3932 1 IN THE IOWA DISTRICT COURT FOR POLK COUNTY ----------------------------------------------- 2 JOE COMES; RILEY PAINT, ) 3 INC., an Iowa Corporation;) SKEFFINGTON'S FORMAL ) 4 WEAR OF IOWA, INC., an ) NO. CL82311 Iowa Corporation; and ) 5 PATRICIA ANNE LARSEN; ) ) TRANSCRIPT OF 6 Plaintiffs, ) PROCEEDINGS ) VOLUME XV 7 vs. ) ) 8 MICROSOFT CORPORATION, ) a Washington Corporation ,) 9 ) Defendant. ) 10 ----------------------------------------------- 11 The above-entitled matter came on for 12 trial before the Honorable Scott D. Rosenberg 13 and a jury commencing at 8 a.m., December 11, 14 2006, in Room 302 of the Polk County 15 Courthouse, Des Moines, Iowa. 16 17 18 19 20 HUNEY-VAUGHN COURT REPORTERS, LTD. 21 Suite 307, 604 Locust Street 22 Des Moines, Iowa 50309 23 (515)288-4910 24 25 3933 1 A P P E A R A N C E S 2 Plaintiffs by: ROXANNE BARTON CONLIN 3 Attorney at Law Roxanne Conlin & Associates, PC 4 Suite 600 319 Seventh Street 5 Des Moines, IA 50309 (515) 283-1111 6 RICHARD M. HAGSTROM 7 Attorney at Law Zelle, Hofmann, Voelbel, 8 Mason & Gette, LLP 500 Washington Avenue South 9 Suite 4000 Minneapolis, MN 55415 10 (612) 339-2020 11 DOUGLAS J. ROVENS Attorneys at Law 12 Zelle, Hofmann, Voelbel, Mason & Gette, LLP 13 550 South Hope Street Suite 1600 14 Los Angeles, CA 90071 (213) 895-4150 15 ROBERT J. GRALEWSKI, JR. 16 Attorney at Law Gergosian & Gralewski 17 550 West C Street Suite 1600 18 San Diego, CA 92101 (619) 230-0104 19 KENT WILLIAMS 20 Attorney at Law Williams Law Firm 21 1632 Homestead Trail Long Lake, MN 55356 22 (612) 940-4452 23 24 25 3934 1 Defendant by: DAVID B. TULCHIN 2 STEVEN L. HOLLEY SHARON L. NELLES 3 JOSEPH E. NEUHAUS JEFFREY C. CHAPMAN 4 Attorneys at Law Sullivan & Cromwell, LLP 5 125 Broad Street New York, NY 10004-2498 6 (212) 558-3749 7 ROBERT A. ROSENFELD Attorney at Law 8 Heller Ehrman, LLP 333 Bush Street 9 San Francisco, CA 94104 (415) 772-6000 10 HEIDI B. BRADLEY 11 Attorneys at Law Heller Ehrman, LLP 12 333 South Hope Street Suite 3900 13 Los Angeles, CA 90071-3043 (213) 689-0200 14 BRENT B. GREEN 15 Attorney at Law Duncan, Green, Brown & 16 Langeness, PC Suite 380 17 400 Locust Street Des Moines, IA 50309 18 (515) 288-6440 19 RICHARD J. WALLIS STEVEN J. AESCHBACHER 20 Attorneys at Law Microsoft Corporation 21 One Microsoft Way Redmond, CA 98052 22 (425) 882-8080 23 24 25 3935 1 (The following record was made out of 2 the presence of the jury.) 3 THE COURT: The Court has three 4 motions before it this morning. 5 First is Defendant's emergency motion 6 for an order to show cause. 7 Defendant ready to proceed? 8 MR. HAGSTROM: Your Honor, if I may, 9 we just got that at the end of the day on 10 Friday, and there are some related issues. 11 We'd prefer to put that off till either this 12 afternoon or tomorrow. 13 THE COURT: Denied. 14 Proceed. 15 MR. HOLLEY: Your Honor, this is the 16 third time that the Court has been asked to 17 require that the Plaintiffs produce documents 18 that they were required to produce pursuant to 19 an agreement entered into months and months and 20 months ago. 21 On August 21, the Court entered an 22 order, which was absolutely clear, requiring 23 both parties to produce all materials that 24 their experts reviewed, looked at, or used in 25 preparing their expert opinions. 3936 1 That order was entered on August 21. 2 In response, Plaintiffs produced just 3 three items; backup data for one spreadsheet 4 and two memoranda. 5 When they refused to produce anything 6 else, including the list they were required by 7 the Court's order to produce, which was a list 8 of things that had been destroyed, Microsoft 9 moved to compel again. 10 And on November 28 of this year, the 11 Court entered another order making it even 12 clearer what the Court intended. 13 The Court wrote, and I quote, the 14 intent of the Court's order was to provide 15 Defendant not only material used in preparing 16 the expert opinions or reports, but material 17 that was looked at, read, or reviewed by 18 experts, but was then rejected or not used in 19 preparing the experts' opinions or reports. 20 That was November 28, Your Honor. 21 And here we are several weeks later, 22 and the best that we have from the Plaintiffs, 23 who are represented by a large law firm in 24 Minneapolis, with many, many lawyers working on 25 this matter, is a vague commitment that maybe, 3937 1 just maybe they might be able to get us these 2 documents by the 19th of December. 3 Your Honor, frankly, we cannot 4 determine -- apologize for the interruption, 5 Your Honor. 6 We can think of no conceivable excuse 7 for this sort of delay. 8 The Court has already been troubled on 9 two occasions to tell these people that they 10 must produce these documents. 11 As I said on Friday, we're not 12 operating on the Pony Express here. There's 13 E-mail. There's long-distance telephone calls. 14 And these people need to comply with the 15 Court's orders. 16 Thank you, Your Honor. 17 THE COURT: Response? 18 MR. HAGSTROM: Well, Your Honor, as 19 history of this situation goes, there was a 20 stipulation between the parties that was 21 entered in the spring of this year to -- for 22 each side to produce documents reviewed or 23 relied upon by their experts in forming their 24 opinions. 25 We fully complied with that 3938 1 stipulation. Microsoft contended that we did 2 not. Your Honor entered an order, I guess it 3 was August or September. We went -- I guess it 4 was late August. 5 We went back and found a couple of 6 additional documents that we produced on 7 September 1. 8 Microsoft again moved, and Your 9 Honor's November 28 order seems to change the 10 wording of the stipulation, and it also says 11 that to make clear from my August, whatever the 12 date of the order was, it clarifies that prior 13 order. 14 So since then, we have gone back and 15 talked to our experts. 16 In that process as well, what we've 17 done, Jim Reece talked with Jay Jurata of the 18 Heller Ehrman firm. 19 And as we had a short discussion at 20 the end of the day this past Thursday, I 21 reported to the Court that an agreement had 22 been reached between Mr. Jurata and Mr. Reece. 23 Mr. Reece sent a confirming letter, or 24 E-mail, I should say -- well, one or the other, 25 to Mr. Jurata. 3939 1 As you recall, Mr. Tulchin during that 2 brief discussion at the end of the day on 3 Thursday expressed surprise at that agreement. 4 Within about two or three hours after 5 the letter or E-mail was sent to Mr. Jurata, a 6 response came back from Mr. Jurata basically 7 revoking the agreement. 8 So what clearly happened was an 9 agreement was reached between Mr. Jurata and 10 Mr. Reece, and then Mr. Tulchin went back after 11 the hearing and made sure that that agreement 12 was revoked. 13 Now, in the meantime, we've been in 14 contact with our experts, and we've been 15 confirming with a number of them -- we've got I 16 think it's 11 total experts. We haven't got 17 confirmation from everybody. 18 But we've got a number of them that 19 have gone back and concluded there are no 20 additional documents other than the thousands 21 of documents that they've already identified. 22 So we need to complete that process, 23 and that's why we had proposed to Mr. Jurata 24 December 21. 25 Mr. Jurata reported back to Mr. Reece 3940 1 that well, we'd like a little bit of extra time 2 prior to the holiday break, and he had 3 suggested December 19. 4 So then Mr. Reece wrote back and 5 agreed to that date. 6 And so because we've got some people 7 -- some of the experts have been traveling out 8 of the country, that's one of the primary 9 reasons for additional time. 10 So as I've mentioned, we've confirmed 11 with a number of them that there are no 12 additional documents. 13 So the parties' stipulation should, in 14 fact, be honored, even though the original 15 stipulation from March of this year apparently 16 has not been honored. 17 THE COURT: Anything else, Mr. 18 Hagstrom? 19 MR. HAGSTROM: Well, I guess the 20 additional point, too, is this more recent 21 order suggests a change. 22 It says well, what I meant to say or 23 something like that. 24 So the very fact that there's a 25 suggested change also means that we have to 3941 1 look at the issue again. 2 So it is clearly unfair to put in a 3 change and then be expected to address that 4 within a matter of a few short days. 5 Now, we -- I'm trying to think -- back 6 in July of 2005, we got a motion to compel an 7 order against Microsoft. 8 Microsoft took 15 months to comply 9 with that order. We don't even know if they 10 necessarily fully complied. 11 We got an order compelling them to 12 produce source code. They took four to five 13 months to produce those materials. 14 And so we've proposed an additional 15 couple of weeks to go back to the experts, take 16 a look at this to see if there are any 17 additional documents. 18 So it's entirely reasonable in order 19 to show cause. It is entirely inappropriate, 20 especially given the modification contained in 21 this last particular order. 22 And the parties' most recent 23 stipulation should, in fact, be honored. 24 I have with me a declaration of 25 Mr. Reece that sets out the details of his 3942 1 communication with Mr. Jurata. I can hand that 2 up to you. 3 THE COURT: Thank you. 4 MR. HAGSTROM: So that particular 5 declaration sets out the history and the facts 6 that I've just pointed out. 7 So, in short, this order should be 8 denied. 9 The parties' stipulation that was made 10 between Mr. Jurata and Mr. Reece should be 11 honored. 12 And I'd also like to point out that 13 with regard to the affidavit that Mr. Jurata 14 submitted that was attached to the Microsoft 15 papers, that some -- had some very interesting 16 language in it. 17 I'll just find it, Your Honor. 18 In paragraph four of Mr. Jurata's 19 affidavit attached to their motion papers, it 20 says, at no time did I, or to the best of my 21 knowledge Microsoft, agree to allow the 22 Plaintiffs to further delay the production of 23 the improperly withheld materials until 24 December 19, 2006. 25 That statement is incorrect. 3943 1 If you look at the affidavit of 2 Mr. Reece, it sets forth in detail the 3 telephone communications between he and 4 Mr. Jurata, and the confirming E-mail to Mr. 5 Jurata by Mr. Reece, and the -- in the 6 afternoon or early evening of last Thursday. 7 Then a couple hours later, a very 8 short, abrupt two-sentence E-mail came back 9 from Mr. Jurata, which obviously was the result 10 of Mr. Tulchin's communication -- or through 11 somebody else -- to Mr. Jurata to revoke that 12 agreement. 13 That's all I have, Your Honor. 14 THE COURT: Anything else, Mr. Holley? 15 MR. HOLLEY: Yes, Your Honor. 16 I guess we should have an evidentiary 17 hearing under the Plaintiffs' view of this 18 matter to figure out if Mr. Reece's 19 self-serving effort to create an agreement 20 where none existed should be given any credit 21 by this Court. 22 THE COURT: Call your first witness. 23 MR. HOLLEY: If you'll give me five 24 minutes, Your Honor, I'll get Mr. Jurata here. 25 MR. HAGSTROM: Your Honor, Mr. Reece 3944 1 is out of town. 2 THE COURT: We'll take his testimony 3 some other time, I guess. 4 MR. HOLLEY: Your Honor, just while 5 we're awaiting Mr. Jurata's arrival -- and that 6 obviously is an important point because their 7 defense seems to be that there's an agreement, 8 and we obviously deny the existence of that 9 agreement. 10 The only other point that they seem to 11 be making is that the Court changed its mind. 12 And I don't think that's a fair 13 characterization of the Court's orders. 14 It's been quite clear for a long time 15 what the Court wanted the Plaintiffs to 16 produce. So that really isn't an excuse about 17 why we are here in mid-December still trying to 18 get the Court's order from August complied 19 with. 20 If Your Honor -- I'm afraid it's going 21 to take five minutes for Mr. Jurata to run over 22 here. 23 Can we -- could we move on to one of 24 the other matters that's pending before the 25 Court? 3945 1 THE COURT: Sure. Which motion? 2 There's two other ones. 3 MR. HOLLEY: Your Honor, I'm happy to 4 talk about the finding of fact 65 motion. 5 THE COURT: Okay, proceed. 6 MR. HOLLEY: Your Honor, we received 7 papers in response, this morning from the 8 Plaintiffs, and I doubt the Court has had an 9 opportunity to read them. I just had a very 10 quick opportunity to read through them. 11 The argument seems to be that there's 12 no harm because Ms. Conlin stood up after 13 telling the jury repeatedly that the findings 14 of fact said that Microsoft imposes monopoly 15 power and that she said well, that wasn't so. 16 But as we point out in our opening 17 papers, Your Honor, she said it on multiple 18 occasions. There wasn't any doubt about the 19 statement she was making. 20 For example, in the transcript of 21 September -- excuse me -- December 28, 2006 22 (sic), at 3172, lines 14 and 15, the statement 23 appears, quote, according to the findings of 24 fact, Microsoft imposes monopoly prices, close 25 quote. 3946 1 Couldn't be any more clear, and that 2 statement is absolutely false. 3 It was also on a slide that appeared 4 on the screen that sat there for five minutes 5 in the context of telling the jury that the 6 findings of facts said that Microsoft imposes 7 monopoly prices. 8 So it isn't sufficient to say that 9 it's all right for the Plaintiffs in this case 10 to argue that position. 11 Obviously they're free to argue that 12 position, but what happened, and what has 13 caused so much prejudice to Microsoft, Your 14 Honor, is that the jury was told in no 15 uncertain terms something that the Plaintiffs 16 now admit was simply wrong and should not have 17 been told to the jury. 18 There is no finding of fact that 19 Microsoft imposes monopoly prices. So in those 20 circumstances, Your Honor, it's Microsoft's 21 position that it should be entitled to refer to 22 finding of fact 65, which makes it absolutely 23 clear that Judge Jackson never found that 24 Microsoft imposes monopoly prices. 25 The Plaintiffs make all sorts of 3947 1 arguments about how this will further confuse 2 the jury. 3 Well, it's not going to confuse the 4 jury, it's going to finally make it clear to 5 them that what Ms. Conlin said is wrong. 6 And this is not some subsidiary issue 7 in this case, Your Honor. This is absolutely 8 the crux of this case. 9 Did Microsoft charge prices that were 10 monopoly prices by virtue of the 11 anticompetitive conduct in which Microsoft is 12 alleged to have engaged? That is the issue 13 that the jury needs to find. 14 And quite advertently -- and I'm 15 afraid there's no other conclusion that could 16 be drawn. 17 Quite advertently, the Plaintiffs 18 repeatedly misrepresented to the jury that 19 state of affairs. 20 They told the jury repeatedly that the 21 findings of fact had already concluded this 22 issue. 23 In those circumstances, Your Honor, I 24 think the relief that we're seeking is quite 25 modest. 3948 1 Thank you, Your Honor. 2 THE COURT: Response? 3 MS. CONLIN: Your Honor, Mr. Williams 4 is going to -- 5 MR. WILLIAMS: Thank you, Your Honor. 6 Kent Williams for the Plaintiffs. 7 Your Honor, this morning we filed the 8 resistance to this motion. I don't know if the 9 Court had a -- I do have a copy for Your Honor 10 if I could hand that up. 11 THE COURT: Sure. 12 MR. WILLIAMS: Your Honor, I'd like to 13 start with what defense counsel finished with, 14 which was the notion that this was somehow 15 advertent; that it was not -- it was 16 inadvertent, as was made clear the first time 17 that Microsoft raised an issue about the 18 statements that they are speaking about today. 19 They don't include as part of their 20 motion, Your Honor, the full record on this 21 issue. 22 It was only a few days ago, but Your 23 Honor may recall that during her opening 24 statement, Ms. Conlin did make a misstatement 25 about the findings of fact. And when she made 3949 1 those misstatements, Mr. Tulchin objected, and 2 Your Honor overruled that objection. 3 Later, during a break out of the 4 presence of the jury, there was full-blown 5 argument on this issue. 6 And we include that argument as part 7 of our submission, Your Honor, because 8 Microsoft is not -- it's part of Exhibit A, and 9 it is specifically at page 3215 and goes on to 10 page 3218. 11 And as part of that argument, 12 Mr. Tulchin made the same arguments that you 13 heard from counsel today that Microsoft was 14 prejudiced by these statements. 15 And at that time Microsoft requested 16 an instruction, which was a reminder 17 essentially, that the Court remind the jury 18 that the opening statements of counsel are not 19 evidence. 20 And Your Honor denied that request. 21 But notwithstanding that denial, Your Honor did 22 remind counsel to confine themselves to the 23 words of the findings. 24 And Ms. Conlin took that to heart, and 25 when the jury came back, she very promptly 3950 1 corrected her misstatement, and that 2 misstatement -- that correction, Your Honor, 3 appears at page 3220 of the transcript. 4 And if I may, Your Honor, I'd like to 5 read what that correction was. 6 Here's what she said. I also want to 7 tell you that in speaking with you about 8 monopoly prices, I believe that I did misstate 9 something, and I want to correct the record. 10 I said that Microsoft imposes monopoly 11 prices. That's not in the findings of fact. 12 That is something that we believe evidence will 13 show that Microsoft did, in fact, impose 14 monopoly prices. 15 So whatever prejudice there would have 16 been from these statements. 17 And Microsoft complains about four 18 statements in its motion. Three of those 19 statements, Your Honor, were all made within 20 about a minute of each other. 21 If you look at the record, the 22 misstatements appear on pages 3171 to 3172. 23 That's three misstatements that they complain 24 about. 25 The fourth one, Your Honor, appears on 3951 1 page 3180, and we do take issue with that one. 2 We have read that statement, and we've 3 read the context that it appears in, and we 4 don't believe that it's misleading, and we 5 don't believe that it relates to a finding of 6 fact. 7 So this really boils down to the three 8 statements. It all occurred within about a 9 minute of each other. 