office." That's WP Office is WordPerfect Office.

In other words, Mr. Harral and the other WordPerfect developers at this meeting were told that they were getting the API's that would enable WordPerfect to integrate their own mail application into the Windows shell, just like Microsoft was doing with Capone.

We took the depositions of Mr. Cole and Mr. Silverberg in this case. We asked them about this e-mail. David Cole wrote the e-mail. It was first addressed to Mr. Silverberg. Neither of them admit or acknowledge remembering anything about the decision to tell WordPerfect and other ISV's that Microsoft had decided to document the shell extensions.

In his deposition, Mr. Gates even claimed that such a decision had never been made. As you can see from the last two e-mails, the decision to document and A-list these extensions was plainly made at the highest levels within Microsoft.

One month after Microsoft's visit with WordPerfect, in December of 1993 -- we're moving month-by-month -- Microsoft held a professional developers conference where Mr. Joe Belfiore gave this presentation to WordPerfect and hundreds of other ISV's. Greg Richardson is another one of

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the Novell developers that you will hear from in this case, attended this professional developers conference.

As the slide states, Mr. Belfiore was the program manager for the Chicago shell/UI. UI means user interface. Microsoft told WordPerfect and the other ISV's about the new controls that they not only can use but that they should use, as stated in the third bullet point here.

The controls included the ability for the ISV's to extend the shell. That capability includes the name space extension API's that we have been talking about here. As Mr. Belfiore went on to explain at the conference, Microsoft was giving the ISV's the ability to create custom container implementations within the left-hand pane of the explorer. Here shown on the left, which we previously discussed, is called the tree view within the explorer.

The shell extensibility being evangelized to the ISV's included the ability to integrate directly into the Windows Explorer. As stated here in the last bullet point. If you have an application that displays a collection of file-like objects, you can create your own custom container displayed in the folder explorer hierarchy.

Here we see the complete explorer -- this was also Mr. Belfiore's presentation -- containing a hypothetical your custom folder, which is highlighted in blue right there on the tree view. That would be created by a third-party ISV

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which has been integrated directly into the tree view of the explorer.

Note that this says at the top, not for most applications and that it, quote, only should be used if your application displays a pseudo folder, electronic mail, document management, etc.

Electronic mail and document management were exactly the type of features that office productivity applications needed. In fact, let's go back a couple of slides. Mr. Cole had previously stated that WordPerfect would use the extensions for WordPerfect mail and a document management system that it had recently acquired, exactly as being evangelized by Mr. Belfiore.

Let's go back now to Mr. Belfiore's presentation to WordPerfect and the other ISV's. As I have mentioned, we are going to play for you certain videos of depositions of Microsoft executives. Just parts of them. I don't want to bore you to death.

One of those will be a portion of the deposition of Bill Gates taken in 2009. Mr. Gates is going to say in that deposition that the technology that allowed applications to do what Mr. Belfiore is talking about here was trivial and unimportant. He repeats, several times in his deposition that it was trivial.

The evidence will show that that is not what Bill

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Gates said back in 1994. Here we see an e-mail from Mr. Gates to Brad Silverberg and other top Microsoft executives. Mr. Gates states that in many meetings he has said that the hierarchical view, also called the tree view, is critical. The ability to see the real name space of the system, where we are putting everything, only exists there.

What are these real name spaces he's talking about? Let's go back a slide. The real name spaces are those folders shown on the tree view on the left-hand side of the explorer. Mr. Gates goes on to say: The tree view is central to our whole strategy. E-mail, document library, applications, file system. E-mail, document library. That should be familiar to you by now. That was exactly the items that Microsoft assumed WordPerfect would use the name space extension API's for. E-mail and a document management system.

So what Mr. Gates said in many meetings, many meetings, was critical and central to Microsoft's full strategy becomes trivial and unimportant in this case.

WordPerfect documents written after the Belfiore presentation showed that WordPerfect understood the importance of Chicago representing both a challenge and an opportunity for WordPerfect to demonstrate its leadership in the Windows arena. WordPerfect understood the importance of integrating into the Chicago shell and the need to extend

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Microsoft's common dialogs to provide the added functionality historically present in WordPerfect or to use the name space extension API's to extend WordPerfect's own dialogs.

Let me break that down for you a little bit. As the WordPerfect developers that you will hear from in this case will explain, WordPerfect had traditionally had a very powerful file open dialogue containing features and functionality well beyond that offered by Microsoft's Word. Within this new operating system, Windows 95, application developers had a choice to make. They could rely on the common open file dialogs provided within Windows 95, or they could create their own more powerful file open dialogue.

In either case, whichever choice they made, the name space extension API's in Windows would allow application developers to add real name spaces to whichever file open dialog was chosen.

Let's look at that in a little more detail. This is the Windows 95 common file open dialogue shown on the screen. It was pretty basic compared to what WordPerfect had done in the past. You couldn't search across different drives or folders. You could only search within a given location. WordPerfect developers had identified a long list of deficiencies with Microsoft's common file open dialogue. Here's a prototype of WordPerfect's file open dialogue. Unlike Microsoft's file open, here you could search across

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all the folders and drives shown on the left-hand pane or tree view. This capability was provided by WordPerfect's quick finder technology, which was light years ahead of anything in Microsoft's Word

You could search by file name. You could search by content. You could search by the attributes of the document. Here we see the tree view as displayed by WordPerfect's file open dialogue. As Mr. Harral and the other Novell developers will explain to you, with the name space extensions being evangelized by Microsoft, Novell would have been able to add its own name space objects, including its own applications, network drives or internet browsers into the hierarchy.

WordPerfect's advanced searching technology would have provided easy access to all this information by text, file name or the attributes of the document. For example, information located in WordPerfect's document management system SoftSolutions, it's Netware file systems, it's mail servers and other work spaces where people could exchange information.

In addition, the name space extension API's would have allowed WordPerfect to add Microsoft's real name space objects, like recycle bin, shown at the bottom, and network neighborhood to its file open. This ability to add your own name spaces and the ability to include Microsoft's new name spaces in your application was absolutely critical to

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WordPerfect. Anything less would have been a step backward from what WordPerfect had historically offered to the consumer.

A search across the unified shell view could result in a broad array of information from websites stored locally or on a network. In 1994, this was a potential huge advance in personal computing. In June of 1994, Microsoft issued Chicago Beta 1 to approximately 20 thousand sites worldwide, including to Novell WordPerfect, so by that time, they had joined forces. Novell had bought WordPerfect.

The reference here to M6 means milestone 6 in the development of Chicago. There were 8 such milestones in the Chicago development process.

There had been a number of earlier milestone releases of Chicago to many ISV's, but none of them contained information on the name space extensions. Now, the issuance of a Beta release is a significant event in the development process. A Beta provides ISV's with a nearly complete pre-release version of the operating system, which allows ISV's to start developing compatible products for the forthcoming new operating system.

The M6 Beta included partial documentation for the name space extensions in an SDK, software development kit. We talked about it. This is just a list of the API's. The actual exhibit is a much bigger document written in language

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that only a software developer could love or understand.

This documentation gave the ISV's like Novell the details of the name space extension API's that Microsoft had been encouraging the ISV's to use to become a great Chicago application. As I mentioned earlier to you, documentation is very important for ISV's work and has great significance in the software industry. Here we have Mr. Raikes, again. You remember the Microsoft executive who admitted that Microsoft widens the moat protecting its operating systems monopoly if Microsoft owns the key franchises running atop Windows.

Here Mr. Raikes is testifying about the significance of documenting an API in the computer software industry.

Question: You testified at your prior deposition that, quote, the purpose of documenting an API is, in effect, to put a stake in the ground and say this is something that you, as an applications developer, can count on being available to you as an operating systems service today and in the future in order to ensure compatibility, close quote.

And the quote goes on, but I'll stop there and ask you, do you recall giving that testimony?

Answer: I don't recall the specific testimony.

Question: You have continued to agree with that statement?

Answer: I would say, from what I recall from what you just read, I would say yes and that, you know, when

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you're an application developer, again, back to principles about how the industry worked, you encourage application developers to bet on your operating system if they know clearly which application programming interface you have and what you're intending to support now and in the future.

You will get to see portions of Mr. Raikes' deposition testimony in this case, including this exchange about the purpose of documenting an API, that purpose being to put a stake in the ground.

This is Greg Richardson on the left, Adam Harral on the right. Both Mr. Harral and Mr. Richardson are software developers. They write the code that makes the software function. There are literally millions of lines of code in an office productivity application like WordPerfect. Mr. Richardson actually worked for Microsoft before coming to WordPerfect and later to Novell. Mr. Harral was also a WordPerfect developer before coming to Novell.

Mr. Harral and Mr. Richardson are part of the shared code team at Novell. That fact is important. The shared code team was responsible for many things, but, most importantly, it was responsible for the file open dialogue for all the constitute parts of the PerfectOffice suite. What do I mean when I say that? This is the box that contained the PerfectOffice suite for Windows 3.1. That was the predecessor operating system to Windows 95.

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Each of these applications, WordPerfect, Quattro Pro, Presentation, Info Central, Envoy, Groupwise, each of these applications has to have a file open dialogue. You have to be able to open the files within the application. Pretty basic.

The shared code team is responsible for creating a commonly shared file open dialogue for each of these applications, or, to put it another way, each of these applications depends on the shared code team to produce the file open dialogue. Mr. Harral and Mr. Richardson will explain that process to you in detail.

As you may recall, the developers at WordPerfect, later Novell, back in November of 1993, were very happy about Microsoft's decision to document the name space extensions. They liked the technology, and they determined to use it for the file open dialogs for all the parts of the PerfectOffice suite. The shared code team immediately started coding, with the expectation of receiving those extensions, and later they were coding directly to the name space extensions, as documented in the M6 Beta for Windows 95 in June of 1994.

By October of 1994, they were 80 percent complete with that process. That's important. I'm going to repeat it. By October of 1994, Novell was 80 percent complete with that process.

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Mr. Richardson and Mr. Harral will testify that Microsoft was well aware that Novell was using these extensions in the development process. As you will see in this case, Microsoft's documents are mixed on the issue of whether Novell was using these extensions. Fortunately, you won't have to rely on conflicting second and third-hand reports from Microsoft. You will get to hear from the Novell developers actually involved in the process.

The evidence will also show that many other substantial and important ISV's were also using these extensions. These extensions were not just important to Novell.

On September 20, 1994, Mr. Gates attended an annual event where top software executives display their latest technologies. It is called the Agenda Conference. This e-mail contains Mr. Gates' later report to other top Microsoft executives on Novell's demonstration at that conference. Mr. Gates saw Bob Frankenberg, the CEO of Novell, demonstrating Novell's new technology.

He saw Mr. Frankenberg demonstrate Corsair, which was WordPerfect's new shell, which was cross platform middleware that integrated with WordPerfect to provide unified views and simplified access across networks. Mr. Gates saw how WordPerfect had created a direct hyperlink to the internet through their new web browser Ferret.

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This was a big deal in 1994. I don't recall seeing another document in this case where Bill Gates used three exclamation points at the end of a sentence.

THE COURT: Mr. Johnson, I'm sorry to interrupt you, but I have to take a break. And I don't think we'll finish up with you're statement, and I have to take a break.

MR. JOHNSON: Thank you, Your Honor. (Short break.)

I'm sorry for the interruption, Mr. Johnson, but I suspect I was doing you a favor, which I think has been confirmed by what occurred as I saw a bunch of you running for the door.

MR. JOHNSON: Your Honor, there is no doubt you were doing us a favor. Thank you.

THE COURT: Thanks. Let's get the jury.

MR. JOHNSON: In fact, your timing was impeccable, as you will soon see.

(Jury brought into the courtroom.)

THE COURT: Mr. Johnson.

MR. JOHNSON: Thank you, Your Honor, very much. Welcome back. I needed this break, too.

Picking up the story where we left off, September 20, 1994, Mr. Gates attended this demonstration of Novell's new technology as presented by Mr. Frankenberg, the CEO of Novell. Mr. Gates not only is extremely impressed, he

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states: "This emphasizes the importance of our shell integration. Novell is a lot more aware of how the world is changing than I thought they were."

Now let's move just two weeks after that September 20 Agenda Conference. On October 3, 1994, in an e-mail widely distributed to Microsoft's top executives, Bill Gates addressed the name space extension API's. What he refers to here is IShellBrowser, which happens to be one of the names for one of the name space extension API's. At the start it is interesting to observe that Mr. Gates says, quote: "It's time for a decision on IShellBrowser," as though that decision had not already been made over a year ago, in September of 1993, by Microsoft's top systems executives. Mr. Gates decided that Microsoft should not publish these extensions, even though his top executives had decided to publish these extensions over a year before and even though the extensions had already been published to the ISV's in the M6 Beta five months earlier.

Instead, Mr. Gates states that Microsoft should wait until they had a way to do a high level of integration that will be harder for the likes of Notes, WordPerfect to achieve and which would give Office a real advantage.

Now, Mr. Gates' reference to Notes is to the middleware product built by Lotus, called Lotus Notes. Mr. Gates wants to wait, in order to allow Office,

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Microsoft's suite of office productivity applications, to gain a real advantage over Lotus Notes and WordPerfect. It is Novell's contention in this case that Mr. Gates' decision is purely predatory, without a hint of pro-competitive justification.

Continuing in the same e-mail. Mr. Gates notes that it was already very late in the day to be making these changes to Chicago and Capone. At this point, we're less than a year away from the launch of Windows 95. It is also important to note that his decision not to publish the name space extensions had nothing to do with the quality of the extensions themselves.

To the contrary, Mr. Gates states, in the same e-mail, that the shell group did a good job of defining the extensibility interfaces and that they were a very nice piece of work.