10 Mr. Tulchin objected at the time. He 11 was overruled. He asked for an instruction. 12 That was denied. But then Ms. Conlin went back 13 on the record and cleared it up for the jury. 14 And then -- and Microsoft cites no 15 other statements after that correction was 16 made. 17 I'd also note that at the time that 18 corrective statement was made by Ms. Conlin, 19 Microsoft did not object to it, as they say 20 now, a half-hearted or somehow insufficient 21 corrective statement. 22 So we submit on -- first of all, Your 23 Honor, that there is no prejudice. There 24 probably wasn't any to begin with, but even if 25 there was, any prejudice has been cured by the 3952 1 corrective statement. 2 As for the slide that appeared, Your 3 Honor, the slide said Microsoft imposes 4 monopoly prices, and as counsel just conceded, 5 we're perfectly entitled to make that 6 statement. We're perfectly entitled to attempt 7 to prove it. 8 And, again, as Ms. Conlin made clear 9 in her corrective statement, we will prove that 10 as part of the evidence that we will submit at 11 trial in this matter. 12 So on the one hand you have no 13 prejudice to Microsoft; certainly none now. 14 So now let's examine on the other hand 15 what Microsoft proposes to do to cure this 16 prejudice. 17 And it's sort of like the proverbial 18 smashing a hand with a ball-peen hammer. 19 What Microsoft wants to do is to refer 20 to, using their words, a finding of fact for 21 which there is no collateral estoppel, somehow 22 try to imply that we have defensive collateral 23 estoppel, which they don't have with this 24 finding. 25 They say in their papers that we are 3953 1 permitted to dispute the finding, but for that 2 to make any sense at all to the jury would 3 require them to have a grave sophistication 4 that I believe they will not have. 5 And the reason for that, Your Honor, 6 is this. 7 Microsoft also omits from its moving 8 papers the language of the finding in full. 9 In a submission I just handed up, Your 10 Honor, we provide for you the full language of 11 the finding, and when you read it, I think 12 you'll see why it's going to be so confusing to 13 the jury. 14 It appears on pages 3 to 4, and it 15 would probably take Your Honor some amount of 16 time to read through the entirety of the 17 finding. 18 I invite you to do that if you believe 19 it necessary. But I do want to talk about it 20 because it doesn't do what Microsoft wants it 21 to. It doesn't say what Microsoft wants it to 22 say. 23 The first sentence of the finding, 24 Your Honor, says, it is not possible with the 25 available data to determine with any level of 3954 1 confidence whether the price that a profit 2 maximizing firm with monopoly power would 3 charge for Windows 98 comports with the price 4 that Microsoft actually charges. 5 What that means, Your Honor, is that 6 the evidence in the government case that was 7 available did not show whether the price that 8 Microsoft was charging for Windows 98 was the 9 same price that a profit maximizing monopolist 10 would charge. 11 That does not in any way say that it 12 has been established that Microsoft -- let me 13 back up. 14 That does not say that it has not been 15 established that Microsoft imposed a monopoly 16 overcharge. It doesn't say that. 17 It says we don't have the data 18 available -- we, the Court -- to determine 19 whether they charge what a profit maximizing 20 monopolist would charge. 21 So, therefore, what that means is 22 Microsoft could have imposed a monopoly 23 overcharge, but what they impose is less than 24 what a profit maximizing monopolist would 25 charge. 3955 1 And then if you read the remainder of 2 the finding, that's underscored by what the 3 finding is clearly about, and it's about 4 whether the Court can rely on pricing data from 5 Microsoft and the prices that Microsoft charges 6 for the notion that Microsoft is charging what 7 a profit maximizing monopolist would charge or 8 even whether it has monopoly power at all. 9 And concludes that even if Microsoft 10 isn't charging what a profit maximizing 11 monopolist would charge, that doesn't mean that 12 Microsoft didn't have monopoly power. 13 That's what this finding is about. 14 It's very sophisticated. It doesn't address 15 the point that they are trying to make. 16 And if the jury were to hear this 17 finding, they would not only be confused about 18 everything I just explained, but they would 19 also be confused about the fact that the data 20 in the government case differed from the data 21 that's available in this case, and they would 22 be wondering, well, what data was shown in the 23 government case and what data was available, 24 and does that data differ from the data that's 25 available here; and if so, why is that, and on 3956 1 and on and on. 2 And, Your Honor, I submit to you that 3 Microsoft knows this. They know that the jury 4 would be confused if the entirety of finding 65 5 were to be read to them, so what they propose 6 to do is to doctor it. 7 What they want to do, and this is made 8 clear on page 6 of their brief -- what they 9 mean by refer to the finding is to pull out the 10 first sentence and the third sentence from this 11 very lengthy finding and read that to the jury. 12 And, Your Honor, we submit to you that 13 if that were to occur, the jury would get a 14 misleading and incorrect impression about what 15 that finding is and what that finding was 16 about, and that is not the way to solve any 17 problem at all that might remain and which we 18 submit to you does not remain from this 19 finding. 20 So, Your Honor, I would again point 21 out that we were not a party to the government 22 proceeding. There is no defensive collateral 23 estoppel with respect to finding 65. 24 And the other thing I would point out, 25 Your Honor, is that when the government case 3957 1 went up on appeal, the Court of Appeals for the 2 D. C. Circuit said Microsoft does not deny that 3 it charged long-term monopoly prices. 4 So it doesn't even fit within the 5 record, that they are trying to somehow correct 6 or ostensibly correct. 7 So if you add all of it together, Your 8 Honor, the fact that there is no prejudice, 9 that it was corrected by Ms. Conlin, that what 10 they are trying to submit to the jury would be 11 far less clear than the very direct correction 12 on the record that Ms. Conlin did make, add in 13 the fact that what they are really seeking is 14 defensive collateral estoppel to which they are 15 not entitled, add in the fact that to make this 16 correction they are trying to doctor a 17 statement, a finding which would only confuse 18 the jury even more. 19 What we're really talking about, Your 20 Honor, is a mountain out of a molehill that has 21 already been fixed. 22 And so, for those reasons, we ask you 23 to deny their motion. 24 THE COURT: Thank you. 25 Anything else? 3958 1 MR. HOLLEY: Your Honor, I guess I can 2 forgive Mr. Williams because he wasn't here, 3 but obviously the rest of us were. 4 The slide and the notion that someone 5 prepared a slide is, of course, completely 6 inconsistent with this notion of inadvertence. 7 It was advertent. They knew what they 8 were doing. 9 There was a slide up on one side 10 during a discussion of the findings of fact, 11 and the finding of fact was on the other slide, 12 and nobody in the jury box was confused, as 13 Mr. Williams is apparently confused, about what 14 the intention of that was. 15 And if there was any confusion, it was 16 eliminated when Ms. Conlin said, and I quote, 17 according to the findings of fact, Microsoft 18 imposes monopoly prices. 19 And with all respect, Your Honor, no 20 half-hearted statement by her that she made a 21 mistake is going to solve that problem for us. 22 Now, Mr. Williams has a theory -- it's 23 a very interesting theory -- about how we 24 intend to doctor finding of fact 65. 25 I have no idea how he purports to know 3959 1 that. He has no idea what we intend to do with 2 finding of fact 65. 3 We would be happy to read it in its 4 entirety to the jury because the point that it 5 makes is that there is no finding of monopoly 6 pricing by Microsoft in the government case. 7 And as I repeat, Your Honor, this is a factor 8 of crucial importance. 9 If this jury believes that the 10 collaterally estopped findings eliminate one of 11 the principal things that the Plaintiffs have 12 to prove, we could not be more prejudiced. It 13 is the crucial issue in this case. 14 Now, the notion that there was no 15 evidence before Judge Jackson about Microsoft's 16 prices is another theory of Mr. Williams, which 17 is interesting, but untrue. 18 I happened to be at that trial; he was 19 not. 20 Franklin Fisher from NIT, who is one 21 of the leading economists in this country, and 22 Professor Warren Boulton, who is one of the 23 Plaintiffs' economists in this case, spent days 24 putting on evidence about Microsoft's pricing. 25 There was no absence of data in the 3960 1 record of the government case about the prices 2 that Microsoft charges. 3 What Judge Jackson meant when he wrote 4 it is not possible with the available data to 5 determine with any level of confidence whether 6 the price of the profit maximizing firm with 7 monopoly power would charge for Windows 98 8 comports with the price that Microsoft actually 9 charges is a conclusion based on substantial 10 evidence. 11 It's not a statement I wish I had 12 evidence and I don't have it, Your Honor. 13 So it's an interesting theory, but 14 unfortunately it's completely inconsistent with 15 the facts. 16 As to the notion that we are asking 17 for, you know, a nuclear bomb to blow up a gnat 18 that is completely overblown, Your Honor. 19 We have suffered substantial prejudice 20 by repeated statements that the Plaintiffs now 21 candidly concede were wrong. 22 They're not arguing that they were 23 correct when they told the jury that Microsoft 24 imposes monopoly prices and that the findings 25 of fact say that. 3961 1 They admit that this was a mistake. 2 Well, it was more than a mistake, and it needs 3 to be dealt with, Your Honor. 4 Thank you. 5 THE COURT: Anything else on this 6 issue? 7 MR. WILLIAMS: Your Honor, a couple of 8 points. 9 I would add that in addition to the 10 corrective statement that Ms. Conlin made at 11 the time, which, again, I reiterate was not 12 objected to, the conclusions of law that Your 13 Honor read to the jury made clear that no 14 monopoly -- that a monopoly overcharge was not 15 established in the government case. 16 The jury has those findings available. 17 They can refer to them whenever they want to, 18 which Your Honor made clear. 19 So again, Your Honor, I submit to you 20 that what they are proposing to do is simply 21 beyond the pale. 22 And I find it very interesting that 23 while they dispute what their own brief says, 24 which is clear on page 6 what they intend to 25 do, they want to pluck out of the findings the 3962 1 things that they want to read. 2 Now they try to cure that obvious 3 problem by saying we'll read the entire finding 4 of fact to the jury. 5 But as I explained earlier, that's not 6 going to cure the problem because it's going to 7 cause more confusion than it would allegedly or 8 supposedly be curing. 9 So again, Your Honor, these statements 10 were made six days ago, roughly. They were 11 made on December 6. 12 There was an issue raised at the time. 13 The issue was promptly cured. It was cured 14 directly. There was no objection by Microsoft 15 to that at the time. 16 There was no objection made to the 17 slide after that correction was made, and so we 18 submit to you that any prejudice was cured. 19 So again for that reason, we would say 20 that -- Your Honor, opposing counsel is correct 21 that I was not present at the hearing. I've 22 been going off the transcript, which sometimes 23 is clearer and sometimes -- than the real 24 thing, and sometimes is not. 25 But this slide makes clear that these 3963 1 are the issues that the jury is going to have 2 to decide. 3 And if you look at the top, it says, 4 what is left for you to decide? 5 What that means is, after you take the 6 findings of fact to which you are bound, and to 7 which Microsoft is bound, which the jury is 8 bound to accept, this is what is left for you 9 to decide. 10 And the very first bullet point says, 11 did Iowa consumers pay more for Microsoft 12 Windows than they would have paid if Microsoft 13 had not broken the law; and if so, how much? 14 That's the classic statement of a 15 monopoly overcharge. 16 So we not only had a curative 17 instruction -- curative statement by Ms. Conlin 18 at roughly the same time, at the end she came 19 out with this slide that would have corrected 20 any lingering misimpression there would have 21 been by the jury, which we submit there was 22 none of. 23 So again, Your Honor, we ask that the 24 motion be denied; that, in fact, it's just 25 going to cause more confusion, and that 3964 1 Microsoft should not be allowed to blow out of 2 proportion a mistake that was made, but that 3 has since long since been corrected. 4 THE COURT: Anything else on this 5 motion? 6 MR. HOLLEY: No, Your Honor. 7 THE COURT: Very well. 8 Proceed to your next one, or what do 9 you want to do? 10 MR. HOLLEY: Your Honor, I think the 11 next one is actually the Plaintiffs' motion, 12 which we have opposed, which is their effort to 13 preclude Microsoft from making reference to the 14 written witness agreements that Plaintiffs 15 represented to the Court that they had and that 16 we still have not seen. 17 As the Court will recall, the Court 18 asked, I'm not sure whether Mr. Hagstrom or 19 Ms. Conlin, to report in five days on the 20 progress in producing these witness agreements. 21 Those five days have expired. 22 We don't have any witness agreements, 23 Your Honor, unless -- unless Ms. Conlin is 24 about to hand them to me. 25 MS. CONLIN: May I hand this up to the 3965 1 Court as well? 2 THE COURT: Yes. 3 MS. CONLIN: Thank you, Your Honor. 4 THE COURT: Thank you. 5 MS. CONLIN: Your Honor, what we have 6 on our agenda for today is this. 7 And there's one other matter, and that 8 is the matter of whether or not the Defendant 9 can in their opening remarks refer to the 10 resellers and any testimony with respect to the 11 resellers. 12 THE COURT: Let's go one issue at a 13 time. 14 MS. CONLIN: All right. 15 Your Honor, this one is the 16 Plaintiffs' motion to prevent Microsoft from 17 referring to the controversy with respect to 18 witness agreements in its opening statement and 19 to do so in a way that implies to the jury that 20 there was any spoliation. 21 The Plaintiffs filed their initial 22 witness list on July 28, 2006. 23 On September 1, in connection with our 24 effort to loosen the protective order, 25 Mr. Green, in his argument, suggested that the 3966 1 -- what we had asked, Your Honor, the Court 2 will recall, is to have the option of providing 3 to our witnesses who were going to testify the 4 highly confidential documents the Court -- and 5 in his argument with respect to that, he 6 suggested that the people on the witness list 7 were probably not going to come. 8 And in that connection when I 9 responded, I indicated that they had indicated 10 that they were going to come and that they had, 11 and I quote, agreed in writing that they would 12 be available. 13 We then -- I have -- the Court entered 14 its order with respect to the change in the 15 protective order on September 7, Your Honor. 16 The next -- it was not until -- so we have the 17 order at the time we filed our final witness 18 list, which I indicated at the time included 19 potential witnesses. 20 There were people on the list that we 21 had not been able to locate. There were people 22 who had not confirmed whether or not their 23 testimony would be available or they would be 24 available. 25 The second witness list, Your Honor, 3967 1 unlike the first, did not include only those 2 people that we knew for sure had agreed to 3 testify, and I imagine that the same is true of 4 Microsoft. 5 I did not say or imply that all the 6 people on the second list had agreed in writing 7 to testify. Indeed the remark that I made was 8 eight days before we filed that final list. 9 We bring the motion to preclude any 10 mention of this matter and any attempt to imply 11 that this is in any way spoliation of evidence 12 because, first of all, there was no spoliation; 13 and second, this is not evidence. 14 Microsoft has recently stated that if 15 the Plaintiffs no longer have copies of the 16 communication, it may argue that Plaintiffs 17 spoliated the material. 18 I have handed up to the Court our 19 report. The Court asked me to report in five 20 days, which would have been Sunday, I think, 21 and we provide that to the Court today. 22 The Court will see that in connection 23 with the people on the initial witness list, 24 and there were nine people, Your Honor, who 25 were -- well, we had our class representatives, 3968 1 of course, and then on the witness list there 2 were two people who were -- who are expert 3 witnesses, but who also, like Mr. Schulman, 4 have facts that they can testify to as well. 5 And so there were nine remaining. 6 There were actually ten remaining, and one was 7 a mistake which I indicated to the Defendant 8 long ago. It was simply a clerical error. A 9 person was included, Mr. McNeill, to whom I 10 have never spoken. 11 So what we had left, Your Honor, were 12 nine people. Of those nine people, I have been 13 able to provide to the Defendant information 14 from eight of them -- well, actually seven. 15 One is Greg Richardson. Mr. -- all 16 the communication with respect to Mr. 17 Richardson has been done through Mr. 18 Richardson's attorney. He is a current 19 employee of Novell. 20 With respect to Mr. Edwards and Mr. 21 Bradford, what I was able to provide to the 22 Defendant was a confirmation, a recent 23 confirmation by Mr. Bradford that both he and 24 Mr. Edwards had agreed long ago that they 25 would, in fact, come and testify. 3969 1 Microsoft's purported and only reason 2 for seeking E-mails between me and witnesses 3 was to see what witnesses were coming. 4 The Defendant disavowed any interest 5 in work product and insisted that all they 6 sought was any written communication between 7 Plaintiffs' counsel and potential witnesses, 8 revealing the witnesses' willingness to testify 9 and nothing else. 10 They have that information. Nothing 11 has been spoliated, and what possible relevance 12 could such E-mails from a potential witness 13 have? They would not be admissible. 14 The Defendant's resistance to this 15 motion is based entirely on allegations we did 16 not make and evidence we did not use. 17 For example, Ms. Reichel, or any 18 material from the Burst case. 19 Plaintiffs referred only to evidence 20 which indicates intentional spoliation in the 21 context of lawsuits which underlie this one. 22 For example, Mark Johnson's recounting 23 of his destruction -- of the destruction of 24 Mr. Gates' E-mails off of backup tapes, and 25 Mr. Johnson's statement that the company policy 3970 1 not to back up E-mails is to prevent them from 2 being discovered and used in the course of 3 litigation, and then the Allchin and Valentine 4 E-mails, to discard all E-mails after 30 days. 5 Defendant simply cannot bring this to 6 the jury in opening because they are not 7 permitted to bring anything to the jury in 8 opening that they do not believe is likely to 9 be in the record. 10 There is no likelihood that this 11 matter will ever be in the record. 12 The Hartsfield factors cannot be met, 13 the first of which is that the evidence 14 existed. And, of course, as we've indicated, 15 we cannot conceive of how this could be 16 evidence. 17 And it needs to be admissible at 18 trial, and this would not be, and it needs to 19 have been intentionally destroyed, and this was 20 not. 21 There was nothing about this that was 22 intentional destruction of anything that could 23 possibly be evidence. 24 And, of course, it must have something 25 to do with the subject matter. 3971 1 Defendant has told the Court that they 2 wanted to be sure that the witnesses that we 3 listed on the initial list would, in fact, be 4 present. 5 We've been able to provide to them and 6 to the Court the E-mails indicating that with 7 the exceptions that I've noted, Mr. McNeill 8 being a mistake and Mr. Bradford and Mr. 9 Edwards having a later confirmation, and 10 Mr. Richardson's -- the communication with 11 Mr. Richardson being only through his 12 attorneys, given the fact that he is a current 13 Novell employee. 14 We believe it is appropriate to 15 preclude the Defendant from using this material 16 in any way in opening to indicate that the 17 Plaintiffs have spoliated evidence. 18 THE COURT: Mr. Holley? 19 MR. HOLLEY: Your Honor, I just was 20 handed this document, as the Court witnessed, 21 and I haven't had an opportunity to go back and 22 compare the E-mails to the first witness list. 23 I will note that the list that appears 24 with the letter C on the bottom is quite 25 stunning given the representations that have 3972 1 been made to this Court about who's coming to 2 testify in this case. 3 It isn't just a couple of people. 4 It's most of the people on the witness list who 5 either say not located, not attending, unlikely 6 to attend, not confirmed. 7 Now, and I don't have at hand the 8 transcripts about the statements that were 9 made, but this certainly suggests that a whole 10 lot of people that we were told were coming to 11 testify at this trial have no intention of 12 coming and are not coming. 13 It would have been nice to know this a 14 long time ago. 15 So, Your Honor, with the Court's 16 indulgence, I would like to be able to go back 17 and check the statements that the information 18 that we just received and -- against the 19 statements that were made in the past, but we 20 don't withdraw this motion -- or our opposition 21 to this motion. 22 MS. CONLIN: Your Honor, if I just may 23 say one additional thing. 24 As I indicated, when I made the 25 statement, I was talking only about the initial 3973 1 list. 2 The Court entered its order before I 3 filed the final list, and the final list, as I 4 have indicated to the Defendant in both 5 formally -- well, all informally, but both in 6 writing to Ms. Nelles and at other -- and 7 orally, the final witness list, we included 8 many, many people who we simply didn't have 9 confirmation from. We didn't know whether they 10 were coming or not. 11 That's what Defendant did as well, 12 Your Honor, and we would ask that the Defendant 13 provide us with the same kind of list that we 14 have provided them. 15 Some of the people on their list are 16 out of the country or -- you know, they have 17 much more control over the people that they're 18 going to call than we have over the people that 19 we're going to call. 20 Some of these are -- have been 21 eliminated, Your Honor, because of the 22 collateral estoppel ruling and the Court's 23 interpretation of it. 24 There is -- I don't think there's 25 anything unusual about this list. 3974 1 The list about which I made the 2 remark, it was the initial list, and, in fact, 3 all those people had agreed to come, and all 4 those people are, to my knowledge, still 5 intending to be present. 6 THE COURT: Anything else on this? 7 MR. HOLLEY: No, Your Honor. 8 But Microsoft had a good faith belief 9 -- obviously we're the Defendant. We have to 10 respond to the case that the Plaintiffs put on. 11 We can't be asked at this stage to say who 12 we're going to call to testify -- 13 THE COURT: Weren't you given a 14 witness list? 15 MR. HOLLEY: Pardon? 16 THE COURT: You were given a witness 17 list, weren't you? 18 MR. HOLLEY: I think what we now have 19 been handed suggested that this list was 20 largely -- 21 In any case, we did not put people on 22 our witness list without a good faith belief 23 that they would be coming to attend this trial. 24 I have nothing further to say, Your 25 Honor. 3975 1 THE COURT: Anything else? 2 MS. CONLIN: No, Your Honor. 3 THE COURT: Do you want to proceed to 4 your witness? 5 MR. HOLLEY: I do, Your Honor. 6 THE COURT: Call him. 7 MR. HOLLEY: Your Honor, the defense 8 calls Mr. Jay Jurata to the stand. 9 THE COURT: Approach and be sworn. 10 JOHN A. JURATA, JR., 11 called as a witness, having been first duly 12 sworn, testified as follows: 13 THE COURT: Mr. Holley. 14 DIRECT EXAMINATION 15 BY MR. HOLLEY: 16 Q. Mr. Jurata, can you please state your 17 full name for the record sir? 18 A. John A. Jurata, Junior. 19 Q. Can you tell the Court what your 20 educational background is? 21 A. Yes. I received a college degree from 22 Villanova University in 1992, and I received my 23 law degree from the University of San Diego in 24 2000. 25 Q. And are you the member, sir, of any 3976 1 bars? 2 A. Yes. I am a member of the bars of 3 District of Columbia, the state of Virginia, 4 and various federal courts. 5 Q. And can you tell me what your 6 professional affiliation is? 7 A. Yes. I am an attorney. I'm an 8 associate at the law firm of Heller Ehrman. 9 Q. And how long have you been an 10 associate at Heller Ehrman? 11 A. I have been an associate of Heller 12 Ehrman for approximately six years. 13 Q. Mr. Jurata, how long have you been 14 working on the case captioned Joe Comes, et al. 15 against Microsoft Corporation? 16 A. I've been working on a variety of 17 Microsoft matters for the past six years. I 18 can't recall specifically when I started 19 working on this case. Approximately -- I would 20 say approximately two years ago. 21 Q. Did you have occasion last week, 22 Mr. Jurata, to interact with Mr. Reece from the 23 Zelle, Hofmann firm about the production of 24 expert materials in this case? 25 A. Yes, I did. 3977 1 Q. Can you tell the Court whether you 2 agreed with Mr. Reece that the Plaintiffs would 3 have until December 19 to produce those 4 materials? 5 A. No, I did not. 6 Q. Did you ever suggest to him that you 7 had the authority to reach such an agreement on 8 behalf of Microsoft? 9 A. No, I did not. 10 MR. HOLLEY: I have nothing further 11 Your Honor. 12 THE COURT: Cross? 13 CROSS-EXAMINATION 14 BY MR. HAGSTROM: 15 Q. Mr. Jurata, last Thursday, did you 16 have telephone discussions with Mr. Reece? 17 A. Yes, I did. 18 On Wednesday -- after the Court gave 19 its ruling, I wrote Mr. Reece a letter that 20 basically requested that he produce the 21 materials that were ordered by the Court by 22 December 6. 23 December 6 came and went, and on the 24 evening of December 6 I sent Mr. Reece a letter 25 basically stating that Microsoft intended to 3978 1 seek judicial assistance since there was not a 2 response to our letter. 3 Mr. Reece sent me a letter -- 4 Q. Just a second, Mr. Jurata. 5 That evening, did you receive an 6 E-mail from Mr. Reece? 7 A. Yes, I received an E-mail later on 8 from Mr. Reece saying that he was going to send 9 me a letter. And he sent me a letter on 10 Thursday, the next day, at which point, after I 11 received the letter, I called Mr. Reece. 12 Q. And when you called Mr. Reece, did you 13 reach him, or did you leave a voice mail 14 message? 15 A. I believe I left him a voice mail 16 message to call me back, at which point he did. 17 Q. And did you -- what did you discuss at 18 that point? 19 A. Well, when Mr. Reece called me back, I 20 basically told him that the letter -- the 21 letter that he had sent was very vague. 22 It said that Plaintiffs -- Plaintiffs 23 were hoping to produce materials in 24 approximately two -- in approximately two 25 weeks. It was very vague. 3979 1 So basically what I told Mr. Reece, 2 and I started out my conversation by basically 3 saying that Microsoft was trying to get 4 additional information from him so that 5 Microsoft could decide whether or not to seek 6 the assistance of the Court. 7 And so I basically asked Mr. Reece two 8 questions during that call. 9 I asked him when Plaintiffs could 10 confirm that they could produce the materials 11 by, and I also asked Mr. Reece if he would 12 agree in advance that Microsoft could take the 13 depositions of any of Plaintiffs' experts whose 14 -- who produced additional materials if 15 Microsoft had a good faith basis to do so. 16 Mr. Reece -- 17 Q. Excuse me. 18 Did Mr. Reece suggest a December 21st 19 date for production of any additional materials 20 that Plaintiffs' experts might have? 21 A. Yes. In response to my first 22 question, he said December 21st date and was -- 23 Q. Did you also, then, suggest during one 24 of those telephone conversations that because 25 of the holiday break that you would like to 3980 1 have a couple of additional days, and you 2 suggested a December 19th date? 3 A. That is an incomplete statement. 4 Q. Did you or did you not suggest a 5 December 19th date? 6 A. I asked Mr. Reece -- 7 Q. Yes or no? 8 A. Yes, in the context of -- 9 Q. Thank you. 10 MR. HOLLEY: Your Honor, I object. 11 You have to let -- you can make him answer yes 12 or no, but he's obviously entitled to explain 13 his answer, and Mr. Hagstrom is seeking to cut 14 him off. 15 MR. HAGSTROM: Your Honor, Mr. Holley 16 can come back on his examination. 17 THE COURT: You may finish your 18 answer. Go ahead. 19 A. As I -- as soon as I got done the 20 first phone call with Mr. Reece, I was getting 21 ready to report to my team, and I recognized 22 the date that he told me, December 21st, was 23 the last day of court before the holidays. 24 So I called Mr. Reece immediately 25 back, within 30 seconds, and I basically said 3981 1 before I report what you are proposing, do you 2 realize that December 21st is the last day of 3 Court before the holidays, and how certain was 4 that date? Could you do it any faster? 5 And he said well, I don't know. 6 I said -- I said, you know, could you 7 do it any faster? Could you do it December 8 19th? Could you do it any other date? And 9 basically that was the context for the December 10 19th date. 11 Q. And Mr. Reece subsequently sent you a 12 confirming letter via E-mail agreeing to the 13 December 19th date; is that correct? 14 A. Mr. Reece sent an E-mail later in the 15 day agreeing to that date, but made no mention 16 about the request that Plaintiffs agree to 17 depositions of these experts, which he 18 categorically denied, and said Plaintiffs would 19 not agree to when we had our conversation. 20 Q. So Mr. Reece did send you a letter 21 confirming the December 19th date; is that 22 correct? 23 A. Yes, he did. 24 Q. And subsequent to receiving that 25 E-mail, did you get a communication from one of 3982 1 your co-counsels directing you to send an 2 E-mail back to Mr. Reece? 3 A. I discussed with my team what response 4 that I should send back to Mr. Reece. 5 Q. Who directed you to send a response 6 back to Mr. Reece? 7 A. I believe that I recommended that we 8 send a response back. 9 Q. So nobody suggested that you send a 10 response back to Mr. Reece? 11 A. I'm the one who initially made that 12 recommendation. Other members of the team 13 agreed with that recommendation. 14 Q. Who worded that response? 15 A. I wrote the initial draft of that 16 response, and it was edited by other members of 17 our team. 18 Q. Which other members of your team? 19 A. I believe that I had conversations 20 with Mr. Rosenfeld, Mr. Tulchin, and Ms. 21 Nelles. 22 Q. Now, did you have any involvement in 23 the original stipulation with regard to the 24 production of expert materials? 25 A. Yes, I believe that I drafted -- I did 3983 1 the initial draft of that stipulation. 2 MR. HOLLEY: Your Honor, I object to 3 this line of questioning. 4 The only question before the Court is 5 the question of Mr. Reece's conflicting sworn 6 statements and Mr. Jurata's sworn statement 7 about what was said in a discussion last week. 8 It should not be open to the Plaintiffs, 9 through this witness, to try to contradict the 10 Court's orders, so I object to this line of 11 questioning. 12 THE COURT: Sustained. 13 Q. And, Mr. Jurata, on Thursday, 14 December 7th, at about 5:07 p.m., you did 15 receive an E-mail from Mr. Reece stating John, 16 we are in agreement to December 19, the date 17 you suggested, as the date by which we intend 18 to provide any additional documents from 19 experts. 20 If we are running into any problems 21 with a particular expert because they are out 22 of the country or for some other reason, we 23 will notify you in advance, but we hope not to 24 have any such problem, Jim? 25 A. Yes, I received that, and that's what 3984 1 caused the E-mail to go back to Mr. Reece 2 saying that we were going to seek -- we were 3 going to bring the matter to the Court's 4 attention. 5 Q. And, of course -- well, let me ask you 6 this. When did you receive that E-mail? 7 A. Sometime late in the afternoon on the 8 7th. 9 Q. So you received the E-mail shortly 10 after it was sent? 11 A. I can't recall exactly what time -- 12 what time it was sent, but I imagine I replied 13 to that E-mail within -- no more than two hours 14 after it was sent. 15 Q. But you had read the E-mail shortly 16 after it was sent at 5:07 p.m.? 17 A. I read the E-mail sometime late in the 18 afternoon. Whether it was 5:15, 5:30, 19 6 o'clock, I can't tell you sitting here today. 20 Q. But it took you two hours to put 21 together the nine- or ten-word response to that 22 E-mail? 23 A. No. I believe I stated that I sent 24 the response about two hours after the E-mail 25 was sent. 3985 1 You know, how long it was after I 2 received it, I'm not sure. 3 I do recall that when I received it, I 4 was very -- I was very upset because I believed 5 that to be a complete mischaracterization of 6 the phone call that we had. 7 Q. Did you tell Mr. Reece that you had no 8 authority to act on behalf of Microsoft? 9 A. Absolutely. And Mr. Reece said the 10 same thing for Plaintiffs. 11 MR. HAGSTROM: Nothing further, Your 12 Honor. 13 THE COURT: Any redirect? 14 MR. HOLLEY: No, Your Honor. 15 THE COURT: You may step down. 16 Any other witnesses? 17 MR. HOLLEY: None for the Defendant, 18 Your Honor. 19 THE COURT: Plaintiffs have any 20 witnesses? 21 MR. HAGSTROM: Your Honor, as I 22 mentioned, Mr. Reece is out of town. 23 THE COURT: Very well. 24 MR. HAGSTROM: So we'd like to bring 25 him as soon as possible. 3986 1 THE COURT: When will he be here? 2 MR. HAGSTROM: I can check his 3 schedule. Possibly we can get him here 4 tomorrow. 5 THE COURT: Anything else? 6 MR. HOLLEY: Not on this point from 7 the Defendant, Your Honor. 8 THE COURT: Very well. I'll let you 9 bring him in tomorrow. 10 MS. CONLIN: Your Honor, the only 11 remaining thing is the reseller depositions as 12 far as I know. 13 MR. TULCHIN: May I be heard on that, 14 Your Honor, just procedurally? 15 THE COURT: On what? 16 MR. TULCHIN: I think Ms. Conlin is 17 referring to a motion that came to us at, I 18 believe, around 11 p.m. last night. 19 MS. CONLIN: Excuse me, Mr. Tulchin. 20 I understand that Mr. Holley and 21 Mr. Gralewski have agreed that this should not 22 be taken up this morning but rather this 23 afternoon. 24 MR. TULCHIN: Could I just finish, 25 Your Honor? 3987 1 I believe this came to us at around -- 2 THE COURT: I don't even know what 3 you're talking about. What motion? 4 MR. TULCHIN: The Plaintiffs made a 5 motion to bar me from referring to some 6 testimony in my opening statement. 7 This was a matter that the Special 8 Master considered. The evidentiary 9 admissibility of this testimony was considered 10 by the Special Master, and I believe that he 11 ruled on this a couple of weeks ago. I think 12 it was around the 28th of November. 13 The motion that came to us by E-mail 14 late last night came after, I'm thankful to 15 say, I was asleep. 16 I saw a reference to it on my E-mail 17 this morning. 18 And I was just going to make the point 19 that certainly if there's a proper effort to 20 bar mention of this testimony in an opening 21 statement, it should have come long before 22 around 11 p.m. on a Sunday evening, the day 23 before I'm scheduled, I understand, to begin my 24 opening. 