Indeed, the evidence will show that these extensions continued to be used in Windows 95 and in various versions of Windows since that time. So, when you hear the later excuses proffered by Microsoft for Mr. Gates' decision to not publish the name space extensions, I want you to return to this Plaintiff's Exhibit 1 to see for yourself if Mr. Gates gave that excuse for making that decision. Remember that the reason given by Mr. Gates was to advantage Office over Lotus Notes and WordPerfect.

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The e-mail goes on. By not publishing the name space extensions Mr. Gates was trying to ensure that only Microsoft would benefit. Here he states again, in the same e-mail, that Microsoft can't compete with Lotus and WordPerfect Novell without this. The goal was to have Office 96 take advantage of the new shell integration work and to delay introduction of that technology to Windows until 1997, thus advantaging Microsoft's applications at the expense of competitors' applications.

So, when Microsoft tells you, as they will in this case, that Office 95 didn't use the name space extensions, turn again to PX-1, where Mr. Gates states that the goal is to have Office 96 sell better because of the shell integration work. By disadvantaging WordPerfect, Novell and Lotus, the key competitors to Microsoft's office productivity application, Mr. Gates was seeking to widen the moat protecting the operating systems monopoly.

Later in this case, you will be hearing from Professor Roger Noll of Stanford University. Dr. Noll is a well-known authority in antitrust economics. He has served as the senior economist at the United States President's Council of Economic Advisors as a consultant for Congress and federal agencies such as the Federal Trade Commission and the Department of Justice.

Dr. Noll will discuss with you in detail how

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Microsoft's conduct, both against Novell and against other software companies, led to harm the competition in the operating systems market and resulted in a further widening of the moat protecting Microsoft's Windows operating systems monopoly.

Let's get back to the facts. Mr. Gates' decision to not publish the name space extensions was immediately carried into effect. Satoshi Nakajima, the principal inventor of the name space extension API's, spoke of hiding one of the shell extension mechanisms. What he was doing, of course, was undocumenting the extensions from the SDK that had gone out with the M6 Beta. Microsoft was next faced with the problem of explaining Mr. Gates' decision to the ISV's that were using the extensions in their planned Windows 95 applications. Note the instructions at the end of the highlighted portion, not to use the words undocumented or private API's, which is exactly the status that Mr. Gates' decision created for the name space extensions.

Microsoft's internal instructions acknowledged that the name space extensions were being used by Microsoft's info center and Marvel. Persons charged with contacting the ISV's were repeatedly cautioned not to mention Marvel in any of their conversations. Why? Because the evidence will show that Marvel, now known as Microsoft network, or MSN, was and continued to use the name space extensions.

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The Microsoft employees that were charged with contacting the ISV's were given a script to follow. ISV's were told to stop using these API's. If ISV's asked why this is being done, the Microsoft employees were told to say, because the API's were very difficult to support long-term. We don't want to send ISV's down a dead-end path.

The evidence will show that this reason was pure spin, just wasn't true. Mr. Gates had said nothing about these API's being difficult to support long-term. To the contrary, he had said that they were a very nice piece of work. The document went on with a question and answer, sample question and answer for the DRG folks to respond to the a ISV's. The number 1 reason underlined in the original, as you see it here on the screen, was compatibility.

Quote: "We have determined that it will be very difficult to support these API's for applications as we move forward with our operating systems. We did not want to encourage ISV's to support interfaces that would go away in the future."

These API's never went away. In fact, the evidence shows that the extensions were not only used in Windows 95, they were also added to Windows NT, Microsoft's advanced server operating system, even before Mr. Gates made his decision not to publish them. A week prior to Mr. Gates' decision to not publish the name space extensions, Microsoft

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had already decided that the entire Chicago shell code base, including these name space API extensions, would be used on Windows NT. Note the date here on this e-mail, September 27, 1994, a week prior to Mr. Gates' decision to deny ISV's the name space extensions.

Mr. Allchin, he's the head of the Windows NT in Cairo development, reports that the decision had been made to use the Chicago shell code base for the NT work station. Notice Mr. Allchin talking about the positive benefit from this decision. The shell in NT will now be the same as Chicago, and this will give ISV's one set of API's to target.

Other Microsoft executives noted specifically that the shell extensions would run fine on Windows NT. This e-mail is from Brad Silverberg, the head of Chicago development. He states that the Windows 955 shell will be on Windows NT and that the shell extensions will run fine there. There is no issue about supporting on NT. So, the alleged lack of future compatibility with future operating systems was just pure spin.

Now, Microsoft will advance other excuses for Mr. Gates' decision. They will say that the API's lacked robustness, that a badly written extension could bring down the shell. We will rebut all those additional excuses but, again, look back at PX-1. Does Mr. Gates say anything about a lack of robustness? Does he say anything about a badly

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written extension could bring down the shell? You won't find that in Mr. Gates' e-mail. To the contrary, Mr. Gates says they were a very fine piece of work and there was nothing wrong with the extensions.

The Microsoft employees charged with contacting the ISV's were told to inform the ISV's that Microsoft's own applications had been required to stop using these interfaces. This also was not true. Marvel was the code name for the Microsoft application I referred to earlier called MSN or Microsoft Network. It planned to ship with Chicago. The Marvel team called Gates' decision a bombshell and poignantly noted a redesign of their shell was not a realistic solution given the time constraints.

Now, keep in mind that Marvel is a Microsoft application. They had direct access to the source code implementing these name space extensions. They could talk directly to the inventor of the name space extensions, Mr. Nakajima, and all the other Microsoft developers of Windows 95. Yet, here, Marvel is acknowledging that a redesign of the Marvel shell was not a realistic solution, given the time constraints. It was even less of a realistic solution for Novell WordPerfect who has no access to the source code, no access to Mr. Nakajima, and no access to the Microsoft developers of this technology.

The bottom line for Marvel, was that there was only

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one solution that didn't cause a huge risk to the project, using the de-documented extensions. Any other option meant that Marvel would not make Chicago. Note here on this e-mail that Bill G. -- that's Bill Gates -- is being advised directly, two days after his decision, that there is only one solution that doesn't cause huge risk to Marvel, using the name space extension API's.

Microsoft, in general, and Bill Gates, in particular, knew that WordPerfect was using these extensions. Here, Brad Silverberg, the head of Chicago development, urges Bill Gates and other Microsoft executives to make the extensions public. He states that other ISV's using the extensions are WordPerfect, Lotus, Semantic, Oracle. Mr. Silverberg points out that the action may lead to calls for the Department of Justice to investigate. The evidence will show that Mr. Silverberg's pleas fell on deaf ears.

The API's remained undocumented at the direction of Mr. Gates, and the reason for de-documenting the name space extensions remained the same, to advantage Office at the expense of WordPerfect and Lotus.

Even after the decision had been made, Novell developers continued to try and get more information about the use of the name space extensions from Microsoft. Here, Kelly Sonderigger writes -- Kelly Sonderigger of Novell, writes to Brad Struss at Microsoft requesting an article on

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the name space extension API's. Mr. Struss finally responds to him that, quote: "This functionality, as described, is no longer available."

Now, as Novell's developers and our technical expert Mr. Alepin, whom you will be hearing from, will explain to you, no ISV can use API's which the operating systems' vendors says it will not support, which may be removed in the future, and having been told here that the functionality is no longer available. Novell and many other ISV's had no choice than but to find another way. Microsoft had laid down a road for the ISV's to use, and Novell had gone a long way down that road. You remember me telling you, 80 percent down that road.

And then, suddenly, Microsoft blocked the road. Microsoft, in essence, forced them to build their own road from scratch. And it wasn't just the withdrawal of the name space extensions. The evidence will show that, after Mr. Gates' decision, Microsoft developers refused to provide any help to Novell about the operation of the entire Windows 95 shell. That information window that Microsoft had provided to WordPerfect and to the other ISV's was suddenly slammed closed.

Mr. Harral and Mr. Richardson will describe in detail to you the struggle of the shared code team to build a new road after Microsoft undocumented the name space

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extension API's. This was functionality Novell had to have in order to create a competitive suite of office productivity applications in a timely manner. The evidence will show that Novell had seven full-time developers working on the file management system night and day for over a year and nine other developers from the various dependent applications in the suite spending half their time on this as well.

Microsoft's decision severely crippled Novell's ability to produce a competitive product in a timely fashion. You will also get the opportunity to hear from Gary Gibb. Mr. Gibb was the director of the PerfectOffice suite for Windows 95. He was in charge of the entire suite development. It was his responsibility to bring all the pieces together to create the finished product.

We will learn about the concept of critical path. That concept looks at the development process of all the pieces that need to come together to finish the suite and tells you -- excuse me -- and tells you which piece is critical path; in other words, which piece is taking the longest to get done in driving the issue of time to completion. Mr. Gibb will explain that the file open dialogue was critical path throughout this project. The evidence will show that Mr. Gates' decision resulted in a delay in Novell's efforts to produce a timely suite for Windows 95.

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By late July, 1995, in a document entitled Panic Mode Modification Recommendations, Novell knew that there was no conceivable way to have the name space browser code complete by August 22, which was close to the scheduled release date for Windows 95. At the same time, eliminating the feature altogether was not a reasonable option. The evidence will show that, as a result of Microsoft's gaming the interfaces, PerfectOffice did not release until May of 1996, long after the release of Windows 95, and Office 95, in August of 1995.

Now, Microsoft's use of the name space extensions within Chicago continued unabated. Athena was another code name, this time for a personal information manager, sometimes called a PIM in the industry. The evidence related to Athena will demonstrate for you the hypocrisy of Microsoft's claimed excuses for denying ISV's the name space extensions and the concern within Microsoft itself for the impact on ISV's like Novell and WordPerfect.

Here we have Scott Henson. He was the head of the developer relations group at Microsoft, the public face of Microsoft. He writes, in August of 1995, about his strong concern for the ISV's. As you can see, the subject of this e-mail is shell extensibility and ISV's. Mr. Henson has just installed Athena, this MS PIM application on his computer and found, to his dismay, that not only was it using the name

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space extensions but that it was also displayed in both the left and right-hand panes of the Windows Explorer. As Mr. Henson states, this is the exact thing we told ISV's they could and should not do.

Here's what Mr. Henson saw. This is a screen shot of Athena being used to display internet mail and news which we highlighted with those red boxes at the bottom, fully integrated into the shell and showing its contents in the right-hand pane. When we click on internet news, the program runs in the right-hand pane. This is the exact functionality that Mr. Gates stated over and over again, in his deposition, never happened. It is also the functionality that he claimed, at his deposition, was trivial and unimportant.

As Mr. Henson further explains, Microsoft had a product that was to be sold in the very near future implementing interfaces that Microsoft told ISV's they should not use because they would not be able to support them moving forward. That was the excuse, you remember, given to the ISV's. That was the excuse advanced in October of 1994. Mr. Henson can't even express how bad this is. We lose everything when we do this, credibility, trust, leverage, the works. Mr. Henson also found it strange that Athena worked just as well on windows NT, because he had been telling the ISV's all a long that incompatibility with Windows NT was the reason why the extensions had been de-documented.

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We know differently from the e-mails we saw this morning. Microsoft had made the decision to use the Chicago shell API's in Windows NT ten months earlier, in September of 1994, just before Mr. Gates' decision to de-document the name space extensions. There was no compatibility issue with Windows NT. It was all a facade. Mr. Henson went on to note that Athena was just the tip of the iceberg. There was internal development within Microsoft where various groups were implementing these interfaces.

Let's look at a little of that work going on at Microsoft. This document is an Office 96 specification. You may remember that Mr. Gates said that the reason to de-document the name space extensions was to advantage Microsoft Office. You will also remember that the target was not Office 95, but, rather, Office 96. The plan was to use the technology in Office 96, the version of Office to come out a year after Windows 95. Here the Microsoft developer writing the specification for Office 96 states that the Office Explorer implementation strategy is to, quote, leverage the Chicago shell's teamwork as much as possible and that Chicago provided some of the crucial interfaces that would simplify their work, including IShell Folder and IShell View, IShell folder and IShell view are two of the name space extension API's.

The evidence will also show that Microsoft used the

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name space extension API's to integrate Microsoft's Internet Explorer directly into the Windows 95 Explorer. This article, written by the inventor of the name space extension, Mr. Nakajima, shows exactly how it was to be done. Windows 95 shell name space extension, he writes, although we haven't clearly defined how we present documents on WWW -- that's the worldwide web, for those that remember -- to the end user on the Explorer left pane, i.e., the hierarchy, we know that they don't belong to any of the existing folders, shells, name space. It is quite natural to use the name space extension mechanism -- see picture below -- to plug the URL name space into the Explorer's name space.

Now, as Mr. Richardson of Novell will explain to you, this is precisely what Novell wanted to do in WordPerfect for Windows 1995. They wanted to add the internet browser right into the file open dialogue in WordPerfect, using the name space extensions.

Let's return now to Mr. Henson's e-mail over Athena. He recommended that Microsoft document the API's quick. Our ISV's are already months behind. Novell couldn't have said it better. Novell and other ISV's were already months behind. Of course we are now in August of 1995. It's too late. Windows 95 is coming out that month. On August 24, 1995, Windows 95 was launched to great fanfare. Office 95 was launched at the same time. People lined up in the stores

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hours before opening to buy the new products. Jay Leno was the MC for the launch ceremony at Microsoft's headquarters.

Microsoft reportedly paid the Rolling Stones millions of dollars to use the song Start Me Up in their launch campaign. The Empire State Building was lit up in Microsoft's orange, yellow and green logo colors. No other office productivity application suite built for Windows 95 was available at the launch. Neither Lotus' Smart Suite nor Novell's PerfectOffice. The PerfectOffice Suite was finally released by Corel, it's new owner, and I mentioned this before, in May of 1996. In other words, Microsoft's suite of office productivity applications was the only choice if an individual or business wanted office productivity applications built for Windows 95.

Microsoft was left as the virtual undisputed owner of the key franchises sitting atop the operating system, just as Mr. Raikes had told Mr. Warren Buffet. Microsoft had succeeded in widening the moat protecting Microsoft's operating systems monopoly.