25 This was decided a couple weeks ago, 3988 1 and we're all living under circumstances where 2 something like this should be acted on 3 promptly. Otherwise, I think it puts the 4 Defendant in the unfair position of when it 5 seemed clear that I could refer to this in the 6 opening. 7 Since the Special Master had ruled on 8 the admissibility of the testimony, it puts us 9 in the unfair position of trying to rejuggle an 10 opening statement when, if the Plaintiffs 11 really wanted to block this to make this appeal 12 from the Special Master's ruling, they could 13 have, and should have, made this motion ten 14 days ago or more. 15 THE COURT: Was there an appeal on the 16 Special Master's ruling? 17 MR. TULCHIN: Apparently, Your Honor, 18 that's apparently what this is, although I 19 think they call it something else. 20 They just say it's a motion to prevent 21 Defendant from referring to reseller testimony 22 in the opening. But, as I say, in essence, 23 it's an appeal. 24 THE COURT: Mr. Holley, is it true 25 that there's some agreement to hear this 3989 1 tomorrow? 2 MS. CONLIN: Wrong Steve, Your Honor. 3 I think it was Steve -- 4 MR. HOLLEY: Can't be me unless I'm 5 hallucinating. 6 THE COURT: Oh, I'm sorry. Who was 7 it? 8 MR. HAGSTROM: Your Honor, I think it 9 was Mr. Tuggy and Mr. Gralewski had talked 10 about handling this this afternoon with the 11 understanding that Mr. Tulchin would not be 12 getting into that issue today. 13 MR. TULCHIN: I've made no such 14 agreement along those lines. 15 MR. HAGSTROM: Mr. Gralewski is here. 16 Perhaps he can address the issue. 17 MR. GRALEWSKI: Your Honor, I spoke 18 with Mr. Tuggy last night when I was connecting 19 in the Dallas-Fort Worth airport, and we agreed 20 that our position is that so long as it's heard 21 before Mr. Tulchin begins his opening, that's 22 fine with Plaintiffs. 23 We don't need to take the matter up 24 this morning, and it will be a very brief 25 discussion. 3990 1 MR. HOLLEY: Your Honor, I don't mean 2 to engage in sort of, you know, he said she 3 said, but I have spoken to Mr. Tuggy about 4 this. He can come over here if we have to go 5 through this again. 6 Mr. Gralewski told him that he wanted 7 this matter heard. Mr. Tuggy did not agree 8 that we were going to do it this afternoon. 9 He took the position that it was a 10 little bizarre to being served with these 11 things at 11 o'clock on a Sunday night. But 12 that doesn't constitute an agreement to hear it 13 this afternoon. 14 And for the reasons that Mr. Tulchin 15 says, we object to that. 16 THE COURT: You object to it being 17 heard at all or this afternoon? 18 MR. HOLLEY: At all, Your Honor, and 19 definitely this afternoon, yes. 20 THE COURT: When did the Special 21 Master rule? 22 MR. GRALEWSKI: I don't know the exact 23 date. 24 Your Honor, they're approximately 25 correct, I would think. 3991 1 However, what led us to believe that 2 Mr. Tulchin was going to refer to these in his 3 opening -- and again I don't have the exact 4 date -- was that under our agreement they 5 provided us an additional line of testimony 6 from one of the resellers, and it was at that 7 point, which I believe is subsequent to the 8 Special Master's ruling, that we then believed 9 that it would be an issue. 10 And all I can say is that everyone has 11 a lot on their plate. This certainly isn't the 12 first time that the parties have brought 13 motions -- I recall last week Microsoft 14 presenting a motion, handing it to us, and 15 wanting to argue about it right away. 16 I was trying to do my best to give 17 them advance notice, and so I served them with 18 a courtesy copy last night at 11 and said let 19 me know when you want to hear this, so long as 20 it's taken up before Mr. Tulchin's opening, 21 that's fine by us. 22 THE COURT: Anything else? 23 MR. HOLLEY: No, Your Honor. I think 24 we've made our points. 25 THE COURT: As soon as you and Mr. 3992 1 Tuggy are ready to hear it, we'll hear it prior 2 to the opening statement. Just so I can figure 3 out what's going on because I have no idea what 4 it's about. 5 MR. GRALEWSKI: Thank you, Your Honor. 6 THE COURT: I think the Court should 7 at least have the benefit of knowing what it's 8 about first. 9 Anything else? 10 Ready for the jury? 11 MR. HAGSTROM: Can we take two 12 minutes? 13 THE COURT: Sure. 14 At the break, the Court will rule on 15 the three motions here this morning. 16 (A recess was taken from 1:05 p.m. 17 to 1:12 p.m.) 18 (The following record was made in the 19 presence of the jury.) 20 THE COURT: Members of the jury, I 21 apologize for the delay. We had some matters. 22 We were working diligently, so we weren't just 23 lollygagging. 24 I apologize. Please blame me, not the 25 attorneys or the parties. 3993 1 You may proceed. 2 MR. HAGSTROM: Thank you, Your Honor. 3 Good morning everyone. I hope 4 everyone had a good weekend. 5 When we left on Friday we were 6 discussing various factors that indicate 7 monopoly pricing. 8 And just to refresh your memory here, 9 the fact is that Professor Mackie-Mason has 10 considered and will be discussing with you. 11 So let's take a look at where we left 12 off. 13 We had gone through the first three 14 factors, and let's take a look at where we are 15 with the next factor. 16 Did Microsoft keep prices for obsolete 17 products high? 18 Now, usually when a technology 19 product, or any other product for that matter, 20 becomes outdated, the price drops. It's common 21 sense, isn't it? 22 Some of us remember back when there 23 were VHS tapes, you know, VCRs. Those were 24 kind of the standards for watching home movies. 25 And when those first came out, they 3994 1 were the machines, and so forth, you can recall 2 were actually quite expensive. 3 Then along came DVDs. And when those 4 DVD players came out, they were quite 5 expensive. And then, of course, the prices for 6 the VCRs dropped. 7 And then the next innovation was DVD 8 progressive scan, I think it was. And so those 9 were more expensive. And the old DVD players 10 dropped in price, and the VCRs were pretty 11 cheap by then. 12 And then I think now it's -- they've 13 even got high definition DVD players. So now 14 you can get the original DVD players pretty 15 cheap, and even the progressive scans pretty 16 cheap. 17 But as Professor Mackie-Mason will 18 discuss with you, that type of progression of 19 older products or obsolete products becoming 20 much cheaper didn't necessarily happen with 21 Microsoft products. 22 For instance, when Microsoft released 23 Windows 95, older versions of Windows became 24 obsolete. 25 Instead of lowering its prices for the 3995 1 early engineer versions, such as Windows 3x 2 versions, Microsoft actually raised the price 3 of the older Windows versions. 4 And you'll hear that this is evidence 5 of monopoly pricing. 6 Now, Microsoft raised the price of 7 Windows 3x and MS-DOS to make those product 8 prices higher, and Microsoft presumably did 9 this to get buyers to purchase Windows 95 10 rather than the older products. 11 Let's take a look at Plaintiffs' 12 Exhibit 2557, which says, our goal in fiscal 13 '97 is to drive sales of 32-bit Windows 14 desktops by convincing 16-bit Windows users 15 that now is the time to upgrade. 16 Now the 16-bit Windows includes the 3x 17 series, and the 32-bit Windows was Windows 95. 18 Now let's look at a few pages later in 19 this same document. 20 Tactics, pricing. Make the Win 3x and 21 WFW upgrade more expensive than Win 95. Price 22 25 percent higher than Win 95. 23 WFW is Windows for Workgroup, 24 something like this, and that was an older 25 version that preceded Windows 95. So Microsoft 3996 1 made the older products actually higher than 2 the new product. 3 And additionally, you can take a look 4 at finding of fact number 62, and the Federal 5 Court found that this happened with regard to 6 the release of Windows 98 as well. 7 In the middle it says, one would 8 expect a firm in a competitive market to pay 9 much closer attention to the price charged by 10 other firms in the market. 11 Another indication of monopoly power 12 is the fact that Microsoft raised the price 13 that it charged OEMs for Windows 95, with 14 trivial exceptions, to the same level as the 15 price it charged for Windows 98 just prior to 16 releasing the new product. 17 In a competitive market, one would 18 expect the price of an older operating system 19 to stay the same or decrease upon the release 20 of a newer, more attractive version. 21 So while prices of older products 22 typically fall with new innovations, 23 Microsoft's prices did not. 24 Normal competitive business cannot do 25 that. Just think what happens when a new model 3997 1 car comes out and the 2007 models come out. 2 You don't see the manufacturers with regard to 3 the 2006 models raise them by 10 percent or 4 something like that. Obviously they wouldn't 5 sell. 6 And, of course, the difference is, 7 there's a lot of competition between the car 8 manufacturers. 9 So did Microsoft keep prices for 10 obsolete products high? Professor Mackie-Mason 11 will tell you that the answer is yes. 12 Next factor. Did Microsoft make 13 profits on the products in question that 14 exceeded competitive profits? 15 Remember the memo to Bill Gates, the 16 one that said there's a huge value to having a 17 monopoly? 18 And I asked you to keep in mind why 19 Microsoft would violate the antitrust laws and 20 risk the consequences from those violations if 21 its goal was, as Microsoft claims, to lower 22 prices. 23 Let's take a look at Microsoft's 24 monopoly profits. 25 Remember I mentioned that there were 3998 1 three damages methods that are being used by 2 Doctor Netz, and one of those is the profit 3 margin method. 4 And in addition to using this method 5 to prove overcharge damages, which we'll get 6 into a little bit later, Professor Mackie-Mason 7 looked at the profit margins for purposes of 8 causation as well. 9 In this particular demonstrative, it 10 shows what Microsoft's profit margins were 11 during the class period. 12 And let me make sure you understand 13 that these are numbers for the entire class 14 period. So it's the profit margins by year, 15 but averaged over the course of the entire 16 class period. 17 So that you can see up there with -- 18 you've got 72 percent on the operating system, 19 64 percent on the office suites, 67 percent on 20 word processors, 73 percent on spreadsheets, 21 and then this over there on the yellow bar, 22 that's negative 12 percent, and that's 23 Microsoft's competitive products. 24 Let me just comment about that 25 particular negative 12 percent number. 3999 1 That is basically the other software 2 products that Microsoft produces in the 3 aggregate. 4 So we're not saying that every 5 Microsoft product, other than the monopolized 6 products, lose money. But the fact of the 7 matter is, because it's an average, there's 8 certainly good products; in other words, 9 profitable products, within that group, and 10 there's also products that lose money. 11 And, you know, the aggregate of all of 12 those other products over the class period is a 13 negative 12 percent profit margin. 14 So despite -- so when we look at the 15 two groups, we've got the monopolized products 16 on the right where you see the red bars, and on 17 the left you've got the other products where 18 Microsoft faces competition. 19 That's the difference between the two 20 groups. 21 Microsoft has monopoly power in these 22 four product areas and the others it does not. 23 So we've got the same resources at the 24 company, same management. 25 What's the difference between the two 4000 1 product groups? Market share monopoly power. 2 Now, so were these monopolies -- 3 monopolized products, were they popular as 4 compared to the other products? Was there 5 meaningful choice with regard to those products 6 as compared to the other products? 7 Let me just talk to you a minute about 8 the concept of popular. 9 Microsoft may suggest that these 10 monopolized products were popular and that's 11 why there's a monopoly position. In other 12 words, why they have over 90 percent of each of 13 these particular products. 14 It may suggest that Microsoft has 90 15 percent of each of these product markets 16 because people chose those particular products 17 as opposed to some other products. 18 But remember the inputs and outputs 19 that Ms. Conlin and I have discussed. 20 You'll hear, for instance, how 21 Microsoft has foreclosed or prevented competing 22 products from getting into the distribution 23 channels. 24 Well, you'll also hear about how the 25 fact that over 85 percent or approximately 85 4001 1 percent of operating systems software is sold 2 preinstalled through the OEM channel. 3 So if competitive products can't get 4 on those machines, how can people choose them? 5 So you have -- consumers really have 6 the choice of do we buy a computer that's got 7 the preinstalled operating system on it, 8 Windows, for instance, or are we not -- or do 9 we not? 10 So it's the choice of purchasing the 11 computer with the operating system 12 preinstalled, Windows, or not buying a computer 13 at all. 14 So you have to ask yourself whether or 15 not that's a true choice. 16 Whereas if you go to a grocery store 17 and you're buying a loaf of bread and you 18 decide well, we have a choice between one brand 19 versus another. It's right there on the shelf. 20 Do you have that sort of choice? And 21 without that choice, is it fair to say that 22 indeed these products are popular? 23 So the question is, what explains this 24 large difference between the profit margins 25 between the monopolized products and the other 4002 1 Microsoft products? In other words, the 2 products where Microsoft actually faces 3 competition. 4 And I think, is it simply a 5 coincidence? 6 I think Professor Mackie-Mason will 7 tell you that the suggested response is the 8 fact of the anticompetitive conduct that 9 Microsoft has monopolized these products to 10 exclude competitors. 11 Now, remember the Windows 98 example I 12 showed you, I think it was last -- must have 13 been last Friday afternoon. 14 It was the $49 price versus the $89 15 price. 16 Microsoft could have charged half as 17 much and still made a huge monopoly profit. 18 Instead, Microsoft took advantage of its 19 illegal conduct and charged nearly double. In 20 other words, the $89 price. 21 So the extra monopoly charge came 22 right out of class members' pockets. 23 Now, keep in mind we're not saying 24 that it's illegal for a company to earn a 25 profit. What we are saying, it's illegal for a 4003 1 company to engage in anticompetitive conduct 2 and then charge -- overcharge consumers. 3 So the question is, did Microsoft make 4 profits on products at issue that exceeded 5 competitive profits? The answer is yes. 6 Let's take a look at the next factor. 7 Did Microsoft engage in punitive price 8 discrimination? 9 So, in other words, when Microsoft 10 considers -- excuse me. 11 When a customer of Microsoft considers 12 or threatens to consider a competitor's 13 product, did Microsoft respond to the pressure 14 by reducing prices as you would expect in a 15 competitive market, or did Microsoft do 16 something else such as punishing that potential 17 customer with higher prices? 18 The evidence will show that Microsoft 19 set prices where it wanted them to be rather 20 than as a result of normal competitive 21 pressures. 22 In fact, the evidence will show that 23 Microsoft engaged in punitive price 24 discrimination. 25 So price discrimination is charging 4004 1 different prices to different customers for the 2 same product, but where the price difference is 3 not supported by a cost differential based upon 4 the cost in actually supplying the customers. 5 Microsoft did this, in other words, 6 the discriminatory prices, by charging higher 7 prices to OEMs who sold or considered selling 8 competing operating systems software and 9 applications. 10 In a competitive market, suppliers 11 can't do that. 12 For instance, if you have a customer 13 that goes to Supplier A and the supplier says 14 okay, I'll sell you these at $10 per unit, and 15 the customer finds out that that supplier is 16 also selling the identical thing to another 17 customer at $8 per unit, what's that customer 18 going to do? 19 He's going to tell the supplier, look, 20 I want the same deal that your other customer 21 is getting at $8 per unit, and if the -- if 22 that supplier doesn't reduce the price, what's 23 going to happen? 24 That customer is going to go to 25 another supplier to get the $8 deal, so that 4005 1 original supplier loses the sale. 2 But this is in stark contrast to what 3 they see that Microsoft has done. 4 The evidence shows that Microsoft 5 actually dramatically -- charged dramatically 6 different prices to different customers for the 7 same, for instance, operating system product, 8 and they weren't based upon cost justifications 9 between the two customers. 10 So why would Microsoft do this? 11 The evidence will show that it was 12 done as punishment. 13 Now, Ms. Conlin told you about some of 14 the contracts between Microsoft and OEMs. And, 15 for example, Microsoft punished Gateway and IBM 16 by charging them higher prices than other OEMs 17 such as Compaq, Dell, and Hewlett Packard. 18 Why? Because Gateway and IBM were not 19 being cooperative. 20 Let's take a look at finding of fact 21 130. 22 So once again we have a finding that 23 is established in this case. 24 The finding says, the discriminatory 25 treatment that the IBM PC company received from 4006 1 Microsoft on account of the software directions 2 of its parent company also manifest itself in 3 the royalty price that IBM paid for Windows. 4 Let me just explain something about 5 this first sentence. 6 The IBM PC company. As you know, IBM 7 makes, you know, the hardware, the personal 8 computers. But IBM also has its software 9 division. So that's what this is talking 10 about. 11 So in the latter half of the 1990s, 12 IBM, along with Gateway, paid significantly 13 more for Windows than other major OEMs like 14 Compaq, Dell, and Hewlett Packard, that were 15 more compliant with Microsoft's wishes. 16 So let's take a look at more 17 specifically what happened with regard to IBM. 18 Ms. Conlin, as you may recall, talked 19 to you a little bit about this in connection 20 with Microsoft's illegal conduct in the 21 applications market. 22 Let's take a look at finding of fact 23 116. Just focus at the end of that finding. 24 When IBM refused to abate the 25 promotion of those -- of its own products that 4007 1 competed with Windows and Office, Microsoft 2 punished the IBM PC company with higher prices, 3 a late license for Windows 95, and the 4 withholding of technical and marketing support. 5 So that's correct. Microsoft punished 6 IBM. You might have heard of IBM referred to 7 as big blue. You know, one of the most 8 successful computer companies over the course 9 of time. 10 So despite IBM's reputation, its 11 strength in the computer industry, it was 12 forced to pay Microsoft more than other 13 computer makers, more than other OEMs for the 14 same Windows products because Microsoft didn't 15 like the fact that IBM was competing with 16 Microsoft in the applications market with 17 regard to the SmartSuite office suite product. 18 I want to just mention one other thing 19 about finding of fact 116. 20 And you'll note that the Federal Court 21 found that Microsoft leveraged the fact that 22 the PC company needed to license Windows at a 23 competitive price and on a timely basis and the 24 fact that the company needed Microsoft's 25 support in many more subtle ways. 4008 1 In the instructions that Judge 2 Rosenberg gave you, one of them was concerning 3 leveraging. 4 MR. TULCHIN: Objection, Your Honor. 5 These -- the finding does not refer to 6 the concept of leverage as its used in the 7 instructions. 8 THE COURT: Evidence will speak for 9 itself. So will the instruction. 10 Continue your opening. 11 MR. HAGSTROM: One of the concepts 12 that will be discussed by Professor Noll and 13 Professor Mackie-Mason is the concept of 14 leveraging. 15 And leveraging is the concept where if 16 Microsoft illegally used its monopoly power in 17 the operating systems market to gain an unfair 18 competitive advantage or destroy a competitor 19 in the applications market and thereby attempt 20 to gain a monopoly in the second market. 21 That type of conduct can be found to 22 be illegal. 23 Now, the evidence will show that IBM 24 had a product called SmartSuite, and that 25 competed with Microsoft's Office. 4009 1 And IBM, of course, had its own line 2 of IBM computers, and IBM preinstalled on those 3 computers, among other things, the Windows 4 operating system. 5 But they also wanted to add the 6 SmartSuite office product, but Microsoft didn't 7 like that, so Microsoft took actions that will 8 be described to you to prevent or otherwise 9 restrict IBM from installing the office suite 10 products and competing with the Microsoft 11 Office product. 12 So if a competitor like IBM has to 13 withdraw or virtually withdraw from the office 14 suite market to get the Windows operating 15 system, what will happen to Microsoft's price 16 for Office? 17 Professor Mackie-Mason will tell you 18 that the effect of that type of conduct is to 19 keep the price for Office higher than it would 20 be in a competitive market. 21 So did Microsoft gain -- engage in 22 punitive price discrimination? The evidence 23 will show you that the answer is yes. 24 The next factor is did Microsoft 25 compete on price when it sold products that 4010 1 faced effective competition? 2 Let me just explain. 3 You've heard the term high prices. 4 You know, some may call them high prices, some 5 might call them low prices. But for purposes 6 of this case, whatever you call the price is 7 what we're talking about in terms of the 8 overcharge is the fact that the prices actually 9 charged are higher than they would have been in 10 a competitive market. 11 MR. TULCHIN: Objection. 12 Again, Your Honor, that is not the law 13 and it's not the Court's instruction. It's the 14 difference between the prices that were charged 15 and the prices that would have been charged in 16 the absence of the alleged conduct. 17 THE COURT: Sustained. 18 MR. HAGSTROM: So the point here is 19 Professor Mackie-Mason will come in and talk to 20 you about the fact that because of the 21 exclusionary conduct, Microsoft was able to 22 charge prices that were higher than they were 23 -- would have been in a competitive market. 24 MR. TULCHIN: Same objection. 25 THE COURT: Sustained. 4011 1 MR. HAGSTROM: You may be wondering 2 how we can show that Microsoft's prices were 3 and are higher than they would have been in a 4 competitive market. 5 MR. TULCHIN: Same objection, Your 6 Honor. 7 THE COURT: Sustained. 8 MR. HAGSTROM: Your Honor, we intend 9 to present evidence on this issue. 10 THE COURT: Proceed. 11 MR. HAGSTROM: The competitive market 12 does not exist. It did not exist because of 13 the anticompetitive market. 14 Since Microsoft eliminated competition 15 in the product market at issue, we can take a 16 look at what Microsoft does when competition 17 does exist. 18 When Microsoft faces competition, it, 19 in fact, does compete on price. 20 In fact, when Microsoft has faced 21 competition in the operating systems and 22 applications markets, Microsoft competed by 23 actually lowering prices. 24 Microsoft's top executives recognized 25 that when it faced effective competition it 4012 1 would have to compete on price or lose sales. 2 Mr. Gates made this very point in a 3 1994 memo to his top executives. Take a look 4 at Plaintiffs' Exhibit 2156. 5 Ideally, we should be able to discount 6 prices where it is really necessary because of 7 competition and not in other cases. 8 He's saying that when you have a 9 monopoly, you lower prices only when it's 10 really necessary because of competition. 11 The evidence shows that when Microsoft 12 faces effective competition, it lower prices. 13 Let's take a look at this next memo. 14 This is from February 1998, and it's 15 Plaintiffs' Exhibit 2841. 16 We would absolutely never drop price 17 unless absolutely forced to do so. 18 In another document, Plaintiffs' 19 Exhibit 564, Bernard Vergnes writes, we could 20 assume that when our market share is dominant 21 and reaches levels well-above the 50 percent, 22 we couldn't probably gain much from reduced 23 prices. However, we should consider the price 24 weapon in cases where our market share is low 25 and we face better entrenched heavy 4013 1 competition. 2 So what Mr. Vergnes is suggesting was 3 once Microsoft reached a market share well- 4 above the 50 percent level, it didn't have to 5 worry so much about competing in price. 6 When Microsoft had lower market share, 7 however, he says Microsoft would compete on 8 price. 9 Let's take a look at another document. 10 In 1991, Mr. Gates explained that high 11 market share allows Microsoft to charge higher 12 prices, but if Microsoft is a distant number 13 two in the market, it has to lower prices. 14 Let's take a look at Exhibit 596. 15 He says, with a market where we are a 16 distant number two, it is a mistake not to do 17 the deal even at $50. If we were number one in 18 this market, I would agree that anything less 19 than $90 is too low, but we are not. 20 Mr. Gates is talking about Microsoft 21 Word in this document before Microsoft had 22 foreclosed all of its competitors in the market 23 for word processing software. 24 His statement is a classic sign, as 25 Professor Mackie-Mason will tell you, of 4014 1 illegal monopoly pricing. Compete on price 2 when necessary, but when the monopoly is 3 achieved, charge more. 4 Microsoft's strategy in the 5 applications market was to compete on price 6 when necessary. 7 Let's take a look at Exhibit 1342. 8 When necessary, meet Lotus price 9 pressure in mass merch channel. Don't lose 10 deals on price. Match competition when 11 necessary to win business. 12 Again, remember Windows 98 -- let's go 13 back to that series of slides for just a 14 moment. 15 First, when Microsoft released Windows 16 98, Microsoft considered pricing 98 upgrade so 17 that it would sell at retail for $49, but 18 ultimately Microsoft decided to approximately 19 double that price to $89. 20 The reason, Microsoft had monopoly 21 power. 22 Finding of fact 63, and I won't put 23 that up here, but finding of fact 63 discusses 24 this particular scenario between the $49 and 25 $89 pricing. 4015 1 Let's look at another example. 2 This is Plaintiffs' Exhibit 135. 3 In this particular E-mail, Bill Gates 4 wrote, DOS being fairly cloned has had a 5 dramatic impact on our pricing for DOS. I 6 wonder if we would have it around 30 to 40 7 percent higher if it wasn't cloned? I bet we 8 would. 9 What Mr. Gates is suggesting, he's 10 referring to DR-DOS, and DR-DOS being fairly 11 cloned -- that's fair -- DR-DOS has had a 12 dramatic impact on our pricing, Microsoft's 13 pricing, for MS-DOS. And he's suggesting if we 14 didn't have to compete on price with DR-DOS, 15 our price for MS-DOS would be 30 to 40 percent 16 higher. 17 Now, Ms. Conlin went through and 18 previewed some of the evidence on DR-DOS and 19 the activities that Microsoft took to foreclose 20 DR-DOS from the marketplace. And this type of 21 information provides you some pretty good 22 insight as to why that was important to 23 Microsoft to eliminate DR-DOS. 24 Let's take a look at another 25 Plaintiffs' exhibit. 4016 1 I believe people underestimate the 2 impact DR-DOS has had on us in terms of 3 pricing. 4 So again, this is the same type of 5 description by Mr. Gates that, in fact, DR-DOS 6 is having an adverse effect on Microsoft's 7 ability to charge much higher prices. 8 Now, Microsoft contemplated decreasing 9 their margins if OS/2 threatened their hold on 10 the operating systems market. 11 As Ms. Conlin told you, Microsoft 12 prevented OS/2 from succeeding but was ready to 13 decrease prices if OS/2 was able to survive. 14 Let's look at Mr. Kempin's E-mails, 15 Plaintiffs' Exhibit 690. 16 Apologize, but that's a little bit 17 hard to read. 18 Decrease in margin only if people vote 19 to buy retail OS/2 from IBM, which I doubt. 20 All key OEMs are committed to DOS 5.0 and Win 21 3x for the next two to three years. Most of 22 them per processor or at least per system. 23 This will give us time to respond technically. 24 So what this is telling you -- 25 remember the per processor and per system 4017 1 licenses that Ms. Conlin spoke to you about. 2 They are the chokehold on the distribution 3 channel, the output. 4 And what Mr. Kempin is suggesting 5 here, he's referring to the -- if people vote 6 to buy retail OS/2 from IBM. 7 So what he's talking about is if IBM 8 tries to put OS/2 into the finished goods 9 channel at the retail level, you know, Best Buy 10 or something like that, if OS/2 does that, go 11 out there and lower prices on the Microsoft 12 products so we can get OS/2 out of the retail 13 channel as well. 14 In the last sentence there, this will 15 give us time to respond technically. 16 So Mr. Kempin is recognizing that 17 Microsoft had to do some catch-up with regard 18 to OS/2, and Ms. Conlin showed you some E-mails 19 and internal correspondence from Mr. Gates and 20 others stating that OS/2 was, in fact, ahead 21 technically in some aspects. 22 And remember Ms. Conlin spoke to you 23 about Linux. 24 In various developing countries, when 25 Microsoft has been faced with competition 4018 1 through some government programs; in other 2 words, governments in these developing 3 countries have been looking for ways to get 4 computers to their population, and they were 5 considering installing Linux on PCs, Microsoft 6 responded on price, as Ms. Conlin spoke to you 7 about. 8 Competition from Linux forced 9 Microsoft to respond to these developing -- in 10 these developing countries by reducing prices. 11 Remember Plaintiffs' Exhibit 8562. 12 Under no circumstances lose against 13 Linux. And the underlining is in the original 14 document, as is the bold font. 15 So competition also forced Microsoft 16 to create the EDGI program that Ms. Conlin 17 mentioned. 18 So when Microsoft is faced with 19 effective competition, it is forced to compete 20 on price. That's just good old common sense. 21 Now, Professor Mackie-Mason will show 22 you that when Microsoft faced effective 23 competition in the products at issue, then it 24 competed on price to avoid losing customers and 25 losing market share. 4019 1 So when competition is effective, 2 customers for these products respond to price 3 competition. 4 Microsoft, of course, went to great 5 lengths to ensure that potential competitors in 6 the market at issue were not effective, and 7 they wanted to ensure that no competition could 8 adversely affect Microsoft's pricing in these 9 markets. 10 So did Microsoft compete on price when 11 it sold products that faced effective 12 competition? The evidence will show that the 13 answer is yes. 14 Now, as these examples have 15 demonstrated, Microsoft's behavior during the 16 class period meets the criteria that are shown 17 on the screen, and the evidence will show that 18 Microsoft does respond to effective competition 19 by lowering prices. 20 But what does this tell us? Professor 21 Mackie-Mason will tell you that Microsoft, by 22 illegally monopolizing the markets, could 23 manipulate operating systems in the 24 applications software prices, and did so. 25 Microsoft could and did charge Iowa 4020 1 class members far more than to make -- just to 2 make a reasonable profit, but they were able to 3 do so because of the anticompetitive illegal 4 conduct. 5 So why did, again, Microsoft engage in 6 the anticompetitive conduct that Ms. Conlin 7 told you about and also that is included in the 8 findings of fact and conclusions of law that 9 have been read to you? 10 Professor Mackie-Mason will tell you 11 that it was not to lower prices, but rather to 12 keep prices higher than they would have been in 13 a competitive marketplace. 14 Remember, there is huge value to a 15 monopoly. 16 One Microsoft executive observed that 17 free competition was bad business for Microsoft 18 and its stock price. 19 In Plaintiffs' Exhibit 1692, he says, 20 in a war of attrition, profitability and share 21 price declines. 22 So what he's saying is, if we've got 23 to face competition, our overall profits will 24 decline, and if our overall profits decline, so 25 does our stock market price. 4021 1 So the bottom line with this, as 2 Professor Mackie-Mason will explain, is just 3 plain common sense. 4 Microsoft did not follow the rules of 5 normal competition, and as a result, Iowa 6 consumers paid more than they would have had 7 Microsoft not broken the law. 8 They paid more -- class members paid 9 more than they would have paid in a competitive 10 market. 11 Remember what Judge Rosenberg told you 12 in Instruction No. 14. 13 To meet the requirements of causation, 14 we only need to prove causation that the 15 Plaintiffs suffered some injury from 16 Microsoft's illegal conduct and that conduct 17 only needs to be a material cause, not the only 18 or sole cause of the injury. 19 The evidence will show that by 20 foreclosing competitors' products from the 21 marketplace, Microsoft was able to eliminate 22 consumer choice, and without a choice, Iowa 23 consumers had to pay higher prices than they 24 would have paid in a competitive market. 25 In short, because Microsoft broke the 4022 1 law, class members had to pay noncompetitive 2 prices for the monopolized products. 3 Now, let's -- that concludes my 4 discussion on causation. 5 So the next question is how much does 6 Microsoft owe Microsoft -- Iowa class members? 7 When you hear the term overcharged 8 used, it's simply the extra money that the 9 monopolist Microsoft was able to charge as a 10 result of its unlawful acts. 11 Another way of describing the 12 overcharge is that it is the difference between 13 the amount Microsoft charged -- actually -- 14 MR. TULCHIN: Same objection, Your 15 Honor. It's not correct. 16 THE COURT: Overruled. 17 MR. HAGSTROM: That the class members 18 actually paid minus the amount that class 19 members would have paid in a competitive market 20 absent the anticompetitive conduct. 21 That equals the overcharge. 22 Remember on Friday when I talked about 23 the purpose of the antitrust laws and how a 24 free and competitive market protects consumers? 25 The competitive market is what 4023 1 regulates prices companies can charge, and when 2 competition is eliminated, that protection no 3 longer is present. 4 Let's just go through an easy example 5 of what an overcharge is. 6 And I just showed you the simplified 7 formula for an overcharge, and this is just a 8 numeric example. 9 So let's say the price charged, 10 actually charged was $100, and based upon 11 information it's determined that what would 12 have been charged in a competitive market is 13 $60. Then the price overcharge is $40. 14 Now, to determine the competitive 15 price; in other words, the price that the 16 product would have cost in a world where the 17 monopolist did not break the law, economists 18 use well-accepted economic models. 19 And you may recall that during voir 20 dire, Ms. Conlin asked if any of you have -- 21 would have any difficulty applying economic 22 models, and I believe each of you agreed that 23 that would not be a difficult proposition 24 provided the evidence was there supporting 25 those models. 4024 1 Now, the prices in what would have 2 been a competitive world are sometimes called a 3 but for price or the price that would have 4 prevailed but for the anticompetitive conduct. 5 This is not a pretend or make-believe 6 price. It's a price based on the use of 7 well-established and commonly used economic 8 models of the sort that we discussed in voir 9 dire. 10 And the reason that the economists 11 have to do this is a direct result of a 12 Defendant's or, you know, here Microsoft's 13 conduct. 