By the way, you are going to hear a lot of evidence from Microsoft that, after the merger of Novell and WordPerfect, that Novell let go a lot of the WordPerfect salespeople and that Novell allegedly decimated the sales force. This is another effort by Microsoft at misdirection. When you hear this evidence, I ask you to reflect on this.

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Even if it was true that Novell had decimated the sales force -- and I think we will show you that that's not true -- but let's assume it is true. What difference would that have made? Because of Microsoft's conduct, Novell didn't have a product to sell. You can have the greatest sales force in the world, and it wouldn't have mattered, if you have nothing to sell.

As I mentioned earlier, Microsoft is also going to try and tell you that WordPerfect was doomed, that the die was cast by decisions made years before by WordPerfect, and later by the alleged mismanagement of Novell. The evidence, however, will suggest otherwise. Here's a chart of WordPerfect revenues from 1989 to 1998. The yellow shown on the chart is revenue from the DOS operating system, the predecessor of Windows, which was on its way out. The important color for you to look at here is blue, WordPerfect revenues on Windows operating systems.

Once WordPerfect started writing for Windows, in 1991, their Windows revenues grew and grew, through 1994, when WordPerfect revenues exceeded $300 million. Even in 1995, with most of the world waiting for the release of Windows 95 in August of that year, WordPerfect's Windows based revenue exceeded $250 million. When Microsoft destroyed Novell's chance to have a timely suite for Windows 95, WordPerfect revenues plummished (as spoken).

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Microsoft is also going to pull out a lot of old product reviews to try and suggest to you that consumers were choosing not to buy WordPerfect because of these poor reviews. As this graph shows, WordPerfect was doing quite well on Windows in 1992, 1993 and 1994. And if product reviews drive sales, as Microsoft will argue, let me share with you a few of the reviews of PerfectOffice 3.0, which came out in 1994.

I show these product reviews excerpts not for the truth of the statements made, but rather to show you that if the reviews drive sales, as Microsoft will argue, then WordPerfect was doing quite well, thank you very much.

PerfectOffice has leapfrogged Microsoft Office Professional and Lotus Smart Suite to become the mostly highly integrated office suite on the market. PerfectOffice does a better job of sharing information across applications for a work group and has a more consistent user interface. PerfectOffice 3.0 runs nose to nose with Microsoft Office, but the cross application integration is better. Overall, PerfectOffice is a stunner. No other suite can match the consistency of PerfectOffice applications. The opportunities for integration, including extensive Olay 2.0 implementation and the QuickCast micros, the end user hand-holder link and the work group support, for now this is the best all arounder. PerfectOffice sales have finally taken a bite out

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of Microsoft Office. The latest figures show Novell has 25 percent of the office suite market, up from next to nothing. Lotus is still in the toilet with 5 percent market share, while Microsoft has all the rest.

So we ask you to draw your own conclusions when Microsoft says that WordPerfect failed in the marketplace because of poor product reviews.

I skipped one, didn't I? I won't even read this one. Here's another one in the same document, Plaintiff's Exhibit 390.

Damages. It would be great if we could turn back the hands of time and give Novell WordPerfect a more level playing field in creating a world class suite of office productivity applications for Windows 95. We can't. All the law can do now is to compensate Novell with money for Microsoft's anticompetitive actions. You will hear from Dr. Frederick Warren-Boulton, who is the damages expert for Novell. Dr. Warren-Boulton has an extensive background in economics. He served for six years as the chief economist for the antitrust division for the United States Department of Justice. I'm not going to get into the issue of damages here in any detail. I'm going to leave that to the experts.

What I will say, however, is that the evidence will show that, by late 1995, after Windows 95 and Office 95 had been launched to great fanfare, Novell had come to understand

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that Microsoft would not allow fair competition in the office productivity applications market and made the decision to sell these applications to the highest bidder. That bidder was Corel, who purchased the applications in March of 1996, for $146 million. In a period of 22 months, Novell lost more than a billion dollars.

A couple of items as I finish up here. As I mentioned at the beginning, name space extensions API's is not the only issue we have with Microsoft in this litigation, although it's plainly the most important. You will hear about other acts taken by Microsoft against Novell that were also anticompetitive, but none of those had the impact of these name space extensions. You will also hear in this case about other anticompetitive conduct engaged in by Microsoft that didn't impact Novell directly. Now Novell, obviously, is not claiming damages for conduct that hurt others, like Lotus or Netscape or Sun Microsystems.

You will learn about the anticompetitive conduct engaged in by Microsoft against Netscape and Sun Microsystems from the findings which will be read to you at the beginning of the case, and we address what Microsoft did to these other companies in this case because it's relevant to your understanding of Microsoft's intent with what they did to us. And some of it will also be relevant to the issue of harm to competition in the operating system market.

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As I mentioned earlier Dr. Noll will be addressing the question of harm to competition in the operating systems market with you in great detail later in the case.

Now, one thing I want to do before I sit down is to thank you for acting as jurors in this case. It's an imposition. We know that, and we thank you for your service. And we will do everything in our power to get the evidence to you as quickly and directly as possible. That's the least we can do. So that's it for now. I won't have the opportunity to talk with you like this until the very end of the case. I look forward to that day.

Your Honor, that concludes Novell's opening statement.

THE COURT: Thank you very much, Mr. Johnson.

We've gone a little longer than we expected, so Mr. Tulchin, you can start, but we may have to have you finish up after the lunch break.

MR. TULCHIN: Thank you, Your Honor. Appreciate it.

Opposing counsel, Judge Motz, and, of course, ladies and gentlemen of the jury, my name is David Tulchin. I'm from the law firm of Sullivan and Cromwell. I'm very pleased to be here today on behalf of Microsoft Corporation, and before I begin, I wonder if I can introduce my colleagues who will be trying the case here. Steve Holley, who is with Sullivan and Cromwell, my firm; Jim Jardine, from Ray,

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Quinney & Nebeker; Steve Aeschbacher, who is from Microsoft Corporation in the state of Washington; and Sharon Nelles, also from my firm, Sullivan and Cromwell.

It is indeed a privilege to be here to represent Microsoft and to address all of you. It's also a pleasure to be in this beautiful old courthouse, which I'm told was built in the 1930's, and I mention that because I remarked on that earlier, and one of my colleagues asked if I had seen it being constructed. Not quite. But it really is a great old courthouse.

THE COURT: Give me a break, Mr. Tulchin.

MR. TULCHIN: Almost, Your Honor.

I have a favor to ask of you at the beginning. As you know, the case will go on for some period of time, and I ask that you be patient, and as the Court said yesterday, wait for the evidence to come in before making any decisions about anything. Novell gets to go first. They put their witnesses and evidence on first. We have to wait until they are finished before we call our witnesses, so I ask you to withhold judgment about the important issues in this case until you've had the chance to hear all the evidence.

A couple of opening remarks, if I may. Novell's lawyer pretty much said -- and I think this is the burden of what he said to you -- that, during the short period of time that Novell owned WordPerfect, the word processing, Novell

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failed. The product was unsuccessful. That period, of course, was from June of 1994 to March 1, 1996, and in my opening statement to you today, I'm going to try to put some of these pieces together chronologically because I don't want there to be confusion about when things occurred.

It's very important in this story. In 2011, here today, Novell's lawyer stood up and blamed Microsoft for the failure of WordPerfect when it was in Novell's hands. He even said that there was deception -- he used that word several times -- hypocrisy, that it was spin, Microsoft's reasons for taking certain things were spin. He said that it was all a facade.

The truth is that the evidence will show that the blame cannot be placed at Microsoft's feet for what happened to WordPerfect and also to another product that Novell bought also in '94 called Quattro Pro, a spreadsheet. The blame really lies at Novell's feet and at the feet of WordPerfect Corporation, the company that Novell acquired in '94. And if Novell's products failed because of bad choices by Novell and WordPerfect, as they did, it was also a function of the great products that Microsoft made.

You remember, just a few minutes ago, Novell's lawyer telling you about the huge success of Windows 95. He showed you a picture of the launch date, August 24, 1995, and I think he said that millions of people around this country

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and around the world waited on line to get Windows 95. And we'll come to that this morning. Microsoft made great products that people wanted to use. And that helps explain what happened to WordPerfect as well. It's easy to make allegations about spin and hypocrisy. It's easy to say there was deception. Again, we ask that you wait to hear the evidence of whether there was any deception at all. I'll come to just a little bit of this evidence as we talk this morning.

Novell's lawyer did not tell you that these events about the name space extension API's -- and that's the only thing that he says Microsoft did wrong -- something to do with the name space extension API's. And he points to a decision on October 3, '94, by Mr. Gates, to withdraw support for the name space extension API's. I'm going to get into this in more detail, but it's important to say right at the very beginning. At that time, October, '94, Windows 95 was not a released product on the market. We're talking about a Beta version of the product, a pre-released version. So, when Novell's lawyer talks about a road that had been built, the road had not been built.

Microsoft was working on Windows 95. This is a pre-release version that it had provided to Novell, under a contract, and you'll see some of this later, and, of course, in the development of a very complicated operating system

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like Windows 95, things change. The product is not final. That's the very nature of a Beta. And that's what the evidence will show. The beta is a pre-release version sent out to ISV's like Novell to be tested, and as Microsoft gets feedback about -- from ISV's about this pre-release version, there are many, many decisions for Mr. Gates and others at the company to make about exactly what the final product will look like.

That's the decision in October '94. There was nothing provided to Novell, that was Novell's property, that was suddenly seized away. Indeed, Novell's lawyer, I noted, said three times that Mr. Nakajima, who was a Microsoft engineer -- he worked for Microsoft. He was paid by Microsoft -- and the lawyer said that Mr. Nakajima was the inventor of the name space extension API's. Yes, he was. That invention belonged to Microsoft.

No one promised Novell that it could use that invention as it chose, if Microsoft decided that Windows 95 would be a better product without it. And I'll come to that in just a little while. And, interestingly, well, today you hear that Novell is asking for -- I think the only number put up on the screen was a billion dollars in damages. And the lawyer said, well, you will hear from experts about that.

At the time, Novell never complained about Mr. Gates' decision to withdraw the name space extension

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API's. That's October of 1994. Novell didn't even file this lawsuit until November of 2004, more than ten years later. So, when you hear there was deception and hypocrisy and spin, when the lawyer says it was all a facade, this conduct that allegedly is so bad -- and it's easy to toss around those words. That's what the courtroom is for, for the evidence. This conduct that was supposedly so bad, Novell said nothing about at the time and waited more than ten years before it even brought this case, filed the lawsuit.

The evidence will show that Novell, itself, made misjudgments and bad choices, and the demise of WordPerfect, the decline of the product, was a function of that and a few other things that we will come to. And, of course, one other preliminary thing. It's easy to say deception and to use the word, and it's easy to show little snippets of e-mails on the screen, just a little word or two or a fragment of a sentence, and to construct an argument about what that sentence means or what you should think it means.

Again, I ask you to wait for the evidence. Mr. Gates will be here in this courtroom. He will come in and tell you about the decision to withdraw support for the name space extension API's. That will be the evidence, not what a lawyer tells you you should think, but how you evaluate the testimony and the evidence in front of you.

I also noted, and I hope I got this right -- I think

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I did -- that through this opening statement that you just heard from the Novell side, I don't think you were shown a single Novell document about what really happened. I'll show you some of those as we go through this this morning. You were also told several times about findings of fact in another case. And you were told that one of the lawyers for Novell will read you those findings of fact.

I ask just this. I ask you, when you listen to them, to try to figure out if there's any mention, in any of those findings in this other case in Washington, in 1999, any mention of Novell or WordPerfect or any Novell products, any of them. I think you'll find that there is none.

So, we're very happy to have you listen to the findings that will be read to you. They have to do with a case that was filed in 1998, as Novell's lawyer said, and the findings were made in '99.

One other preliminary thing, if I may. I don't think you were ever told what the name space extensions really are, what they were, and I will show you if I can. It's technological and a little complicated. There will be witnesses here who will explain it much better than I can. But there is an implication that, when you see something about extending the shell or shell extensibility, that that's a reference to the name space extension API's. And that's not right. The name space extensions were just a very small

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piece of the shell and the Microsoft technology to extend of the shell, just a tiny piece of them. The name space extension API's were not the reason that WordPerfect failed in the marketplace.

Let's start, if we can have the first slide, just with some basics here. And, as I think you know by now, there are three sorts of products that are principally involved in the case, PC operating systems, which we often just call operating systems. Included are DOS and the Microsoft version of DOS called MS DOS, and then Windows; word processing software. Microsoft had something called Word. Novell had WordPerfect; and then spreadsheet software, Microsoft Excel, and Novell had a product called Quattro Pro during that short period of the time, from June of '94 to March 1 of '96.

It's also worth noting, and I think we should do it right here, that, as the Judge instructed you yesterday, it is not unlawful, in and of itself, to have monopoly. Judge Motz said these words to you yesterday as part of his preliminary instructions to you. Mere possession of monopoly power, if lawfully acquired, does not, itself, violate the antitrust laws. And, yes, Microsoft, during the relevant period, had a monopoly in operating systems thanks to the popularity of MS DOS and Windows.

Novell's lawyer mentioned an expert that they will

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call, that Novell has hired, named Roger Noll, who will testify in this case. Dr. Noll, who is a professor, has testified previously that Microsoft's monopoly was lawfully acquired. Nothing illegally done by Microsoft to obtain that monopoly.

And the Court will give you full instructions at the end of the case about what constitutes anticompetitive conduct. I think Judge Motz said yesterday that you'd hear that in his final instructions. A harsh sounding e-mail, in and of itself, is not anticompetitive conduct. And you will hear the final instructions. Whatever they say, they will say, but that's certainly my prediction you will hear that. And I think you will also hear --

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-- that conduct is not anticompetitive if it was undertaken for a legitimate business purpose.