14 Because the monopolist has distorted 15 the market through its illegal conduct, our 16 experts have to use economic models to 17 calculate what the price would have been in a 18 competitive marketplace. 19 So when Microsoft, if it argues that 20 this is too speculative, remember that the 21 competitive market doesn't exist because of the 22 illegal conduct. 23 And that's why, as the Court has 24 instructed you in Instruction 15, you may make 25 a just and reasonable estimate of damages. 4025 1 So to figure out what the price would 2 have been, what the competitive or free market 3 would have looked like absent the illegal 4 conduct, economists gather information from 5 data from the real world and use those -- apply 6 that data in the economic models. 7 So an economist will look at the 8 available data, figure out what's relevant 9 data, figure out what is not relevant data, and 10 then calculate what would have taken place in 11 the competitive market absent any illegal 12 conduct. 13 Remember under the standard of proving 14 damages in antitrust cases, Plaintiffs don't 15 have to convince you that we hit the overcharge 16 with 100 percent certainty, but only that you 17 provide a reasonable estimate of damages. 18 If the rule was different, a Defendant 19 could violate the law without being held 20 accountable. 21 For instance, a Defendant which 22 violates the law might say, sure I violated the 23 law, but you can't calculate how much the 24 damages are precisely; therefore, you get 25 nothing. 4026 1 But Instruction 15 makes clear that 2 Plaintiffs and their experts are entitled to 3 use just and reasonable estimates as long as 4 they aren't based on speculation or guesswork. 5 Now, Doctor Netz and a number of 6 people on her staff spent many, many hours 7 reviewing real world data and applying that 8 data to the economic models. 9 And Doctor Netz used her extensive 10 training and experience to calculate what these 11 products would have cost in a competitive 12 world. And that's the market that's free of 13 Microsoft's anticompetitive conduct. 14 So let's talk a little bit about how 15 Doctor Netz determined what the prices would 16 have been absent the illegal conduct. 17 She'll walk you through the 18 calculations and analyses when she gets here. 19 I'm just -- I'm not going to go 20 through those calculations in detail. You 21 probably are sighing with relief. 22 But she will do that when she gets 23 here, so I just want to give you kind of an 24 overview of what her models are all about. 25 As I've previously mentioned, to 4027 1 calculate damages she's used three different 2 methods. These are called the rate of return 3 method, the profit margin method, and the price 4 premium method. 5 And benchmarks are widely used and 6 well-accepted by economists for the calculation 7 of antitrust damages. 8 Now, each of these three methods, 9 comparisons are made using other companies' 10 profitability and pricing or benchmarks. 11 For example, Doctor Netz looked at the 12 rates of return for the products of other 13 successful software companies to determine a 14 valid comparison or benchmark under the rate of 15 return method. 16 Now, you might ask why Doctor Netz 17 used three different methods. She used three 18 different methods to make sure she got strong, 19 reliable results. 20 And she will tell you that the results 21 from these three methods were, in fact, very 22 close to each other. Each method provides a 23 check and balance against the other. 24 And it will be up to you to decide 25 which method is best. 4028 1 Now, Doctor Netz' job was to figure 2 out what Iowa consumers paid for the 3 monopolized products, figure out what they 4 would have paid absent the unlawful conduct, 5 calculate the difference, and then discuss it 6 with you here at trial. 7 And she will get pretty detailed -- 8 let's take a look at this next slide, which is 9 an overview of her results. 10 I think there's so much detail here 11 that it's probably impossible for Darin -- he's 12 shaking his head -- to really blow it up. 13 But basically what this is, it shows, 14 you see sort of three broad horizontal rows. 15 And the first is the rate of return 16 method with a series of numbers. Goes through 17 each year of the class period and identifies 18 the various numbers and calculations. So it's 19 a summary chart. 20 The next row goes through the profit 21 margin method. And then the final row goes 22 through the price premium method. 23 Let's just take a look at a summary of 24 these -- a more readable summary of that chart. 25 Now, this particular demonstrative 4029 1 shows that you've got the three rows there, 2 profit margin method, and it breaks out by 3 product for operating systems, word processing, 4 spreadsheets, and the office suite. 5 So the total on the profit margin 6 method is just under $326 million. 7 Under the rate of return method, it's 8 a little bit more than 324 1/2 million dollars. 9 Price premium method is a little bit 10 more than $337 million dollars. 11 And then when she took the average of 12 those three methods, there's a little bit more 13 than $329 million for the overcharges for the 14 class period, again May 18, 1994, through 15 June 30, 2006. 16 Now, Doctor Netz also did a 17 calculation of just the average per license 18 number. 19 If you take the 329-plus million 20 dollar figure divided by the total licenses 21 involved in this case, which are approximately 22 seven and a half million, the average per 23 license overcharge is a little over $44. 24 If you break it down into the 25 different products, these are the average 4030 1 overcharges over the course of time. 2 But let me again emphasize that those 3 are averages. 4 Let me also mention that during the 5 period of the government case, the conduct, as 6 you know from the instructions that Judge 7 Rosenberg gave you, from mid-1995, June of 8 nineteen -- excuse me, July of 1995 through 9 June of 1999, for the operating systems, the 10 overcharges that Doctor Netz has calculated for 11 that four-year period is approximately $53 12 million. 13 One other thing I want to say about 14 these uses -- use of averages. As I already 15 mentioned, with averages, obviously when you're 16 looking at the entire class period, an average 17 obviously averages together lower numbers and 18 higher numbers. 19 So keep in mind that these averages 20 are the averages over the 12-plus year of the 21 entire class period. 22 So in any given year for a particular 23 product, the average per license overcharge 24 will be lower or higher than the overall 25 average for the class period. 4031 1 Of course, let me emphasize the 2 overcharge never exceeds the actual price of 3 the product. 4 So if in one year, for instance, the 5 overcharge was 60 percent and the license cost 6 $100, then the overcharge is 60 percent of 7 $100, $60. 8 If another year the overcharge was 9 still 60 percent, but the license cost $50, 10 then the overcharge is 60 percent times $50 or 11 $30. 12 So the overcharge price never exceeds 13 the price of the product. 14 And so if you average those two years 15 together, for example, the $60 overcharge and 16 the $30 overcharge, if my math is correct, the 17 middle is $45. 18 So the $45 average, of course, is 19 actually higher than the one year where it was 20 $30 overcharge in the example, but lower in the 21 other year where the $60 was the overcharge. 22 So don't get confused by the use of 23 averages because if you just take the average, 24 you know, in -- for instance, in the operating 25 system on this chart, $42, early on the cost of 4032 1 the operating system was less than $42, but 2 again, if in the early years the price of the 3 operating system was, say, $40 and the 4 overcharge percentage was $60, that means the 5 overcharge itself is $24, not $42. 6 I hope that makes sense. 7 Now that we have the -- just sort of 8 an overview of the three methods, I want to 9 kind of quickly run through each of the three 10 methods themselves. 11 Let me first talk about the rate of 12 return method. 13 The rate of return, the simplified way 14 to look at that time is the return you get on 15 your investment. 16 So if you have a checking account or a 17 savings account and it's paying 3 percent, for 18 instance, the 3 percent is the rate of return 19 on your investment. 20 Now, Doctor Netz determined that one 21 reasonable way to calculate what prices would 22 have been had Microsoft not acted illegally is 23 to calculate what the prices would have caused 24 -- what prices would have caused Microsoft to 25 earn a rate of return similar to other 4033 1 successful software firms products. 2 So to calculate damages under this 3 method, Doctor Netz asked the question how much 4 less would Microsoft have had to charge on the 5 monopolized products to get a rate of return 6 similar to the rate of return of other software 7 companies' products. 8 So Doctor Netz and her staff 9 identified quite a number of companies, other 10 successful software companies, whose products 11 were appropriate to use as benchmarks during 12 the class period. 13 And so for each of these other 14 benchmark firms, Doctor Netz and her staff 15 obtained financial information, and they used 16 that financial information to calculate the 17 rates of return for these other successful 18 software companies. 19 Let me just show you the companies -- 20 list of companies that Doctor Netz used with 21 regard to rate of return method. And this list 22 includes 290 companies. 23 Again, I apologize. It's so much 24 information there that Darin cannot blow up the 25 things so you can actually read the names. 4034 1 But amongst the 290 companies, there's 2 names like VeriSign. You might see VeriSign 3 when you go to a secure website. 4 If you're putting in financial 5 information, it says something like protected 6 by VeriSign. 7 Symantec, that's a -- they develop 8 security software. 9 Oracle, Novell, Adobe, and many 10 others. 11 So Doctor Netz will explain how she 12 selected these particular firms. 13 And like I said, after she selected 14 the firms, then she analyzed their data to 15 determine the rate of return. 16 Then Doctor Netz had to get the rate 17 of return for the products at issue. So 18 Windows Word, Excel, and Office. 19 To do this, she took Microsoft's 20 internal accounting data and Microsoft's profit 21 and loss statements and other Microsoft 22 financial records, and she calculated then the 23 rate of return by -- for the particular 24 monopolized products. 25 And she then compared those results 4035 1 from Microsoft to the results that she got for 2 the benchmark firms. 3 So finally, if Microsoft's rate of 4 return on its monopolized products, you know, 5 was high, and the rate of return on the 6 benchmark firms was lower, then she had to 7 determine what adjustment in price would get 8 the rate of return on these monopolized 9 products down here, similar to the rate of 10 return for the benchmark firm's products. 11 So Doctor Netz did this analysis 12 individually for eight years. 13 The average rate of return during the 14 class period for the benchmark firms products 15 is 24.5 percent. 16 So that was the comparable rate of 17 return on successful software firms' products. 18 The average rate of return for 19 Microsoft operating systems was 304 percent. 20 So over 12 times the rate of return on the 21 successful firms. In other words, those 22 successful firms that competed in the 23 marketplace, but not, of course, with the 24 operating system product. 25 So that would mean that on $100 of 4036 1 investment by the benchmark firms, that they 2 then returned or got a rate of return of $24.50 3 for every $100 investment, but for the 4 operating systems for every $100 investment 5 that Microsoft had, it had a return of $304. 6 And the same principles applied to the 7 other products, the office suites, word 8 processing, and spreadsheet. 9 And the average rate of return for the 10 four products in the aggregate over the class 11 period was approximately 266 percent. 12 So for every $100 invested in these 13 four products in the aggregate, Microsoft 14 received back $266, whereas in the aggregate, 15 the benchmark firms for every $100 received 16 $24.50. 17 Now, let's take a look at the other 18 column there where it says Microsoft's 19 competitive products. 20 And that shows a rate of return of 5.2 21 percent. 22 And again, these are products that 23 Doctor Netz looked at. These are other 24 software products of Microsoft where Microsoft 25 faced competition. 4037 1 So it includes products, I believe, 2 like Microsoft Money, Microsoft Access, and 3 other Microsoft software products. 4 But again the difference is that on 5 these products, Microsoft was in a market where 6 there were other companies competing in 7 Microsoft, and they weren't in a marketplace 8 where there was chokeholds on the inputs or the 9 outputs. 10 11 So again with these figures, the 12 comparisons of the rate of returns, then Doctor 13 Netz went through and calculated them from the 14 Microsoft actual prices by year for the 15 products at issue, the operating system suites, 16 Word and Excel, and calculated by how much 17 those prices would have to be lowered to come 18 to approximately a 25 percent competitive rate 19 of return. 20 And she will go through with you, like 21 I said, in greater detail the steps that she 22 took and her actual results. 23 Now, the next method is the profit 24 margin method, and this compares the profit 25 margin earned by Microsoft on the products at 4038 1 issue. Again compared, then, to the profit 2 margin on the -- on other software firms 3 successful products. 4 So the profit margin is the percentage 5 of a product's price that is profit. 6 So, for example, if you've got a 20 7 percent profit margin and the revenue on a unit 8 is $100, that means that $20 of the $100 is 9 profit and $80 is a return of the costs to make 10 that product. 11 Now, again, we don't need to get into 12 the details of this profit margin method, but 13 again using a similar group of benchmark firms, 14 Doctor Netz examined how much lower Microsoft's 15 profits on the monopolized products would have 16 to have been to earn a profit margin similar to 17 the benchmark firms' profit margin. 18 Let me just show you this next 19 demonstrative. 20 So again on average, over the entire 21 class period, again May 18, 1994, through 22 June 30, 2006, you can see the red bars are the 23 numbers for each of the monopolized products at 24 issue. 25 The blue bar, the 12 percent, is the 4039 1 benchmark competitive products. In other 2 words, that's all of the benchmark firms in the 3 aggregate. 4 And then the yellow column is that 5 negative 12 percent, and that's the column that 6 represents the other Microsoft products where 7 it faced competition. 8 So again, on all of these columns it's 9 averages. 10 And again on Microsoft's competitive 11 products, I want to emphasize to you that there 12 were obviously products where there were 13 negative profit margins, but also because it's 14 an average, there were obviously successful 15 products that had positive profit margins. 16 Let's take a look at the summary 17 chart. 18 Again, the overall overcharge by using 19 the profit margin method was a little bit under 20 $326 million, just by a few thousand dollars it 21 looks like. 22 So let's turn to the third method, 23 which is the price premium method. 24 Now, the price premium method looks at 25 the difference between price of the Microsoft's 4040 1 products in the monopolized products -- in 2 monopolized markets -- excuse me -- like 3 Windows and Office to the price of comparable 4 products, and it then compares that difference 5 to the difference between the prices of 6 Microsoft's products in the benchmark markets 7 where Microsoft actually faced competition. 8 So, in other words, like Microsoft 9 Money, Microsoft Access, those are software 10 products of Microsoft where it faces 11 competition. 12 And it looked at the price premium 13 differentials between, for instance, like I 14 said, Microsoft Access and Money and other 15 products compared to similar products of 16 competitive firms. 17 This chart shows that Microsoft's 18 prices for its nonmonopolized products are 19 about 18 percent lower than the prices of its 20 competitors, but on the operating systems and 21 suite markets, Microsoft's prices are 22 considerably higher than any competitors. 23 Then as shown on the damages summary, 24 the price premium method, the damages that 25 Doctor Netz calculated are slightly more than 4041 1 $337 million. 2 As I mentioned, Doctor Netz used the 3 three methods as checks and balances against 4 each other, but she actually did more as well. 5 She used some additional collaboration 6 methods and also what are called sensitivity 7 analyses. And I won't get into those, but she 8 will be explaining those as well. 9 Now, when Doctor Netz compares the 10 rates of return and profit margins of other 11 software companies' products to the rates of 12 return of Microsoft products, she looked at 13 products from 266 benchmark firms for the 14 profit margin method and 290 benchmark firms 15 for the rate of return method. 16 Now, Microsoft's experts, like Doctor 17 Hubbard, may use a phrase like apples to 18 oranges, indicating that the two items being 19 compared are not similar. 20 But Doctor Netz, as she will explain 21 to you, did make proper comparisons. 22 Doctor Hubbard may tell you that 23 unless Doctor Netz' benchmark used products or 24 companies that are equal in every respect 25 except for the effects of the challenged 4042 1 conduct, the benchmarks are unreliable. 2 But let's think about an example. 3 You own a house. A chemical plant is 4 built next to the house and ends up spewing on 5 you pollution and it lowers the price of your 6 home. 7 To estimate what the price of the home 8 would have been without the polluting chemical 9 plant, an appraiser will look at similar houses 10 in areas without a chemical plant. 