Novell's lawyer said something similar to that in his opening statement, and we will come to the name space API's and the reasons, plural, reasons, that Microsoft decided, during the period it was working on Windows 95, developing the product, to make that small change.

Now, let me tell you a little bit about Microsoft. Many of you know a piece of the story. Bill Gates was 19 and at Harvard College in Massachusetts in 1974, I believe, when he became very interested in actually a -- what was then

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called a mini computer that he saw in a magazine, dropped out of college, and with his boyhood friend, Paul Allen, went to work in writing a computer programming language called Basic. Some of you may even have heard of Basic. A few years later, Bill Gates and Paul Allen, who had started Microsoft, bought a software program from a company in Seattle, modified it, and developed what was called Microsoft DOS or MS DOS.

Of all things, IBM, which was then the 300 pound gorilla in the world of technology and computing literally knocked on Mr. Gates' door, in the suburbs of Seattle, inquiring about whether Microsoft could write or provide an operating system for the first IBM PC, which came out on the market in 1981.

And, Judge Motz, that one I do remember.

And Mr. Gates made a deal with IBM and, pretty soon, MS DOS was on the majority of all PC's that were being sold anywhere around the world.

Now, that, of course, was in the 1980's. Bill Gates could have stopped right there. Microsoft was very successful selling MS DOS to IBM and all these other companies that were making what were then called IBM clone PC's. But Mr. Gates saw the future of computing as something a little different.

And let me just show you what MS DOS looked like. It was a character based system. Some of you may have seen

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it. In a character based system, this is what the screen would look like when you get your computer booted up.

And let's look at the next one.

In order to get to anything useful in your computer, you had to type in a command, and if you typed in the command correctly, the computer would respond by displaying the contents of the file that you were interested in. If you didn't type the command in exactly right, the computer, of course, would give you nothing.

And let's look in a minute at what are called graphical user interface operating systems. And I know there are a lot of are acronyms in this case. It's going to be hard to keep them all straight. This one I think you will hear from time to time. GUI, G-U-I, which stands for graphical user interface. And what you're looking at now, is a screen shot of a GUI operating system. This one is Windows. The picture depicts the Windows 95 desktop, and, as I think all of you probably know, the user can interact with a GUI operating system by just clicking on icons and buttons on the screen.

Now, in the 1980's, this was something very new. Mr. Gates, early in the '80's, made a commitment to the GUI platform, graphical user interface platform. He saw it as the future of computing. He saw it as the way that, as he had predicted in the 1970's -- something that seemed

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implausible then -- there would be a computer in every home and in every office. And, in effect, Mr. Gates bet the company, bet Microsoft's future on the GUI platform.

Apple -- and you've all recently read about the unfortunate death of Mr. Jobs, one of the co-founders. But Apple came out with the Macintosh in 1984. It was a GUI platform. Bill Gates recognized the potential of GUI's right then, in 1984. It was a whole different, much easier way for most people to get the benefits of using a computer. And, right away, Microsoft went to work on making operating systems that were graphical and applications, like word processors and spreadsheets, that would run on a GUI platform.

In 1985, Microsoft came out with the first version of Windows. That's -- it's not on this chart, but that's 1985, Windows 1.0. Windows 2.0 came out in 1987, at the end, and what we show you on this graph is all the work that Microsoft did writing applications for GUI platforms, for these graphical user interface operating systems, Word and Excel for the Macintosh. That's 1985. 1987. And you see the progression here of Microsoft applications for the GUI platform. This is an important point because of the contrast with what WordPerfect, itself, did.

Now, you see Windows 3.0. That was released in May of 1990. The evidence at the trial will show you that

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Windows 3.0 was a game changer. And we'll come to that in just a minute. The first two versions of Windows were not hugely popular. They were not huge sellers. The world continued using mostly DOS operating systems, and particularly Microsoft DOS.

Now, while Microsoft was working on these graphical user applications, Word and Excel, WordPerfect Corporation -- this is long before it was bought by Novell -- was much, much slower at recognizing the future, where computing might go in the next several years. WordPerfect first came out with a word processor for the Apple Mackintosh system in the middle of 1988, and, in fact, came out with nothing for Windows, no word processor for Windows, until the end of 1991. And we're going to come back to that in just a minute.

The evidence will show that the reason Novell was having so much trouble getting its applications out in a timely way in 1995 is because WordPerfect was always late. We'll see this as we go along. At that time -- and I want to stop here and talk a little bit about Novell, which did not own WordPerfect then. At that time, Novell --

I'm sorry. Would you turn that off. My apologies.

Novell, in the early '90's, was principally a company whose product was called Netware. And I think you remember Novell's lawyers saying Novell's business was network operating systems. The evidence will show that

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Novell, in the early '90's was very successful in network operating systems. They had something like 65 or 70 percent of that market. These are operating systems for servers.

And Novell and Microsoft competed at that point. Microsoft had Windows NT, and Novell had Netware. Many of the e-mails that Novell's lawyer showed you from 1992 and 1993, written in Microsoft, are clearly about competition between Windows NT and Netware, Novell's Netware. They have nothing to do with WordPerfect or Quattro Pro. They have nothing to do with the issues in this case. Those e-mails from '93 were before Novell ever bought WordPerfect. Those e-mails are about this competition in this other area where Novell was then dominant, network operating systems, and Microsoft was sort of the new boy on the block.

The idea of diversifying for Novell, to diversify into word processing and spreadsheets, was an idea that Ray Noorda had. Mr. Noorda was the founder of Novell. He ran Novell up until the spring of 1994. Just about the time that he left Novell is when Novell announced that it was buying WordPerfect and Quattro Pro. Quattro Pro, at the time, was owned by company called Borland in California, Scotts Valley, California.

And, as I've noted, the current lawsuit is Novell's effort to blame Microsoft for what happened to those products. In order to understand what happened to them, we

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really need to understand where they were, where those products were in the marketplace at the time Novell bought them. And let's go through just some of that.

Slide 15.

First, it is quite correct that, on DOS, WordPerfect was king. It was true in the '80's. And here we show you the period in the early '90's. The WordPerfect word processing product, owned by WordPerfect Corporation, was very successful on the DOS platform.

The evidence will show you that, if you have a piece of software like WordPerfect that's running on one platform, like DOS, you cannot usually automatically make it available on a different platform, like Windows or Mackintosh, some GUI platform. That's a big job. You have to rewrite your code so that it fits with the other operating system. WordPerfect had done a great job on DOS. Their market share was very high. Microsoft Word's market share -- this was the Microsoft product Word, on the DOS platform, was much lower.

And you can see it here. Even when Microsoft Word was written to run on the Microsoft operating system, MS DOS, WordPerfect was far more successful. Microsoft, meanwhile, was hugely successful on the Mackintosh, on the GUI operating system from Apple. And Microsoft was getting all these years of experience working on a GUI system. Microsoft was also way, way ahead of WordPerfect in writing Word for Windows.

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Again, you have to rewrite your software to make it work on a different platform.

Let's look at 18, please.

I showed you on one of the charts, and just mentioned it briefly that, in May of 1990, Microsoft released Windows 3.0. And I mentioned to you that the evidence will show that Windows 1 and Windows 2, released years earlier, had not been huge hits in the market, but Windows 3.0 was. Even Novell's expert in this case, Roger Noll, has said Windows 3.0 was a revolutionary technological leap. It was a huge event for Microsoft.

And Charles Middleton, who will come testify, who was a Novell employee, has said something very similar, that Windows 3.0 was a big leap forward from the previous versions of Windows. When that product came out in May of 1990 -- and this will be the evidence at trial -- droves of consumers moved from the DOS platform, that character-based system where you had to type in commands, to Windows 3.0.

The evidence will show that WordPerfect Corporation was nowhere at that time. They weren't ready for this change, this shift in the marketplace.

Let's look at slide 19.

Again, I know this is a lot of information. We're just getting started at the trial. You will hear this over weeks and weeks. We don't expect you to memorize all these

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dates and things and for people who are new to all this, it may sound a little intimidating. But what we show here on this slide is that when Windows 3.0 came out in May of '90, this operating system that Microsoft created, that was a revolutionary technological leap, Microsoft had Word out to run on Windows; one version in 1989, a second one later.

WordPerfect had nothing, and you will hear at this trial, from a man named Willard Peterson -- he goes by Pete, as you might think -- Pete Peterson who, at the time, worked for WordPerfect. He left WordPerfect in 1992. Mr. Peterson basically ran the business. His title, I believe, was executive vice-president. But he was running the WordPerfect business. And he will testify right hear from the witness chair, I believe, that WordPerfect Corporation was late to come out with a product that ran on Windows because it was late to see this huge shift that was taking place in the market, or maybe because it deliberately decided to stick with DOS, where it was very successful and making lots of profit. He'll explain to you these reasons.

So, first, WordPerfect is a year and a half behind in coming out with a product that will run on Windows. The first one it comes out with is November, '91. I don't think you will hear any evidence at trial that Microsoft did anything about name space extension API's or anything like that that caused WordPerfect to be late. Mr. Peterson will

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tell you why.

And, not surprisingly, what happens in a high tech field when you're late? Let's say you're the second or third company to get to the market? In a fast changing technological field, very often the first product turns out to be the big winner. There are many examples of this. You can think of an iPod to play music. Apple came out with that in 2001. There were other competitors, including Microsoft that came out with something called the Zune a few years later. If you're first, very often, you win.

And the first product that WordPerfect ever had for any Windows platform was late. November, '91. It took a bump up in market share because, the evidence will show, consumers were waiting for WordPerfect. It had a great reputation on the other platform, DOS. And people were excited to see if WordPerfect would do well on Windows. The evidence will show it did not. It was not a good product.

And you can see where the market share lines go for WordPerfect on the Windows platform thereafter. And just so that we can keep this in mind, this is the date on which Novell bought WordPerfect. You can see where that line is going. And making a misjudgment about the value of a business you buy, that can happen. We don't blame anyone or say it's anyone's fault. But making a misjudgment about a business that you buy and then, ten years later, blaming

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someone else for your mistake, that, with all respect, I think is wrong

Now, let's look at 25, please, David.

I told you that the WordPerfect products that were written for Windows weren't that good, that the evidence will show that they weren't of high quality, and I just want to look at a couple of documents with you. This is Defendant's Exhibit 259, second page. And I want you to note that this is a document that was a Novell document. It was written at WordPerfect in 1993, and Novell later produced it to Microsoft in discovery. That's why it has those funny little numbers in the lower right-hand column, N-O-V, dash, and then a number.

This was a document prepared by WordPerfect, and even in Oct -- sorry. Even in December, 1993, you'll see that WordPerfect, itself, evaluates its own product. WordPerfect (Win) 6.0, which came out in October, 1993, very late, is too slow, as compared to the competition, and containing too many bugs to be considered sufficiently stable.

Now, the evidence will show that those two things will make it difficult for you to sell your software. If it's too slow for the hardware, and if it's not stable because it's crashing, you have a problem with quality.

And let's look at 25-A.

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Even in 1995, this is in the middle of the period when Novell owns WordPerfect. Even in 1995, Novell, itself, is saying, still recovering from that slow and buggy product, WordPerfect 6.0 for Windows. This was eight months after Mr. Gates made the decision not to support the name space extension API's. June of 1995. And Novell, in its business plan, Exhibit 341, is noting they are still recovering from a product that is not high quality. So the question of who to blame for the lack of success is one we'll come back to.

Let's look at Exhibit 26.

In contrast to some of the problems that WordPerfect and Novell were having with its own products, again, they did great on the DOS platform, but the products written for Windows? Another Novell document. This is DX 7, Defendant's Exhibit 7. It was written in 1994. This is just a month, less than a month after Novell purchased WordPerfect. So, Novell was brand new. They now owned this WordPerfect business. And what do they do? They recognize that Microsoft's suite, Microsoft's suite is called Office, as you may know, is the industry leading suite, that it's 1, 2 punch Word and Excel, is the strongest combination in the industry.

There will be lots of evidence at the trial. But, as you can see -- and I'm coming to some more as we go through this -- even Novell recognized quality, of course, is hugely important. If you have a product and its quality is

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not high, and the competition has the best 1, 2 punch, well, you don't have to speculate about why a product fails.

And let's look at slide 29.

Again, this is after Novell purchased WordPerfect. I'm going to get a little bit of this in my opening, but because of constraints of time, it may be less than I'd like. WordPerfect had no suite. WordPerfect had the word processing program called WordPerfect. Quattro Pro was being made by Borland in California. So, when WordPerfect and later Novell got into the suite business, they partnered with Borland. First WordPerfect Corporation did that, and they came out with a suite called Borland Office. And here in 1994 what do they say? This has not been received very well. Nothing about the name space extensions in this document.

In fact, what they say -- and this was the reality in the marketplace. The evidence will show you this at trial. As an incomplete suite, the Borland Office has not been met with great enthusiasm. It has been labeled by some as a sort of suite because it didn't take into account some of the factors which persuade people to buy suites, integration and consistency. Now, if you're selling a product that doesn't take into account the factors that convince people to buy that product, well, we all know what happens.

So, let's look at slide 30.

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We talked earlier, briefly, about the shift that went on from the DOS platform to the GUI platforms. There was also a shift that took place a little bit later, in the early '90's and into the mid-'90's from stand-alone products, like a word processor by itself, either WordPerfect or Word or some competing product, to buying office suites. And Microsoft Office contained everything that you could get in word and Excel and also several other products.

And you can see what was happening in the marketplace during this period. 1993. You can see it in green. That shows you the quantity of spreadsheets being purchased. The purple or blue color is word processors, and it looks like they are about double the number of suites being sold in terms of dollar amount of the revenue. In 1994 suites are in first place. They have made up that whole deficit by a fair amount. By 1995, you can see that revenues for suites are triple those for word processors and spreadsheets alone. And then you see what happens in 1996.

Again, the period that Novell owned WordPerfect and Quattro Pro was this period, June of '94, from the middle of '94, to March 1, '96. So the evidence at trial will show you that, at the time Novell purchased these products --

Sorry, David. My fault. We want slide 34.

-- there had been two major changes in the market. WordPerfect Corporation was slow getting to the Windows

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platform. It was not only slow when it came out with products, those products were not of high quality. And it was very slow coming out with products that could compete in the suite market. Those two major changes in the market, in effect, meant that Novell was buying products that were already in decline.

When Novell purchased WordPerfect and Quattro Pro in June of '94, those products were on that sharp line downward. Instead of blaming Microsoft, the evidence will show that Novell, and the companies before it, had not adapted to technology, to changes in technology.

And now let's do 31.

I use this just as an example. The Eastman Kodak company was once dominant when it came to film for cameras. And here's a picture on the left. Some of the younger people here may not even remember the old-fashioned film that was used in cameras. Many of you will. And now look what you get in the memory card. You can actually store 5 thousand photographs in one tiny little card instead of a clumsy piece of film that you have to feed properly into your old-fashioned camera.

Changes in technology can happen fast, and companies that don't recognize them, of course, go by the wayside. It may sound harsh. It's the nature of competition, particularly when it comes to high tech.

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Okay. Let's look at exactly what happened when Novell announced that it was going to buy WordPerfect and Quattro Pro because the marketplace itself recognized the shifts that were going on that I've described to you, the shift to the GUI platform, to Windows, where WordPerfect was weak, the shift to suites, where WordPerfect, if anything, was even weaker. And this is March 21. This is the reaction in the stock market, shareholders of Novell, to the announcement that Novell is going to purchase WordPerfect and Quattro Pro for roughly $1.5 billion.

The announcement was made on March 21, after trading had closed. I should say Novell's stock -- Novell was a public company. Its stock was traded on the NASDAQ stock exchange, and these prices are the closing prices on the days in question, on NASDAQ. Novell's stock is going along nicely. It closes at 23.75. The announcement is made at the close of trading that day. The next day the price drops to $20, and the day after that, the 23rd, to 19. That drop, from 23.75 to 19, is a fall in the stock price of Novell of 20 percent. 20 percent.

Unless you think that the stock market is crashing on the days in question and that's what explains this drop, no, the NASDAQ was just about flat. It was up a teeny amount in the two days in question. The New York Stock Exchange, the S&P 500 were also flat. Novell's stock took a huge hit

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downward.

And Glenn Hubbard, who's the Dean of the Colombia Business School, will come testify in this case as an expert for Microsoft and will tell you why, in his opinion, the stock price dropped by 20 percent on the days in question. He will tell you that the stock market, the shareholders of Novell, recognized the very things that I've been describing, that I think the evidence in this case will show. The stock market recognized that Novell was buying products that were in decline, that Novell made a misjudgment about the future of those products.

And the map is more complicated than we may want to deal with here. Dean Hubbard from Colombia will give it to you in detail. But if you take the number of shares of Novell that were outstanding then -- it was about 309 million -- and you multiply by the drop in the stock price, the loss in the value of the company, what is called the market capitalization, in those two days alone was almost $1 1/2 billion, about the same -- not quite exactly the same but about the same as what Novell was paying to buy the two companies. In other words, the stock market saw that these two products were not worth what Novell was prepared to pay.

Now, let's talk now about the name space extension API's and the decision to de-document them. Chicago, as Novell's lawyer told you, was the code name used by Microsoft

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for the project it was working on that ultimately became Windows 95.

There's nothing strange about these code names. Every software company does that when they are developing a product. And Chicago, Novell's lawyers said it, was a big advance in the planned user interface. The name space extension API's were just a very small piece of what was called the shell. And you'll see that from the witnesses who testify, including Mr. Nakajima, who wrote the name space extension API's and from several other Microsoft witnesses.

Thank you.

One thing that maybe got a little bit lost in the shuffle earlier this morning, an API is the connection that Microsoft writes in the operating system that an application can use to call on the great things the operating system can provide and the underlying hardware. As Novell's lawyers say, API is an acronym. It stands for application programming interface. And Microsoft, in working on Chicago, what became Windows 95, worked very hard, lots and lots of Microsoft engineers, to write many API's so that all sorts of software -- not just word processing -- thousands of different kinds of software products, would work well with Windows.

There were four API's that are referred to as the name space extension API's, just four. They are four of

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several thousand.

Our slide says approximately 2,500. I think John Bennett, who will come here from the University of Colorado, and is a true expert on operating systems and software engineering, will testify that the number of API's was something like 2,800. But the exact number isn't important.

What's important here is to keep the name space extension API's in context. Just a very small piece of what the operating system was being written to provide to companies like Novell.

Now let's look at slide 41.

And bear with me for just a minute. I've tried not to be too technical, but here it's going to be just a little bit technical. Bill Gates will be here and talk to you about why he decided to do what he did. And I want to show you the e-mail that Novell's counsel so heavily relied on, but there are three reasons Mr. Gates decided, during the development of Chicago, to withdraw support for these four API's, three reasons. The first is that a program written to use those API's could potentially crash the whole shell, the Windows shell.

These four API's -- sorry to be technical -- allowed an ISV', like Novell or WordPerfect, to write a program that integrated directly into the shell of Windows 95. So, that meant that any ISV', any application developers, could use

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the name space extensions in a way that their programs would be written in the same what's called process space as the whole shell, and if one of those programs malfunctioned, a program not written by Microsoft, by any one of thousands of other companies that makes applications, it could crash the entire shell.

Now there aren't that many things more important to someone building an operating system than to avoid the possibility that a user, who's using his or her computer, would find that the whole thing crashes.

Secondly. The name space extension API's were not compatible with future versions of Windows that were then being developed. There were, at the time, in 1993 and 4, actually three different teams at Microsoft all working on different operating systems. One was Chicago, which became Windows 95. One was something called Cairo, which was working on an operating system that Microsoft never brought to market. It never got released. And the third was Windows NT, this version that was competing with Netware, an operating system for work stations and servers.

The Windows NT team was headed by a man named Bob Muglia. Mr. Muglia will be here and testify from the witness stand during the trial. The NT team, because they were writing an operating system for work stations and servers, needed to make sure that stability and reliability could not

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be adversely impacted by third-party programs. Mr. Muglia and the people who worked for him were very, very opposed to leaving the name space extension API's in the system and available for all ISV's to use because of their fear of what it would do to Windows NT. And they lobbied Mr. Gates hard to withdraw support for the name space extension API's.

Thirdly. Mr. Gates, it is true, had originally contemplated that the name space extension API's would be more significant than what Mr. Nakajima was able to create or invent. Mr. Gates wanted and dreamed of API's that would allow applications to be launched from the scope pane and to run in the view pane, the right-hand pane of the Explorer. When Mr. Nakajima got done writing these API's, they could not accomplish all that. All they did was to allow an application to add a custom folder to the scope pane of the Explorer that would display a list of files or other objects in the view pane. In other words, they did not achieve the functionality that Mr. Gates sometime earlier had hoped.

They turned out to be far less important or, to use the word that Novell's lawyer used, more trivial than what Mr. Gates had been hoping for when he was thinking, a year earlier, about what Windows 95 might become. Again. A complicated operating system, as Novell's lawyer said, I believe, with millions of lines of source code. There were many decisions to be made about what would go in the final

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product.

In effect, what Novell is arguing, is that it was Microsoft's job to make those decisions in a way that was best for Novell instead of a way that was best for Microsoft, for Microsoft to make the Windows 95 that would actually become that product that Mr. Johnson referred to, the product where people lined up for blocks and blocks to get it, a product that all of us -- many of us, I'm sure, wound up using.

And let me try to show you, just briefly, what the name space extensions are all about. Microsoft designed Windows 95 during this time period in a way so that ISV's, like Novell, could display their applications in a way that would make it very easy for users to launch those applications.

Let's look at 47.

This is the Windows 95 desktop. Windows 95 was the first Windows operating system that had a start button. By now, I think we're all familiar with start buttons. This was new in Windows 95. It allowed an ISV, like Novell or anyone else, to put a shortcut to their application, to their software products, by clicking on the start button. And what we show you here in this slide, clicking on the start button, you can get right to Corel Office 7, the product Corel launched in 1996.

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There was a second way that Windows came out with something that people like Novell, companies like Novell could use to make it very easy for all of us to get to WordPerfect or PerfectOffice. And that was by clicking an icon on the desktop.

We are all familiar with this now, but Windows 95 was the first operating system that allowed a developer like Novell to put this shortcut right on the desktop. All you'd have to do to use Quattro Pro or WordPerfect is to click on one of those icons. Now, those two means of launching WordPerfect were in Windows 95. There's no complaint about those. Microsoft invented that technology in a way that assisted all ISV's so that any user could get to WordPerfect very easily.

What Novell says it wanted, what Novell says it was entitled to through the name space extensions, was a third way, a way that would allow users to get to WordPerfect and Quattro Pro from the Windows Explorer. Now, Windows Explorer is different than Internet Explorer, as you probably know, but here's a picture of the Explorer. The left-hand pane is called the tree view. Novell's lawyer pointed out to you it sort of looks like it has branches on the left here. That's the tree view. And what we've shown you on this slide is functionality that was never implemented in Windows 95.

Here there's an icon for a prototype of an e-mail

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client called Infocenter. That appears way on the left. And then in the tree view, you can see Infocenter right there. In this picture, a user could access his e-mail, in box, from the Windows Explorer, as opposed to, for example, clicking on Microsoft Outlet -- Outlook, excuse me, which is the way most people would do it.

And let's look at the next slide.

Windows 95 provided this functionality to Novell. It allowed Novell and any other ISV to add whatever folders they wanted to, to the left-hand pane of the Explorers. They didn't need the name space extension API's. And you could add, on the right side, folders labeled WordPerfect and Quattro Pro.

So the whole thing about the name space extensions --

And let's go back one slide.

-- has to do with this one way, of three or four, of getting access to WordPerfect or Quattro Pro. This was the functionality that Microsoft did not include in Windows 95. Microsoft withdrew support for them. And you will hear what that means. It's technical.

The API's actually stayed in Windows 95. They were never taken out. And if Novell needed them so desperately to get to market in a timely way, Novell could have used them. They stayed right there. Microsoft withdrew support, which

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just means that it warned ISV's that, in future versions of Windows, those four API's might not remain there, so it would be risky to rely on them because, in some future version, let's say Windows 98, they might be taken out then.

That's what Microsoft did, withdraw support. And the only thing that it would have given Novell is what's depicted on our slide 48, the addition of custom folders to the Explorer, as opposed to the way people wound up using their software, going to the start button and finding WordPerfect or going to the icon on the Desktop itself.

Now, thank you for your patience. I know it's been a long morning, and we've given you lots of information. I do have a few other things that I need to go through with you. Let's look quickly at PX-1. And I won't take you through it all. This is the e-mail that Novell's lawyer says Mr. Gates wrote. And they say this is the proof.

It's 44-C, I think.

This was the paragraph. There are seven or eight paragraphs in this e-mail, and I'm sure, before any of you come to any judgment about what Mr. Gates was thinking and what he meant and what his reasons are or were in 1994, you'll listen to Mr. Gates and read the e-mail.

But this is what Novell's lawyer says was the proof that Microsoft was trying to do something deceptive, was trying to get some unfair advantage over Novell. And the

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sentence that he directed you to is the second sentence of the two that I've highlighted. It says: "We can't compete with Lotus, WordPerfect and Novell without this."

Novell's lawyer then argued to you that, what that means is that we can't compete with WordPerfect unless we take the name space extensions out.

It's clearly not what this e-mail says. When it says "without this," in the second highlighted sentence, it's plainly referring to the prior sentence. Having the office team really think through the information-intensive scenarios and be a demanding client of systems is absolutely critical to our future success. Those two sentences say nothing about the name space extension API's. Those two sentences are about the office team thinking hard about the functionality that would be provided in Office.

Of course Microsoft, Mr. Gates, is thinking, what do we do to make Microsoft Office as good as it can be, as easy to use as Windows 95, as something critical to our future success. And the idea that we can't compete with WordPerfect is not about the name space extension API's. The prior sentence makes it clear. It's about continued work by the Office developers to make its product as good as it can be.

It will be several weeks now, I believe, before Mr. Gates can come and testify. Novell, of course, gets to go first. But Joe Belfiore will also testify. He's from

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Microsoft as well. He will tell you about alternative ways that Novell could have gotten the same functionality that the name space extension API's would have given them.

If those four little API's were so critical to Novell, there were ways for Novell to write their own software instead of using Microsoft's inventions to get to the desired objective. And, of course, they could have used those same API's themselves if they were so important.

Bob Muglia, whom I mentioned earlier, who I said was lobbying Mr. Gates to de-document the API's, he will testify. So will Mr. Nakajima, and Brad Struss will as well. And we will come to him in a minute.

But first if we can look at slide 50.

When I started a little while ago with my opening statement, I said to you that one of the things that I thought you probably hadn't appreciated in listening to Novell's opening statement, is that the decision in October, 1994, about the name space extension API's, was made when the product was still under development. Microsoft wasn't finished with it. They are still working on it, developing it. Of course it can change.

And here's the contract between Microsoft and WordPerfect which, of course, May 24, '94, just before Novell bought it -- so it's the contract binding on Novell as well. And the idea that Novell advocates in this case, I think, is

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that somehow, because Microsoft in a very early version of the Beta, included the name space API's, they could never take them out. That was the deception. They've told us that these API's, these four, out of thousands, might be in the product, and then later you withdrew support for them.

Well, Novell and WordPerfect understood full well what a Beta version is. The contract under which Microsoft agreed to pretrial Novell with the Beta says this.