11 And the comparable houses would be 12 called benchmark houses. 13 Would the appraiser find an identical 14 house? Well, no. 15 Also wouldn't find a house in the 16 identical location. 17 So the appraiser will use benchmarks 18 for purposes of comparisons. And, of course, 19 there's going to be variations in the 20 benchmarks, but they can provide a reasonable 21 basis upon which comparisons can be made to 22 provide a market value of your home without the 23 chemical plant being present. 24 So the same type of scenario applies 25 here with what Doctor Netz has done with the 4043 1 benchmark analysis. 2 Microsoft's expert, Doctor Hubbard, 3 also thinks Doctor Netz should have only 4 compared Microsoft's product to the next most 5 successful firm among industry leaders, but 6 Doctor Netz will tell you that that's really 7 cherry-picking because what it assumes is that 8 Microsoft would always be the best. And there 9 is not evidence to suggest that Microsoft would 10 always be the best. 11 And as you've seen from the charts 12 with the rate of return and profit margin 13 method, when Microsoft faces competition with 14 its other products, you can see that the rate 15 of return and profit margins are actually 16 substantially lower than those in the 17 monopolized products. 18 Now, Doctor Netz will be here, as I 19 indicated. She will go through what her 20 analysis was in determining the overcharges. 21 And what you're going to hear from 22 Microsoft's experts, they'll be taking potshots 23 at Doctor Netz and say well, she didn't do 24 this, she didn't do that, but you'll also see 25 that they did not perform a complete damage 4044 1 analysis either. 2 So you've heard the term Monday 3 morning quarterback. It's easy to take 4 potshots at somebody if you don't do the work. 5 As you know, the Iowa class members 6 are referred to as -- 7 Your Honor, I'm changing subjects. 8 Did you want to take a break? Or I can keep 9 going. It's up to you. 10 THE COURT: Does the jury want a short 11 break? 12 Keep going. 13 MR. HAGSTROM: Okay. 14 As you know, the Iowa class members 15 are referred to as indirect purchasers. So, in 16 other words, they didn't buy these products 17 directly from Microsoft. 18 Because the profit margin method and 19 rate of return method calculate the overcharge 20 to the direct purchaser, you know, such as a 21 Dell, for example, you know, Dell computer, 22 Doctor Netz used two steps in her analysis. 23 In step one, she calculated the 24 overcharge to the direct purchasers. 25 And so that's -- you know, that's the 4045 1 overcharge, like I said, to, you know, a direct 2 purchasing OEM; or if it's in the finish good 3 channel, a volume reseller. 4 In other words, a company that buys -- 5 simply put, buys license in volume and then 6 resells to large purchasers; in other words, 7 large volume purchases. 8 Such as, you know, a large insurance 9 company, for instance, might purchase thousands 10 of copies of licenses at a time not 11 preinstalled on a computer. So that would be 12 one type of volume license sales. 13 So the first step, as I indicated, is 14 to calculate the overcharge to the direct 15 purchasers. 16 And then the second step is to 17 calculate how much of the overcharge was passed 18 through to the indirect purchasers, the Iowa 19 class members. 20 So, in other words, the question is, 21 how much of the cost -- the overcharge cost to 22 direct purchasers is ultimately paid by the 23 Iowa class members? 24 So we've talked about the overcharge, 25 the three methods to determine the overcharge. 4046 1 So pass-through is this step two used 2 in figuring out how much of that overcharge is 3 passed through. 4 The pass-through, I should mention, 5 applies just to the profit margin and the rate 6 of return methods. 7 The price premium method, the third 8 method, already correctly calculates damages to 9 the consumers at the retail level. 10 It uses the finished goods channel to 11 calculate those damages. It does not use the 12 OEM channel in that price premium calculation. 13 So this pass-through analysis that 14 we're going to discuss now applies to the OEM 15 -- excuse me -- the profit margin and rate of 16 return method. 17 Now, common sense tells you that 18 resellers in a highly competitive distribution 19 channel pass on their costs, but not -- Doctor 20 Netz simply didn't rely on common sense. She 21 didn't simply assume that intermediaries passed 22 on the overcharges to Iowa class members. 23 She and her staff analyzed data to see 24 whether Microsoft's overcharges were paid by 25 the class members. And what did she find? She 4047 1 found that direct purchasers indeed passed 2 through price adjustments to Iowa class 3 members. 4 And she will tell you that what she 5 found was that there's a pass-through rate of 6 at least 100 percent. 7 In other words, if there was a $50 8 overcharge to a direct purchaser, that $50 9 overcharge would be passed on to the class 10 members, at least that amount. 11 And Doctor Netz looked at five 12 different sources of evidence for this 13 conclusion. 14 First, economic theory predicts that 15 when distribution markets are highly 16 competitive, a cost increase to distributors 17 will cause a price increase of at least the 18 same amount to consumers. 19 Let me just mention that I use the 20 term distribution markets, and what I mean by 21 that are the two distribution channels, the OEM 22 channel that we've talked about and the 23 finished goods channel. 24 And in both channels, there is lots of 25 competition. 4048 1 There are, you know, many computer 2 manufacturers competing for sales in the 3 finished goods channel. There's many volume 4 resellers. There's many retailers. 5 And so because of the amount of 6 competition in those two channels, they are 7 very competitive, as the experts will explain 8 to you, and because of the competition, margins 9 tend to be fairly tight, and because margins 10 are fairly tight, if there's cost adjustments 11 on a market-wide basis, they have to pass those 12 cost adjustments through, whether the cost 13 adjustments are up or down. 14 Now, the second source of information 15 on pass-through was internal Microsoft 16 documents. 17 And Doctor Netz reviewed various 18 pricing studies by Microsoft internally. And 19 these pricing studies were focused on the 20 finished goods channel. 21 And as I mentioned, finished goods 22 channel is where you buy, you know, things like 23 this shrink-wrapped software, and it also 24 includes volume licenses. 25 And then the OEM channel again is 4049 1 where the software is preinstalled on a 2 computer. 3 Now, a number of these internal 4 documents from Microsoft, they were looking at 5 what would be a target street price in the 6 finished goods channel for prepackaged 7 software. 8 And what they did, then, is they took 9 -- like for the Windows 98 upgrade example, if 10 they believed that they wanted to have an $89 11 street price, they had to determine what are 12 the intermediaries going to do in between. 13 Because, obviously, if Microsoft 14 charged $89 to the direct purchaser, the 15 intermediaries are going to be marking that $89 16 up. So, in fact, the street price, then, would 17 be higher than the $89. 18 So by doing that, these Microsoft 19 internal documents analyze what the step-ups in 20 that pricing through to the end consumer are. 21 And based upon the analysis of the 22 street pricing, it was clear that Microsoft 23 internally recognized that these prices are 24 going to be increasing through the distribution 25 channel. 4050 1 Now, third, Doctor Netz reviewed a 2 study prepared by one of Microsoft's own 3 consultants. 4 Darin, can we go back to the list of 5 five? 6 So the third source was Microsoft's 7 paid study, and this was done by some 8 consultants by the Viewpoint Group, called the 9 Viewpoint Group. 10 And again the purpose of this study 11 was similar to the internal studies that I just 12 mentioned to you, to determine what would be 13 the street prices, you know, through the 14 distribution channel. 15 And the Viewpoint Group, as a result 16 of their studies, looked at, you know, how 17 these prices are increasing through the 18 distribution channels. 19 And there are over 2,000 calculations 20 included within those studies, and all of them 21 showed these increasing prices through the 22 distribution channel. 23 Now, fourth, Doctor Netz reviewed 24 documents from other companies. For example, 25 she looked at a study by a company called IDC. 4051 1 And IDC is, you know, an industry-type company 2 that analyzes pricing data. 3 In using the IDC study, Doctor Netz 4 concluded that the pass-through rate was 5 between 118 and 125 percent. 6 So that means that for every $100, for 7 instance, of overcharge, ultimately when it 8 reaches the consumer with that pass-through 9 rate, it's between -- the pricing is between 10 118 and $125. 11 And she also looked at documents from 12 various OEMs. 13 And then fifth, Doctor Netz and her 14 staff conducted a number of statistical 15 studies. 16 And what she did is she gathered data 17 from various companies and performed what are 18 called regression analyses. I don't know if 19 you're familiar with that term, but it's a 20 statistical term. And it analyzes various 21 pricing points. And they do these statistical 22 studies to determine what the trend line is as 23 a result of gathering this pricing and cost 24 indicate data. 25 And, in fact, Doctor Netz did 41 4052 1 pass-through studies, and they are summarized 2 in this demonstrative here. 3 Darin, could you try to blow up like 4 the left side there? Thank you. 5 Now on the left side is the OEM 6 channel. So Doctor Netz went through and 7 gathered data from various companies, and these 8 companies, some of them are located within 9 Iowa. You can see wherever there's a little 10 Iowa in the parenthetical, that indicates that 11 company is located within Iowa. So she was 12 analyzing Iowa-based data. 13 And you'll see that the pass-through 14 rate determined with regard to each of these 15 companies all exceeded 100 percent. 16 And the average of all of these OEM 17 pass-through studies as indicated was 114.4 18 percent. 19 Now, then, Doctor Netz looked at the 20 finished goods channel. 21 Darin, can you blow that side up? 22 Thank you. 23 So the same sort of thing, data was 24 gathered from these various companies. 25 And you can see there's companies that 4053 1 are located in different states. There's a 2 number of them located within Iowa. And you'll 3 notice that in this chart, the finished goods 4 channel, the top ones are retail segment, and 5 then the bottom is the corporate segment. 6 That's the volume side of the finished goods 7 channel that I mentioned. 8 And, again, there's Iowa companies 9 here. There's companies from other states as 10 well. 11 And the overall weighted average of 12 all of these pass-through studies was 107 13 percent. 14 So when you look at all five sources 15 of information that Doctor Netz looked at, you 16 know, economic theory, internal studies, 17 external studies, statistical analyses, 18 evidence from other corporations like IDC, in 19 all of these studies the pass-through rate 20 determined was in excess of 100 percent. 21 Now, additionally, Doctor Netz and her 22 staff also did like she did with the overcharge 23 numbers; she did corroboration studies. And 24 one of the corroboration studies was with 25 regard to computer hardware. 4054 1 So these studies that you just saw in 2 the pass-through was regard -- with regard to 3 computer software pricing. 4 So she wanted to determine as sort of 5 a cross-check or corroboration whether or not 6 you would find pass-through in the similar 7 hardware markets similar to what she was 8 finding in the software markets. 9 And so what she did is she used 10 advertisements in PC Magazine, data from 11 Gateway, data from Dell, Dell's website, 12 Gateway's website, and a company called General 13 Nano System. 14 And as you can see here, the 15 pass-through rates under all of these studies 16 were in excess of 100 percent, and the overall 17 average was 121 percent, well above, you know, 18 100 percent pass-through rate. 19 So this issue of pass-through is 20 probably the easiest part of the case, easiest 21 part to comprehend. 22 Usually resellers will not only charge 23 consumers their costs, but they'll also add in 24 a profit margin so that their businesses 25 survive they've got overhead and so forth that 4055 1 they need to pay for. 2 So their prices are related to their 3 costs, and that's what Doctor Netz will explain 4 to you. 5 There are not generally too many 6 resellers who are willing on a regular basis to 7 sell products that they have purchased at 8 prices less than they have paid. 9 If that was a regular course of doing 10 business, logic dictates that they would not be 11 in business very long. 12 That's not to say that occasionally 13 retailers don't make special marketing 14 decisions, but because they make a special 15 marketing decision doesn't mean that prices are 16 not related to costs. 17 So we're at December 11th, I think is 18 today's date, and, of course, a couple weeks 19 ago, right after Thanksgiving, it's the -- you 20 know, the big Friday after Thanksgiving sale 21 and you -- paper on Thanksgiving morning is 22 about two inches thick because it's absolutely 23 loaded with all of these bargains because 24 that's a huge shopping day for stores, and they 25 want to make a lot of profits that day because 4056 1 -- and they want lots and lots and lots of 2 people to come into the store on that 3 particular day, or at least over that weekend. 4 So the -- these retailers might 5 advertise some really super, super deals on 6 something, Best Buy might have HDTV, for 7 instance, some flat panel HDTV at, you know -- 8 I don't know, 50 percent, say, of its normal 9 price. 10 Well, that's a marketing technique, as 11 we know, to get people into the store because 12 Best Buy knows that it will get people into the 13 store, they'll be buying other things, they'll 14 be buying -- if they buy the TV, of course, 15 there's always limited quantities, as we 16 usually find out. 17 But it gets people into the store. 18 They'll be buying additional items, warranties, 19 cables for that TV; probably buy some other 20 odds and ends, as well. 21 But even if that price is 50 percent 22 lower than its normal retail price, and, say, 23 even that price is slightly below the cost, 24 number one, it isn't giving the HDTV away. So 25 at least part of that cost is being passed 4057 1 through to the purchaser. 2 But the point I want you to keep in 3 mind is that this is a marketing decision by 4 Best Buy. 5 So if it turned out that there was -- 6 that this TV, and say there's only one TV -- 7 but we know there's many brands of TVs. But 8 say this was a monopolized product, and say 9 that the cost of it included an overcharge. 10 The point is, and you'll hear this 11 from the experts, that the overcharge is still 12 being passed through, and in a competitive 13 world, say in the actual world, the price is up 14 here, the marketing price, the Friday-after- 15 Thanksgiving price, and say that price was 16 $1,000. But let's also say that there was $100 17 overcharge. 18 What's going to happen in the 19 competitive world is that price drops to 900, 20 but the retailer still engages in the same 21 marketing practice. 22 So, in other words, the marketing 23 strategy is going to apply in the real world or 24 the competitive world. It's just at a price 25 level that is less. 4058 1 And I hope that makes sense. And the 2 experts will talk to you more about that. 3 Now, Microsoft has an expert by the 4 name of Doctor Paul, who's an economist 5 professor at University of California at Davis. 6 And, generally speaking, she says 7 pass-through is impossible to calculate. 8 And Professor Paul will tell you that, 9 you know, it's so difficult to calculate 10 pass-through that -- and it's so complicated 11 that because you can't figure out precisely how 12 much of an overcharge is passed through to Iowa 13 class members. It's impossible. Therefore, 14 they get nothing. 15 You know, so it's that no-harm, 16 no-foul theme that I've mentioned previously. 17 But as you just heard, Doctor Netz is 18 going to use five different sources to conclude 19 and demonstrate that pass-through is at least 20 100 percent. 21 Now, while Microsoft is able to charge 22 prices substantially above the competitive 23 level because of its anticompetitive conduct, 24 would it surprise you to know that Microsoft 25 internally has determined that it's in its best 4059 1 interest in the OEM channel not to show how 2 much prices of its operating systems actually 3 are? 4 Let's take a look at this exhibit 5 where Microsoft executives are discussing some 6 pricing goals. It's Plaintiffs' Exhibit 431. 7 It says, we can achieve these goals by 8 making it harder for the end user customer to 9 calculate the effective price of the software 10 offered. 11 Microsoft didn't want people to know 12 how much they were paying for the Microsoft 13 preinstalled software. 14 And you'll hear testimony that 15 Microsoft keeps it's -- this price and, of 16 course, the monopoly overcharge that's included 17 within that price well-hidden, like a stealth 18 overcharge is like a secret. 19 If there was nothing wrong with its 20 pricing, why isn't it -- why isn't it 21 disclosed? 22 Microsoft overcharged its direct 23 purchasers, as Doctor Netz will tell you, and 24 that those overcharges were passed through to 25 class members. 4060 1 That's the overview of the overcharge 2 damages. 3 Remember last Friday we talked about 4 that there are two types of damages, the 5 overcharge damages and then the damages 6 resulting from increased security 7 vulnerabilities. 8 In 2004, Microsoft executive James 9 Allchin recognized that Microsoft had lost 10 sight of the importance of security and 11 performance in a memo to Bill Gates and Steve 12 Ballmer. 