It's a pre-release version, so of course it says this. "The product may not operate correctly and may be substantially modified prior to first commercial shipment." So these accusations about deception, that somehow Microsoft deceived Novell. Novell could not have been deceived that a Beta version of Windows 95 was subject to change. It may be substantially modified before the final product is shipped.

Now, Novell's lawyer implied, if he didn't say it, that -- he says now, I guess, that the reason Novell's products were late, that they came to the market later than the release date of Windows 95, that August 24, '95 date, was because these developers were working so hard to build their own root, that road, they didn't have the name space extensions, they actually had to do the work themselves instead of relying on Microsoft's engineers, and that's what held them up.

That's what made the products late, and because they

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were late, I think the theory is, because they were late, that's why Novell was able to sell those products for a much, much smaller amount than they had paid for them.

I think you may remember Novell's lawyer said that Novell was able to sell the products for $140 million, when they had paid about 1.5 billion, ten times as much. Of course, as we saw earlier, the stock market thought the products were worth about 140 million, apparently, when the announcement was made.

But the idea that Microsoft is to blame because Novell was late getting WordPerfect out, that idea is just not supported by the evidence. And I'll try to go through this. There will be lots of evidence at trial about this. I will give you some of it now.

THE COURT: Do you know if the lunch is here?

THE CLERK: It should have been here at 11:45.

THE COURT: According to your estimate, you have about 20 minutes to a half an hour to go?

MR. TULCHIN: Yes, sir. Half an hour would do.

THE COURT: I think we had told everybody that the lunch would be here. This seems like a natural stopping spot, so why don't we stop for a light lunch for 20 minutes and then resume.

MR. SCHMIDTLEIN: Your Honor.

THE COURT: Yeah.

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MR. SCHMIDTLEIN: Can we be heard once the jury has been --

THE COURT: Sure. Okay. I'll stay here if you want. If the lunch isn't there, let me know, Theresa, and we'll continue. (Jury leaves the courtroom.)

MR. SCHMIDTLEIN: Your Honor, during one of the motion in limine rulings, I think Novell filed a motion in limine on the beta release, and I think you denied the motion. But you stated, at the time -- and we can get the transcript -- you stated at the time that a limiting instruction would be given.

Mr. Tulchin has just told the jury that, in light of that beta release language, that warranty language, there can be no deception in this case.

I think we are entitled to an instruction at either the close of this or some appropriate time very soon after, that explains to the jury -- and I believe you said it at the time, that you will give an instruction that that language is not immunity or does not otherwise, as a defense to the antitrust claims in this case.

MR. TULCHIN: Your Honor, if I may --

THE COURT: No. I understand the point. As far as I'm concerned you all are here, and you shouldn't be here now, but you are here now, and just wait it out, and I will

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give a limiting instruction when I give it, and I'm not going to give a limiting instruction at the end of what you are saying. (Short break.)

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THE COURT: Let me clarify what I meant. And obviously I might not let you all avoid my ruling in terms of --

THE COURT REPORTER: I'm sorry. I can't hear you.

THE COURT: -- in terms of Mr. Schmidtlein's objection. I just think it was in the realm of fair argument. I don't recall what I said before. I mean, I really, to some extent it is a defense to the deception. It may not audibly be a defense to anticompetitive conduct, and that's something with which -- I had -- it just seemed to me it was in the wrong --

MR. SCHMIDTLEIN: What we'll probably do is, I take Your Honor's point about the context right now giving that instruction, but what we might do is submit something to you so that when they do produce --

THE COURT: Sure.

MR. SCHMIDTLEIN: -- because it may come up in the first witness.

THE COURT: That's when I think it might come up. And I may submit something. But again, recheck the transcript. It's not so much -- it's obviously deception blurs any anticompetitive conduct. But I really thought it was not a defense to anticompetitive conduct.

MR. SCHMIDTLEIN: Right. We'll look at that this afternoon, and we'll probably approach you in the next day or

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so.

THE COURT: Fair enough.

MR. SCHMIDTLEIN: Thank you, Your Honor.

THE COURT: We have another half hour?

MR. TULCHIN: I hope it's more like 20, Your Honor, 20 or 25.

THE COURT: You're not doing anybody any disfavor by breaking up the collateral of estoppel.

MR. SCHMIDTLEIN: Well, I think what we're going to do, Your Honor, if it's okay, if Mr. Tulchin gets done roughly around 1 o'clock, we could do probably a half hour of it and split it in half.

THE COURT: That sounds perfect.

MR. SCHMIDTLEIN: And pick up it up in the morning.

THE COURT: That's fine.

MR. SCHMIDTLEIN: Thank you.

(Whereupon, the jury returned to the court proceedings.)

MR. TULCHIN: Thank you, Your Honor.

Ladies and gentlemen, I will try to finish up in the next 20 or 25 minutes, and I thank you for all the patience that you've shown already.

THE COURT: This is a good part of the next hour. The bad part is during the collateral estoppel, so enjoy it while you can.

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MR. TULCHIN: I think you will remember that during his opening Novell's lawyers said it was absolutely critical to get an application out to the market at around the time that a new operating system was coming out. And in that connection, what I thought I would do is to show you now evidence from Novell's own files about what was happening at Novell. They own the products now. We're in the period from June of '94 to '96. What was happening at Novell and the reasons Novell was late.

Let's start with Slide 58. Now, this is August of 1994. So it's less than two months after Novell takes over WordPerfect. And this is a memo written by a man named Mr. Reed Felt, who was a senior executive at WordPerfect and then Novell. And what he says is:

After Windows 3.1 products are released this year, move large percentage of Windows resources over to Chicago, 32-bit.

Well, I think the evidence will show that Windows 3.1, which was the Microsoft operating system that had come out years before, was what's called a 16-bit system. Windows 95 was 32. It was an improvement in the technology.

And what this memoranda by Mr. Reed Felt indicates is that WordPerfect Novell has very few resources working on Chicago Windows 95, even in August of '95. They're still working on versions of the products, which did come out in

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late '94 that will run on the old Windows operating system, Windows 3.1.

So as you hear the evidence as we go through the trial, there will be evidence on this and related subjects. Why was Novell late? Novell like WordPerfect before, it was always late. They're way behind here. They're working on the prior version, versions of their products to run on the old technology. And there are very few resources on Chicago Windows 95 even then.

And let's look at Slide 60. This is Exhibit 271. We're now in April of 1995. Novell Business Applications Business Plan, produced by Novell in this case. And again, this is six months after the NameSpace extension APIs. That decision was made by Mr. Gates.

And in this document, which is lengthy. And I can't show you all of it now, but the document will be in evidence. What Novell recognizes is this tremendous growth in the suite category has resulted in a corresponding drop in standalone applications like WordPerfect and Quattro Pro. And as I showed you earlier, and the evidence at trial will show, Novell was very weak in suites. Microsoft Office, you remember that prior exhibit, has the strongest 1-2 punch in the industry, so said Novell.

And let's look at 61. This is from the very same document, Defendant's Exhibit 271. It's just a little bit

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deeper into it. Again, it's Novell's business plan. And here's what I thought was a revealing comment. Was it the NameSpace extensions that caused Novell's product to be unsuccessful, or is it something more basic, something that all of us can relate to? Good products sell; weak products usually don't.

And here's Novell itself in its own business plan. In the middle of 1995, after all, Windows 95 is coming out in August of that year, just a few months later. And Novell candidly evaluates its own position in the market. And it says, quote:

Weak vis--vis Microsoft in perception for corporate strategy, vision and ability to develop software, unquote.

Ability to develop software. Pretty basic thing. These are both software companies, Microsoft and Novell.

And then let's look at the Slide 62. This is the next month, May of 1995. The prior document was April. Novell says, we're weak as compared to Microsoft in ability to develop software.

Now, the acquisition that Novell made of WordPerfect had taken place a little less than a year earlier. And there will be evidence from witnesses who will come here to testify who worked for Novell during the relevant period about the difficulty Novell had in integrating WordPerfect

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into the Novell business. As some of you I'm sure can relate to, when one company buys another, it's sometimes very difficult to integrate the businesses and make people work together well. Borland, and Quattro Pro was the Borland product, was in California. And the software engineers who worked on Quattro Pro at Borland remained in Scotts Valley, California, not too far from San Francisco.

And here's Exhibit 16. A survey was taken by Novell. Novell employees survey.

48 percent of employees originally hired at WordPerfect are thinking about quitting.

It's indicative of the difficulty Novell had in this period in integrating the two businesses. There would be evidence from a number of witnesses who were former Novell employees. Dave Acheson, who worked as -- at WordPerfect beginning in '93 and at Novell into the middle of '95, will testify about the difficulty and what that meant for Novell's ability to be successful with these products.

Craig Bushman will also come in, another former WordPerfect Novell employee. I think he worked a total of about 10 years for those companies. Nolan Larsen is the third one. He worked from 1985 to 1996 for Novell and WordPerfect. There may be others, as well.

And let's look at Slide 63. We showed that almost half of the people who had been hired at WordPerfect wanted to

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quit. Things were not going well with Novell. There were lots of problems. This is much later in the year, December of '95. And it's just a little snippet. You need the whole document to understand it. But it's Exhibit 230. It will come up during the trial.

And what happened is that out in California, the Quattro Pro developers were quitting in mass. And in December of '93, about 15 additional people submitted their resignations. All except one are going to Oracle. From a development standpoint this leaves us with just two people. Two software engineers.

Now Novell's lawyer pointed out that Corel wasn't able to get the Perfect Office suite out into the market until May of '96. There was a long delay there. Here is some of the reasons.

There was -- in California among the Quattro Pro software engineers, according to Exhibit 230, there were just two left in December. And you can't get the suite out. The suite includes WordPerfect and all the functionality of Quattro Pro. The suite itself can't be released until Quattro Pro is finished.

Let's look at Slide 64. This is more about Quattro Pro, and I'm going back in time now to the middle of 1994. One slight explanation. I know there's so much information that's been thrown at you this morning. But when

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software engineers talk about internationalizing a product or sometimes they say localized versions as you'll see there, they're talking about writing a piece of software for some language other than English. Of course, all these products, Microsoft products, Novell products, WordPerfect, were so worldwide. And if you're a user in France, I pick France particularly, I guess, you may not want the version that runs in English. You want to see it in French. Same for many, many other places around the world. Sometimes Americans forget that people speak other languages elsewhere.

And so here's a document, Exhibit 4, from the middle of '94, which indicates that Quattro Pro has a little bit of a problem. They need to increase resources to write the Quattro Pro spreadsheet to foreign languages.

And then let's look at 66. Now we're already in 1995. It's on the same subject of getting Quattro Pro written to local languages so it can be sold outside English speaking countries. February 2nd, '95. This is months after the NameSpace extension APIs decision. And if the question is, could Novell have been ready to come out with a suite by August when Windows 95 came out, here's in part one of the answers. It's a Novell document, Exhibit 219. It says that:

Quattro Pro folks are still working on international versions of Quattro Pro 6.0.

That was the old Quattro Pro written to run on

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Windows 3.1, which ultimately came out in 1994, October of '94. But it came out in English, and they're still working on international versions.

Expect to finish that by the end of March '95, and then, according to Novell and only then, will they begin working on the next version of Quattro Pro.

That's the version of Quattro Pro to be written to Windows 95.

So the NameSpace extension decision, and it's the only thing that Novell's lawyer told you this morning that Microsoft did wrong, the only thing, the only thing he said that caused all these problems and made these products late was Mr. Gates's decision in October of '94. That's what he said. There were no other, no other acts that Microsoft committed that he said caused any delay.

And here he is, this document indicates that it's not going to be until March or April of '95 that Novell is even going to begin working on the version of Quattro Pro that would be written to run on Windows 95. Quattro Pro, that version didn't depend on the NameSpace extensions. What Novell's lawyer told you this morning, it was the shared code group that was writing their PerfectFit technology, which would be used for all their applications in the suite. It was the shared code group that needed the NameSpace extension

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APIs, he said. They weren't going to begin working on the next version of Quattro Pro until a few months before Windows 95 comes out.

And then let's look at 60 -- sorry -- Slide 70. We talked earlier before your break about the fact that WordPerfect and Novell were late. They were always late. WordPerfect was late to see the shift to Windows. They were king on DOS, and they were happy making money and pulling in the revenue on DOS. But when the shift to Windows came, when Windows 3.0 came out, that was a revolutionary technological leap in May of 1990, they were way behind. It took them a year and a half to get out a product to run on Windows 3.0. When it came out, that product was slow and buggy. They were behind. Microsoft Word was doing much better on Windows.

And we talked also about suites. WordPerfect had no spreadsheet. They couldn't develop a suite until they partnered with Borland. And the first two suites that included the WordPerfect Word processing software were called Borland Office 1.0 and Borland Office 2.0. Those products were panned. Even Novell itself and WordPerfect in their documents say those products were way behind Microsoft and that Microsoft was first to suites.

And by the way, I don't think I mentioned this earlier. Microsoft was the first company in 1990 to come out with an Office suite. It was an innovation. It was

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Microsoft's idea. And Office became very successful right off the bat.

And this slide, which is Slide 70, in effect sums up that situation in the suite market. Remember, the NameSpace extension API decision was October of '94. And according to Novell, that might have affected its ability to get out a product in the middle of '95, a suite product, or so they say. The evidence I think will show otherwise.

But even before October of '94 and before the middle of 1995, how was Office doing in the market and how was the Novell and WordPerfect suite doing in the market?

And here it is. Borland Office 1.0, Borland Office 2.0 and the PerfectOffice product, the Corel release in 1996 were never successful. Never. Borland Office came out before the NameSpace extension APIs. It would be irrational to blame Microsoft for the lack of success, and they don't.

The truth is that in the market for suites, and we saw earlier that slide that had the orange bar showing that everyone was going to suites real fast, it happened really quickly in the market, as can happen in a high-tech market. When it came to suites, Office as Novell's own documents recognize, Office was the strongest. It had the strongest 1-2 combination, Word and Excel.

So Microsoft Office was successful from the beginning. It always had high market shares. The Borland

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WordPerfect, Novell product eventually Corel, was never successful.

Here's a case in which, as I told you earlier, Novell contends that it's Microsoft's fault that Novell's products were late. And Novell contends, and Mr. Johnson said earlier today that they would have an expert, Dr. Warren-Boulton to tell you about the damages. And they said that they lost $1 billion. And I predict to you that Dr. Warren-Boulton, Novell's expert, will offer the opinion that Microsoft should pay Novell $1 billion or more.

We think the evidence will show in trial that the reason Novell was late had nothing to do with the one and only act that Novell says Microsoft committed that was wrongful, Mr. Gates's decision in October of 1994 to withdraw support for those NameSpace extensions. Remember, Microsoft provided Novell and everyone else with the technology in Windows 95 that made it really easy for all of Novell's customers to launch WordPerfect or Quattro Pro or a suite from the start button from an icon right on the desktop.

And it's not just that Novell made a misjudgment when it paid so much for WordPerfect in 1994. It did make a misjudgment. It paid much too much. The stock market reaction immediately shows that. It's not just that. It's that Novell also made some bad choices along the way.

Keep that up there for a minute, Dave. Sorry.

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Novell made some bad choices along the way. They didn't integrate the two companies well. We saw just a little piece of that. They were having trouble writing Quattro Pro for foreign languages. They recognized that in many ways Microsoft's products were better.

And as the world shifted to suites, this was the natural result. Consumers, people across this country and around the world, preferred Microsoft Office. Novell's own documents explained why. Novell's products were slow. They were buggy. They were late to the market, long before the NameSpace extension APIs came out.

And Microsoft's strong share is also attributable not just to mistakes by Novell. Nobody's perfect, and business people can make mistakes, for sure. But also to the fact that Microsoft was making the best products it could. And again, the idea that Mr. Gates in 1994 had some obligation to design Windows 95, the product they were working on very hard, to design it in a way that helped Novell instead of design it in a way that was best for Microsoft to make the best Windows 95 that they could, that idea just seems peculiar.

Let's look at Slide 2. Yesterday Judge Motz provided you with this instruction, that:

In order to prove its claim, Novell must establish among other things that Microsoft

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willfully maintained its monopoly in the operating system market by engaging in anticompetitive conduct against Novell's products during the time Novell owned those products.

I submit to you that Novell won't be able to do that. It won't be able to show that Microsoft's conduct was anti-competitive. It won't be able to show that any conduct injured the Novell products. Those products were in a decline all the way along and continued. Novell made it worse with their own business choices. And Novell also won't be able to show, we predict, that Microsoft maintained its monopoly by that conduct, that Microsoft kept the monopoly in Windows by virtue of the NameSpace extension APIs, because for Novell to prevail in this case they have to prove to your satisfaction, as the Court instructed you yesterday, that Microsoft's monopoly in operating systems, in Windows, came about because of the conduct they claim was wrong, the decision to withdraw support for the NameSpace extension APIs. Four APIs out of thousands.

And to think that the market for operating systems would have been different -- you remember Novell's lawyer showing you that picture of the launch date of Windows 95. He said the Rolling Stones were hired and Jay Leno had something to do with it. I forget what. And millions and millions of people across our country and the world lined up to get

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Windows 95.

And to prevail in this case, Novell is going to have to show you that somehow if WordPerfect had come out earlier, and they have to be able to prove that it would have come out earlier, had the NameSpace extension decision not been made, that that would have changed everything in the market for operating systems, that Windows' popularity would have declined significantly.

We don't think there is any evidence, there will be any evidence at the trial that the market for operating systems would have been any different had WordPerfect come out sooner or had the NameSpace extension APIs been fully documented or anything else that Novell lawyer -- Novell's lawyer asserted.

So I know you'll be glad to hear I'm almost done.

Windows 95 was one of the most significant technology products to be released to the public in the last 25 years. It was a huge success. It was a game changer. It provided great functionality for people to use. Microsoft developed it in a way that was best for Microsoft. That's what it's supposed to do. That's called competing in our country. And the Microsoft engineers who worked on it and the executives who supervised including at the very top Bill Gates, had one thing in mind, to make the best product they could, the one that would work best for consumers and be

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most successful for Microsoft, of course.

We don't think there will be any evidence that Mr. Gates withdrew support for the NameSpace extensions to hurt Novell. In fact, Brad Struss, S-T-R-U-S-S, will come testify, he worked for Microsoft then, still does today. Mr. Struss had a relationship with WordPerfect and Novell. He spoke frequently to someone at Novell named Norm Creighton. Mr. Struss was told before Mr. Gates made the decision that Novell was not working on the NameSpace extension APIs. And Mr. Struss wrote an e-mail after Mr. Gates made the decision 10 days or two weeks later in October of '94 saying that WordPerfect appears to be okay with the decision to withdraw support for the NameSpace extensions. WordPerfect appears to be okay. No one at WordPerfect said to Microsoft at the time, boy, if you withdraw support for the NameSpace extensions, this is a huge problem for us, for WordPerfect or Novell. Microsoft thought the contrary. And Mr. Struss will come tell you, and you'll see his e-mail.

We don't think there will be any evidence, no document from Novell, contemporaneous document written in 1994 or 1995, that will indicate that they complained to Microsoft about the decision. The developers at WordPerfect, Novell, may have had work to do to write some source code to give them whatever features in WordPerfect they needed to go sell their product. Of course, if so, they should have done the work.

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Microsoft's responsibility alone was to write good software for Microsoft and for other users.

And as I told you when I started this opening statement way back when, though the decision was made in '94 and Novell made no complaint in 1994, the lawsuit was filed 10 years later. If this decision had been such a killer for Novell, had made life so impossible, if there was no way for Novell to compete in the market, I ask you, because as a juror you don't have to leave your common sense home, would Novell have remained silent at the time?

We think that at the end of the case you will find that there is no liability, that there was no anticompetitive conduct, that Novell wasn't hurt by anything Microsoft did. We also think that you will find that the operating system competition would not have been affected, Windows would have remained just as popular as it was regardless of the NameSpace extension APIs.

And lastly, even if you thought that there was some liability, we will ask you at the conclusion to determine that damages are zero because the decline in WordPerfect and Quattro Pro and the suite was a function of Novell's misjudgments and Novell's bad business choices and also of the great products that Microsoft was making. Thank you.

THE COURT: Thank you, Mr. Tulchin.

Now we're going to begin the evidence, which is

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going to begin with a reading by Mr. Taskier. And he's going to read the estoppel findings. We'll stop -- I think because of the schedule, we'll probably only get about halfway through.

Pick a time around or before 1:30, Mr. Taskier.

Let me just make a couple of remarks before we begin. Number one, it was mentioned to you during opening statement by one of the lawyers. You may be feeling overwhelmed right now. There's an awful lot of information. I mean, I've learned a lot of information, and I've been working on this case for a while. You are going to learn more about the case. Don't feel overwhelmed, as you have an outline of what the evidence is going to show, and you're going to be living with the case for a long time, and you'll come to understand it as it goes along.

Secondly, let me just say that I don't know if you all realize this, but I do. I've been around the system for a long time. I just want to comment on it. Even though a lot of information was imparted upon you which may be overwhelming, you are very fortunate in having very good lawyers on both sides of this case. I mean, bad lawyers could have made this go on for days and days and days. They really were able to summarize on both sides what the case is all about. And I think you'll find this true throughout the case. I mean, they work very hard preparing their witnesses and

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preparing opening statements, and there are all kinds of legal issues which when you all go home sometimes they work out among themselves. Sometimes I have a pretty small part, it is a pretty small because they work out things so that I don't have to make a decision on it.

Fourth, the collateral estoppel is not exciting, and everybody here knows it's not going to be exciting for you. But let me mention that because this -- these binding facts, I've used the term collateral estoppel, which is a legal term, by having these facts read to you it is saving you a lot of time. You would have had a lot of witnesses come in and testify. So even though these findings have a binding effect here may be a little boring for you to hear it really is a big timesaver.

So with that, Mr. Taskier. I'm sorry I used the word collateral estoppel.

MR. SCHMIDTLEIN: You were going to give I think --

THE COURT: Oh, yes. Excuse me. I certainly was.

Now there was also mentioned in the opening statement the previous litigation in 1999 in the District of Columbia certain factual findings were made that were binding in this case. As you will hear these findings were somewhat lengthy, but they will now be read to you. Thanks.

MR. TASKIER: Thank you, Your Honor.

Ladies and gentlemen.

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An operating system is a software program that controls the allocation and use of computer resources such as central processing unit time, main memory space, disk space and input/output channels. The operating systems also supports the function of software programs called application that perform specific user oriented tasks. The operating system supports the function of application by exposing interfaces called application programming interfaces or APIs. These are synapses at which the developer of an application can connect to invoke prefabricated blocks of code in the operating system. These blocks of code in turn perform crucial tasks, such as displaying text on the computer screen. Because it supports applications while interacting more closely with the PC system's hardware, the operating system is said to serve as a platform.

An operating system designed to run on an Intel-compatible PC will not function on a non-Intel-compatible PC, nor will an operating system designed for a non-Intel-compatible PC function on an Intel-compatible one. Similarly, an application that relies on APIs specific to one operating system will not generally speaking function on another operating system unless it is first adapted or ported, to the APIs of the other operating systems.

In 1981, Microsoft released the first version of its Microsoft disk operating system commonly known as MS-DOS.

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The system had a character-based user interface that required the user to type specific instructions at a command prompt in order to perform tasks such as launching applications and copying files. When the International Business Machines Corporation, IBM, selected MS-DOS for pre-installation on its first generation of PCs, Microsoft's product became the predominate operating system sold for Intel-compatible PCs.

In 1985, Microsoft began shipping a software package called Windows. The product included a graphical user interface which enabled users to perform tasks by selecting icons and words on the screen using a mouse. Although originally just a user interface or shell, sitting on top of MS-DOS, Windows took on more operating system functionality over time.

In 1995, Windows introduced a software package called Windows 95 which announced itself as the first operating system for Intel-compatible PCs that exhibited the same sort of integrated features as the Mac OS running PCs manufactured by Apple Computer Company, Inc., Apple. Windows 95 enjoyed unprecedented popularity with consumers, and in June 1998, Microsoft released its successor Windows 98.

Microsoft is the leading supplier of operating systems for PC. The company transacts business in all 50 of the United States and in most countries around the world.

Microsoft licenses copies of its software programs

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directly to consumers. The largest part of its MS-DOS and Windows sales, however, consists of licensing the products to manufacturers of PCs known as original equipment manufacturers or EOMs, such as the IBM PC company and the Compaq Computer Corporation Company. An OEM typically installs a copy of the Windows onto one of its PCs before selling the package to a consumer under a single price.

Although certain Web browsers provided graphical user interfaces as far back as 1993, the first widely popular graphical browser distributed for profit called Navigator was brought to market by the Netscape Communications Corporations, Netscape, in December of 1994. Microsoft introduced its browser called Internet Explorer in July 1995.

Currently there are no products, nor are there likely to be any in the near future, that a significant percentage of consumers worldwide could substitute for Intel-compatible PC operating systems without incurring substantial costs. Furthermore --

THE COURT: Let interrupt you. Just a reminder. As you were told before, these findings were made in 1999. So when you hear the world "currently" it's referring to the time period, refers to in 1999. Excuse me.

MR. TASKIER: Thank you, Your Honor.

Furthermore -- now it works -- no firm that does not currently market Intel-compatible PC operating systems

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could start to doing so in a way that would, within a reasonably short period of time, present a significant percentage of consumers with a viable alternative to existing Intel-compatible PC operating system. It follows that if one firm controlled the financing licensing of all Intel-compatible PC operating systems worldwide, it could set the price of a license substantially above that which would be charged in a competitive market and leave the price there for a significant period of time without losing so many customers as to make the action unprofitable. Therefore, in determining the level of Microsoft's market power, the relevant market is the licensing of all Intel-compatible PC operating systems worldwide.

Since only Intel-compatible PC operating systems will work with Intel-compatible PCs, a consumer cannot opt for a non-Intel-compatible PC operating system without obtaining a non-Intel-compatible PC. Thus, for consumers who already own an Intel-compatible PC system, the cost of switching to a non-Intel-compatible PC operating system includes the price of not only a new operating system, but also a new PC and new peripheral devices. It also includes the effort of learning to use the new system, the cost of acquiring a new set of compatible applications and the work of replacing files and documents that were associated with the old applications. Very few consumers would incur these costs in response to the

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trivial increase in the price of an Intel-compatible PC system that would result from even a substantial increase in the price of an Intel-compatible PC operating system. For example, users of Intel-compatible PC operating systems would not switch in large numbers to the Mac OS in response to even a substantial, sustained increase in the price of an Intel-compatible PC operating system.

Operating systems are not the only software programs that expose APIs to application developers. Netscape's Web browser and Sun Microsystems, Inc.'s Java class libraries are examples of nonoperating system software that do likewise. Such software is often called middleware because it relies on the interfaces provided by the underlying operating system while simultaneously exposing its only APIs to developers. Currently no middleware product exposes enough APIs to allow independent software vendors, ISVs, profitably to write full-featured personal productivity applications that rely solely on those APIs.

Even if middleware deployed enough APIs to support full-featured applications, it would not function on a computer without an operating system to perform tasks such as managing hardware resources and controlling peripheral devices. But to the extent the array of applications relying solely on middleware comes to satisfy all of the user's needs, the user will not care whether there exists a large number of

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other applications that are directly compatible with the underlying operating system. Thus, the growth of middleware-based applications could lower the costs to users of choosing a non-Intel-compatible PC operating system like the Mac OS. It remains to be seen, though, whether there will ever be a sustained stream of full-featured applications written solely to middleware APIs. In any event, it would take several years for middleware and the applications it supports to evolve from the status quo to a point at which the cost to the average consumer of choosing a non-Intel-compatible PC operating system over an Intel-compatible one falls so low as to constrain the pricing of the latter systems.

Firms that do not currently produce Intel-compatible PC operating system could do so. What is more, once a firm had written the necessary software code, it could produce millions of copies of its operating system at relatively low cost. The ability to meet a large demand is useless, however, if the demands for the product is small and signs do not indicate large demand for a new Intel-compatible PC operating system. To the contrary, they indicate that the demand for a new Intel-compatible PC operating system would be severely constrained by an intractable chicken-and-egg problem. The overwhelming majority of consumers will only use a PC operating system for which there already exists a large

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and varied set of high quality, full-featured applications and for which it seems relatively certain that new types of applications and new versions of existing applications will continue to be marketed at pace with those written for other operating systems. Unfortunately, for firms whose products do not fit that bill, the porting of applications from one operating system to another is a costly process. Consequently, software developers generally write applications first and often exclusively for the operating system that is already used by a dominate share of all PC users. Users do not want to invest in an operating system unless it is clear that the system will support generations of applications that will meet their needs, and developers do not want to invest in writing or quickly porting applications for an operating system until it is clear that there will be a sizable and stable market for it. What is more, consumers who already use one Intel-compatible PC operating system are even less likely than first-time buyers to choose a newcomer to the field, for switching to a new system would require those users to scrap the investment they have made in applications, training and certain hardware.

The chicken-and-egg problem notwithstanding, a firm might reasonably expect to make a profit by introducing an Intel-compatible PC operating system designed to support a type of application that satisfies the special interests of a

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particular subset of users. For example, Be, Inc., Be, market an Intel-compatible PC operating system called BeOS that offers superior support for multimedia applications, and the operating system enjoys a certain amount of success with the segment of the consumer population that has a special interest in creating and playing multimedia content with a PC system. Still, while a niche operating system might turn a profit, the chicken-and-egg problem hereinafter referred to as the applications barrier to entry, would make it prohibitively expensive for a new Intel-compatible operating system to attract enough developers and consumers to become a viable alternative to a dominant incumbent in less than a few years.

To the extent that the developers begin writing attractive applications that rely solely on servers or middleware instead of PC operating systems, the applications barrier to entry could erode. As the Court finds above, however, it remains to be seen whether server- or middleware-based development will flourish at all. Even if such development were already flourishing, it would still be several years before the applications barrier eroded enough to clear the way for the relatively rapid emergence of a viability alternative to --

THE COURT: Just a minute.

Thank you.

MR. TASKIER: Even if such developments were

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already flourishing it would be several years before the applications barrier eroded enough to clear the way for the relatively rapid emergence of a viable alternative to incumbent Intel-compatible PC operating systems. It is highly unlikely then that a firm not already marketing an Intel-compatible PC operating system could begin marketing one that would in less than a few years present a significant percentage of consumers with a viable alternative to incumbents.

Microsoft enjoys so much power in the market for Intel-compatible PC operating systems that if it wished to exercise this power slowly in terms of price, it could charge a price for Windows substantially above that which could be charged in a competitive market. Moreover, it could do so for a significant period of time without losing an unacceptable amount of business to competitors. In other words, Microsoft enjoys monopoly power in the relevant market.

Viewed together, three main facts indicate that Microsoft enjoys monopoly power. First, Microsoft's share of the market for Intel-compatible PC operating system is extremely large and stable. Second, Microsoft dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows.

Microsoft possesses a dominate persistent and

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increasing share of the worldwide market for Intel-compatible PC operating systems. Every year for the last decade, Microsoft's share of the market for Intel-compatible PC operating systems has stood above 90 percent. For the last couple of years, the figure has been at least 95 percent. And analysts project that the share will climb even higher over the next few year. Even if Apple's Mac OS were included in the relevant market, Microsoft's share would still stand well above 80 percent.

Microsoft's dominate market share is protected by the same barrier that helps define the market for Intel-compatible PC operating systems. As explained above, the applications barrier would prevent an aspiring entrant into the relevant market from drawing a significant number of customers away from a dominant incumbent even if the incumbent priced its product substantially above competitive levels for a significant period of time. Because Microsoft's market share is so dominate, the barrier has a similar effect within the market. It prevents Intel-compatible PC operating systems other than Windows from attracting significant consumer demand, and it would continue to do so even if Microsoft held its prices substantially above the competitive level.

Consumer interest in a PC operating system derives primarily from the ability of that system to run applications. The consumer wants an operating system that runs not only

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types of applications that he knows he will want to use, but also those types in which he might develop an interest later. Also, the consumer knows that if he chooses an operating system with enough demand to support multiple applications in each product category, he will be less likely to find himself straitened later by having to use an application whose features disappoint him. Finally, the average user knows that generally speaking, applications improve through successive versions. He thus wants an operating system for which successive versions of his favorite applications will be released promptly at that. The fact that a vastly larger number of applications are written for Windows than for other PC operating systems attracts consumers to Windows because it reassures them that their interests will be met as long as they use Microsoft's product.

Software development is characterized by substantially economies scale. The fixed costs of producing software including application is very high. By contrast marginal costs are very low. Moreover, the cost of developing software are sunk, once extended to develop software, resources so devoted cannot be used for another purpose. The result of economies of scale and sunk costs is that application developers seek to sell as many copies of their applications as possible. An application that is written for one PC operating system will operate on another PC operating

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system only if it is ported to that system. And porting applications is both time consuming and expensive. Therefore, application developers tend to write first in the operating system with the most users -- system with the most users Windows. Developers might then port their applications to the other operating systems, but only to the extent that the marginal added sales justify the cost of porting. In order to recover the cost of ISVs that do go to the effort of porting frequently set the price of ported application considerably higher than that of the original versions written for Windows.

Consumer demand for Windows enjoys positive network effects. A positive network effect is a phenomenon by which the attractiveness of a product increases with the number of people using it. The fact that there is a multitude of people using Windows makes the product more attractive to consumers. The large installed base attracts corporate customers who want to use an operating system that new employees are already likely to know how to use, and it attracts academic consumers who want to use software that will allow them to share files easily with colleagues at other institutions. The main reason that demand for Windows experiences positive network effect, however, is that the size of Windows' installed base impels ISVs to write applications first and foremost to Windows thereby ensuring a large body of applications from which the consumers can choose. The large body of applications thus

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reinforces demands for Windows, augmenting Microsoft's dominate position and thereby perpetuating ISVs incentives to write applications principally for Windows. This self-reenforcing cycle is often referred to as a positive feedback loop.

Microsoft continually releases new and improved versions of its PC operating system. Each time it does, Microsoft must convince ISVs to write applications that take advantage of new APIs so that existing Windows users will have incentive to buy an upgrade. Since ISVs are usually still earning substantial revenue from applications written for the last version of Windows, Microsoft must convince them to write for the new version. Even if ISVs are slow to take advantage of the new APIs, though, no applications barrier stands in the way of consumers adopting the new system for Microsoft ensures that successive versions of Windows retain the ability to run applications developed for earlier versions. In fact, since ISVs know that consumers do not feel locked into their old versions of Windows and that new versions have historically attracted substantial consumer demand, ISVs will generally write to new APIs as long as the interfaces enable attractive innovative features. Microsoft supplements developers' incentives buy extending various seals of approval, visible to consumers, investors and industry analysts, to those ISVs that promptly develop new versions of their applications adapted to

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the newest version of Windows. In addition, Microsoft works closely with ISVs to help them adapt their applications to the newest version of the operating system, a process that is in any event far easier than porting an application from one vendor's PC operating system to another's. In sum, despite the substantial resources Microsoft expends inducing ISVs to develop applications for new versions of Windows, the company does not face any obstacles nearly as imposing as the barrier to entry that vendors and would-be vendors of other PC operating systems must overcome.

Do you want me to stop here, Your Honor?

THE COURT: It's up to you. If you want to go for more five minutes. Stop?

MR. TASKIER: I think it's a natural place to stop.

THE COURT: Okay. Thank you.

We'll resume tomorrow at 8:30. I'm going to ask you something now which I have not cleared with the lawyers, I haven't cleared with the court staff, and any of you can say no. I was just talking to another judge here who said he sometimes starts earlier than 8:30 and sometimes goes to 2:30 rather than 1:30. The lawyers may not be able to do it, the court staff may not be able to do it. But if you say no, say 8:15 to 2 o'clock, that's the end of it. If any one of you says no because this is not a bait and switch. But I'm getting sort of used to the pace around here, and people do

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get here earlier. And to the extent that we'd spend a little more time in a day, the sooner the case will be over, which may be a benefit to you, also. So I'm only asking that just for you, also.

Don't tell me now. Talk to one another about it. Tell Theresa. As I say, if one or certainly if one just says, I can't do it, that's fine, because you all were picked as jurors on the basis of the 8:30 to 1:30 schedule. But if we pick up, you know, 45 minutes a day, that's 45 minutes a day and it comes off the back end. So I'm asking for your benefit, so just let me know.

And have a nice afternoon. I'm going to forget to tell you this every day. In fact, I'm not going to tell you every day on purpose because I don't like to hear myself talk. But now that we're in the trial, please don't talk about the case in anyone. More importantly make sure you don't read anything about it. And most importantly, particularly because what you all were asked to absorb today was overwhelming. You might want to think, look, to really understand this, I have to learn a little bit more on my own, do a little research, particularly on the Internet or everywhere.

Don't do that. You will learn the case during the course of the coming weeks, and don't try to -- your verdict has got to be based upon what you hear here in the courtroom, and, please, don't do any independent research.

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Most importantly of all have a very, very nice afternoon, and see you tomorrow at 8:30 tomorrow. I'll stay here with counsel.

(Whereupon, the jury left the court proceedings.)

THE COURT: Please be seated. Just a couple things, and then I'm going to ask you if there is anything you should take up with me about tomorrow. Number one, if you all can't do it, you let me know, too. I mean, just say it's not going to work. I saw everybody was here around 8:15 this morning or 8:00. So if you can do it and they can do it, we'll pick up some time.

MR. TULCHIN: We're happy to start earlier, Your Honor.

MR. JOHNSON: The same, Your Honor.

THE COURT: We'll see what they say, and also the Court staff.

Secondly, totally selfish. If any of you know of any particularly interesting witness that's going to come up, please let me know so I can connect my office. Just like they wanted to hear the opening statement, I'm sure they want to hear from Bill Gates. But if there is anyone that you think is particularly interesting let me know so I can let them know who it is and we can connect them. That's fine.

Thirdly, and, Mr. Taskier, you're doing a wonderful job, a wonderful terrible job. This is not as a criticism to

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you. I have no objection, and I don't know if anyone does, I have no objection if you want to call a live witness and then use some of these things as fillers from time to time, that is fine with me. It's also fine with me if you just finish it up right now. But I just want to let you know that I don't stand on ceremony. So if you think it would be good to change the pace a little and have a live witness and resume, that's fine with me. But it's entirely up to you, unless what does Microsoft think.

MR. TULCHIN: I wasn't sure I understood you.

THE COURT: No. I said instead of reading all of the collateral estoppel findings at the same time maybe split them up between witnesses.

And I'm not saying you should. I'm just letting you know I'm not opposed to it.

Okay. What, if anything, should I have to think about? Hopefully nothing. Is there anything I should consider for tomorrow?

MR. SCHMIDTLEIN: I think we're all set for tomorrow.

MR. TULCHIN: I understood tomorrow, Your Honor, that Novell would be playing videotapes of two depositions.

THE COURT: Fine.

MR. SCHMIDTLEIN: I think we've resolved all the objections.

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MR. TULCHIN: Yes.

THE COURT: Have a nice evening. See you all in the morning.

Do you want the court reporters here while the depositions are being taken? Or since you already have copies, do you just want to maybe have an official court reporter here just to say the videotapes are being taken and then --

MR. SCHMIDTLEIN: We can just provide the transcripts.

THE COURT: And provide the transcripts.

MR. JOHNSON: Yeah. No need to be here at the start. But once we turn on the tape, I don't see any reason for them --

THE COURT: Sure.

MR. TASKIER: -- to record what has been recorded.

MR. TULCHIN: I agree with have that, Your Honor. It might be a good idea to have someone here in case. Sometimes a juror says something.

THE COURT: Sure.

MR. TULCHIN: Or there's some unanticipated commotion.

THE COURT: Someone will be available to be here the whole time. And so at the beginning to say what's happening. In case, you know, you all think of something.

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And I will be around the courthouse at 8:15, so if something over night comes up that you think needs my attention, just find me and I'll come here, and so when the jury gets here at 8:30, we'll get started. Thank you all.

MS. NELLES: Your Honor, do you want a copy of the testimony that's being played? The parties can provide that if you want it.

THE COURT: I'll have it for my office, just as a courtesy. I think they wanted to hear the opening statements. Just they're interested.

MR. SCHMIDTLEIN: Judge, we're going to e-mail your clerk with that streaming information, if you want.

THE COURT: That's terrific. Thanks a lot.

(Whereupon, the court proceedings were concluded.)

* * * * *

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STATE OF UTAH )

) ss.
COUNTY OF SALT LAKE )

I, KELLY BROWN HICKEN, do hereby certify that I am a certified court reporter for the State of Utah;

That as such reporter, I attended the hearing of the foregoing matter on October 18, 2011, and thereat reported in Stenotype all of the testimony and proceedings had, and caused said notes to be transcribed into typewriting; and the foregoing pages number from 125 through 162 constitute a full, true and correct report of the same.

That I am not of kin to any of the parties and have no interest in the outcome of the matter;

And hereby set my hand and seal, this ____ day of _________ 2011.

______________________________________
KELLY BROWN HICKEN, CSR, RPR, RMR

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