13 He wrote, I think our team's lost 14 sight of what bug-free means, what resilience 15 means, what full service means, what security 16 means, what performance means. I see lots of 17 random features and some great vision, but that 18 doesn't translate into great products. 19 So one of the things he's talking 20 about is security issues with its products. 21 You will hear from our experts and 22 you'll see evidence that one of the reasons 23 Microsoft lost sight of security was because it 24 was obsessed with protecting its Windows 25 monopoly from the threat posed by Netscape 4061 1 Navigator, and this concern operated to the 2 detriment of consumers. 3 As I've mentioned, the antitrust laws 4 are designed to compensate class members and 5 consumers for any and all damages they suffer 6 when there is a violation of the law. 7 Instruction 15 says that the Iowa 8 Competition Law requires that Plaintiffs be 9 fairly compensated for all of their actual 10 damages. 11 And in that same instruction, it notes 12 that the Plaintiffs and class members are 13 seeking two types of damages, the overcharge 14 damages and the additional security 15 vulnerabilities damages. 16 So under the antitrust laws, 17 Plaintiffs and class members are entitled to 18 recover, if they make the proper showing, the 19 additional costs resulting from a company's 20 illegal conduct. 21 You'll hear during the course of this 22 trial that Windows users have had to deal with 23 additional security vulnerabilities on their 24 computers because of Microsoft's illegal 25 activity regarding its web browser Internet 4062 1 Explorer. 2 And as you heard from the government 3 case, Microsoft was slow to develop its web 4 browser Internet Explorer. 5 Netscape was the first company to 6 commercialize a web browser that would allow 7 computers used to easily and quickly access the 8 Internet and its, you know, sites on the 9 Internet. 10 In finding of fact 143, Netscape's 11 name was nearly synonymous with the web in the 12 public's consciousness. 13 It was extremely popular. And Bill 14 Gates recognized after the fact that the 15 Internet and web browsing was going to be big. 16 He also recognized that Netscape's 17 middleware could act as its own platform on top 18 of which applications could run. He was 19 worried that Netscape would commoditize the 20 Microsoft operating system and the gold mine 21 would be gone. 22 You remember some documents that 23 Ms. Conlin showed you about the gold mine. 24 Let's take a look at Plaintiffs' 25 Exhibit 5717. 4063 1 Mr. Gates wrote in 1995, a new 2 competitor born on the Internet is Netscape. 3 And it goes on to talk about one scary 4 possibility being discussed by Internet fans is 5 whether they should get together and create 6 something far less than a PC, which is powerful 7 enough for web browsing. 8 He goes on to talk about they are 9 pursuing a multiplatform strategy where they 10 move the key API into the client to commoditize 11 the underlying operating system. 12 Now, Mr. Gates was worried that 13 Netscape would commoditize the operating 14 system's monopoly. 15 As Ms. Conlin explained, Netscape is 16 middleware that sits on top. And she showed 17 you those sockets and plug-ins. 18 Well, Netscape, the middleware, what 19 Mr. Gates was concerned about was whether 20 additional applications would be able to plug 21 in to Netscape as opposed to having to plug in 22 to the operating systems. 23 And Mr. Gates, of course, and 24 Microsoft controlled those sockets. These are 25 the undisclosed APIs. So if Netscape made it 4064 1 so other applications weren't dependent upon 2 the APIs of the operating system, but basically 3 provided a translator, you know, a translator 4 so that others could plug into Netscape, the 5 concern of Mr. Gates was that that would 6 commoditize the operating system itself. 7 I'm sure you understand what a 8 commodity is. You know, there's corn, wheat, 9 gold, silver. Commodities are something that 10 are around in abundance. 11 And there's a marketplace, a 12 commodities market, and there's a standard 13 price for them. There's really no 14 differentiation. 15 And that's what Mr. Gates was 16 concerned about with regard to Netscape. 17 So to protect the gold mine, to 18 protect the huge value its monopoly was 19 bringing, Microsoft did a number of things 20 which are described in the findings of fact and 21 conclusions of law. 22 So just as Microsoft had cloned CP/M 23 operating system in the early days, it decided 24 to clone Netscape's Navigator. 25 Let's take a look at -- in October 4065 1 1995, Ben Slivka, writes in a memo entitled no 2 half measures, how we should meet the Netscape 3 challenge. 4 And he wrote clone their -- that's 5 Netscape's -- client technology early and 6 often, full embrace strategy. 7 So what this is saying, and will be 8 explained to you by the evidence, is that 9 Microsoft didn't recognize the opportunity of 10 the Internet. 11 Gates was worried about commoditizing 12 the operating system, which means the gold mine 13 disappears, or is at least adversely affected. 14 So what do they do? They have to 15 clone Netscape's browser. They need to look at 16 the functionality offered by the Netscape 17 browser, duplicate it, and try and catch up. 18 But as you've seen from the findings 19 of fact, Microsoft decided it had to do more 20 than just clone because Microsoft had a 21 substantial share of the browsers. 22 People thought it was very helpful. 23 People were excited about the Netscape browser. 24 And as you saw, it was -- the name was pretty 25 much synonymous with the web. 4066 1 So one of the things that Microsoft 2 decided to do was to bolt the cloned browser, 3 which was code named O'Hare, and later became 4 known as Internet Explorer, to bolt that 5 browser to the operating system. 6 So as you saw, and the evidence will 7 show you this further, Microsoft did this 8 bolting so that anyone who bought Windows from 9 that point in time on had to take Internet 10 Explorer. 11 That's whether they wanted it or not. 12 And, of course, the evidence will show 13 that Microsoft knew that this bolting would 14 drastically discourage the use of Netscape's 15 Navigator. 16 And as Judge Rosenberg instructed you, 17 Microsoft's commingling of code related to 18 browsing and other code in the same files and 19 Windows was anticompetitive conduct. 20 The end result of Microsoft's strategy 21 to tie users to Windows with the bolting and 22 commingling of code was that it created large 23 amount of software code between the combination 24 of Internet Explorer and Windows and exposed 25 internal operating systems code. 4067 1 This bolting, that commingling, as 2 you'll hear from the experts, has created 3 security vulnerabilities. 4 And here's what the Federal Court had 5 to say about some of the effects of this 6 bolting. 7 To the extent -- excuse me. 8 To the extent that browsing-specific 9 routines have been commingled with operating 10 system routines to a greater degree than is 11 necessary to provide any consumer benefit, 12 Microsoft has unjustifiably jeopardized the 13 stability and security of the operating system. 14 Specifically, it has increased the 15 likelihood that a browser crash will cause the 16 entire system to crash and made it easier for 17 malicious viruses that penetrate the system via 18 Internet Explorer to infect nonbrowsing parts 19 of the system. 20 I think it might be helpful to show 21 you a diagram of some of the features of 22 Internet Explorer to illustrate the additional 23 code, which creates the additional security 24 problems caused by Internet Explorer. 25 This diagram is prepared by one of our 4068 1 experts, and it lists a number of the separate 2 features or functions within Internet Explorer. 3 And in a normal web browser that was 4 sold without intent to harm competitors through 5 illegal activity, you would have some of the 6 features that are listed there in the inner 7 circle. 8 The level zero is the innermost 9 circle. The first ring around that is called 10 level one, and second ring is level two, and 11 the outer ring is level three. 12 And the experts will explain about the 13 functionality that is listed within this 14 diagram and what's actually necessary for 15 browsing and what is not. 16 So what is the significance of the 17 extra software code? 18 You will hear from Plaintiffs' experts 19 on this issue. One is Mr. Alepin and one is 20 Mr. Smith. 21 Mr. Alepin has been a computer 22 consultant for around 30 years. He was a 23 principal technical and industry adviser to the 24 antitrust division of the U.S. Department of 25 Justice. 4069 1 And Mr. Alepin will discuss 2 Microsoft's intentional bolting and commingling 3 of code with regard to the Internet Explorer, 4 and ultimately how this -- he and the other 5 experts will discuss how this has harmed 6 Netscape Navigator and harmed class members. 7 So the more code you have in a web 8 browser like this, the more susceptible you are 9 to attacks, viruses, worms, et cetera. 10 You'll also hear about terms like 11 malware and spyware, and these refer to use by 12 hackers of software that take advantage of 13 vulnerabilities within the code. 14 Now, Windows and Internet Explorer had 15 more software code because of Microsoft's 16 anticompetitive goal to foreclose Netscape. 17 The more software code in the program, 18 the greater the attack surface. So the larger 19 the attack surface, the greater it is to hit 20 it. 21 Smaller attack surface, it's more 22 difficult to hit, it's more difficult to get a 23 vector through into the operating system and 24 the -- you know, the experts will explain that 25 in far greater detail than I can. 4070 1 MR. HAGSTROM: Your Honor, is this -- 2 I just noticed we're -- 3 THE COURT: Good time to break. 4 MR. HAGSTROM: I was just on a roll 5 here, so thank you. 6 THE COURT: Ladies and Gentlemen of 7 the jury, we will take your lunch break from 8 now until noon. 9 Remember the admonition previously 10 given to you. 11 You may leave your notebooks here. 12 They'll be safe. See you at noon. 13 (A recess was taken from 10:59 a.m. 14 to 12 p.m.) 15 (The following record was made out 16 of the presence of the jury.) 17 THE COURT: The Court said it was 18 going to rule on some of the motions this 19 morning. 20 All I can rule on at this time is two 21 of the motions, since Plaintiffs are going to 22 offer Mr. Reece tomorrow, I assume, in regard 23 to the first motion on sanctions. 24 The motion in regard to allowing the 25 Defendant to make reference to written witness 4071 1 agreements -- written witness agreements as 2 spoliation is denied. 3 The witness agreements are not 4 relevant evidence. They're not relevant to the 5 proof of an issue in the case, and they may not 6 state to the jury that there is an issue of 7 spoliation regarding those agreements. 8 In regard to the finding or the 9 complaint regarding the prior government 10 action, I will tell the jury when they return 11 that they're instructed that the government 12 action -- that in the government action there 13 was no finding of fact as to whether Microsoft 14 imposed monopoly prices. 15 Anything else? 16 MS. CONLIN: The one other motion that 17 we have, Your Honor, pending is the reseller 18 motion. 19 It's the Plaintiffs' motion to 20 preclude Microsoft from offering reseller 21 testimony at the part of its opening, and I 22 think probably safe to -- I think Mr. Hagstrom 23 has another hour or so, so I hate to keep the 24 jury waiting. So perhaps we can take that up 25 immediately after. 4072 1 THE COURT: I thought we were going to 2 take that up this afternoon or tomorrow or 3 something. 4 MS. CONLIN: This afternoon, I think, 5 or whatever. 6 THE COURT: Isn't that right? 7 MS. CONLIN: At some later time. 8 MR. HOLLEY: I think to give Mr. Tuggy 9 time, we would prefer to do it at 8 o'clock 10 tomorrow morning, Your Honor. 11 We just heard about it at 11 o'clock 12 last night. So with the Court's indulgence, we 13 would prefer 8 o'clock tomorrow morning. 14 MS. CONLIN: No problem. 15 THE COURT: Very well. 16 Anything else before I bring the jury 17 in? 18 Carrie is going to inquire of 19 [Juror Name] what pieces of paper he did take. I 20 don't know what he took. She'll let us know. 21 THE CLERK: Ask [Juror Name] what pieces 22 of paper he took and come back and report to 23 me. 24 THE CLERK: It was a rough draft to a 25 thank you note. He's a little upset that I 4073 1 asked. 2 THE COURT: Okay. 3 (The following record was made in the 4 presence of the jury.) 5 THE COURT: Before Mr. Hagstrom 6 begins, I need to give you a further 7 instruction that you are instructed that in the 8 government action, there was no finding of fact 9 as to whether Microsoft imposed monopoly 10 prices. 11 You may proceed. 12 MR. HAGSTROM: Thank you, Your Honor. 13 Good afternoon. 14 As you recall, we were talking about 15 the security vulnerability issue before the 16 lunch break. 17 And as I mentioned, the experts, when 18 they come here to testify, will explain in 19 detail the software code that is commingled and 20 part of Internet Explorer and the relationship 21 between that and Windows. 22 And they will also explain that, as I 23 mentioned earlier, this -- as depicted by this 24 diagram, that the additional code created a 25 larger attack surface allowing for increased 4074 1 security vulnerabilities. 2 Now, you'll hear from our security 3 expert, Richard Smith. He's been a 4 professional in the computer industry for more 5 than 30 years and has been dealing with 6 security issues for many, many years. He's a 7 security consultant and specializes in 8 security-related issues. 9 Mr. Smith has studied the identified 10 security vulnerabilities that have been 11 associated with Internet Explorer and looked at 12 patches that have been issued up through May of 13 2006. 14 And during that time period from when 15 Microsoft first bolted Internet Explorer to the 16 operating systems, there have been 113 patches 17 issued during that time period, like I said, up 18 through May of 2006. 19 Now, Windows users would have had to 20 deal with these patches, and as our experts 21 will explain, they would not have had to deal 22 with most, if not all, of these security 23 patches absent the anticompetitive conduct. 24 To summarize this point, Plaintiffs' 25 experts will testify about the amount of 4075 1 software code in Internet Explorer; that the 2 attack surface would have been smaller but for 3 the anticompetitive conduct, and obviously had 4 not -- Microsoft not acted illegally the attack 5 surface would have been much smaller. 6 Now, Mr. Smith will talk to you about 7 the security vulnerabilities with these 8 additional features and code. 9 Now, the next issue then, is the 10 damages associated with the increased security 11 vulnerabilities. 12 I introduced to you on Friday Doctor 13 Gautam Gowrisankar, and he will come to you to 14 discuss the damages aspect resulting from the 15 increased securities vulnerabilities. 16 He received his Ph.D. from Yale 17 University, and he's currently an assistant 18 professor of economics and senior fellow at 19 Washington University in St. Louis. 20 He's been a visiting professor at 21 various universities. 22 Now, he will come here and explain how 23 he's applied economic principles to calculate 24 the damages associated with these additional 25 security vulnerabilities. 4076 1 And he starts with the fact that 2 Microsoft has developed patches for these 3 vulnerabilities using its technical knowledge 4 of the problems that the vulnerabilities have 5 created. 6 And so Microsoft designed these 7 patches for the specific purpose of addressing 8 the vulnerabilities. 9 And remember, the vulnerabilities 10 exist in the first place because of Microsoft's 11 anticompetitive conduct directed towards 12 Netscape. 13 So Doctor Gowrisakar will explain the 14 economic principles and tell us that a 15 reasonable way to calculate damages for these 16 security vulnerabilities is to look at the 17 amount of time that it takes for class members 18 to address them through downloading, reviewing 19 the patches, and installing the patches. 20 So installing these patches, reviewing 21 the materials takes time that a user could be 22 doing something else, and he puts a dollar 23 figure on that time. 24 Now, it's likely that Microsoft is 25 going to throw up its hands and say it's too 4077 1 difficult. What if people didn't download the 2 patches? And they'll ask a number of other 3 questions. 4 However, Doctor Gowrisakar is going to 5 explain that the same economic principles that 6 tell us that the estimated damages from being 7 exposed to the security vulnerabilities and 8 facing the viruses are going to be at least as 9 expensive; in other words, more expensive than 10 the time it's going to take to actually address 11 the -- and install the patches. 12 Now, Mr. Smith and his colleagues 13 determined the minimum amount of time that it 14 would take to deal with each and every one of 15 these 113 patches. 16 In more recent years, you may know 17 that Microsoft has provided a mechanism by 18 which downloading and installing patches occurs 19 automatically. 20 Now, with regard to the automatic 21 patches, the automatic installation, Mr. Smith 22 did not count any time for that automatic 23 downloading. 24 So this diagram showed, generally 25 speaking, how Doctor Gowrisakar came up with a 4078 1 total time -- excuse me -- Mr. Smith came up 2 with a total time per patch. 3 So it's the total download and install 4 time and overhead time. 5 So obviously if somebody has received 6 a patch, they've got to download it. There's 7 generally information bulletins that need to be 8 read and understood, and the process then of 9 actually installing the patch. 10 You want to, of course, make sure that 11 the patch is not causing additional problems 12 for your computer. 13 So after taking into account the fact 14 of downloading, reading, understanding, 15 Mr. Smith concluded that at a minimum, there's 16 three minutes per patch to do this. 17 Now, we believe, and I think he 18 believes, that three minutes is very, very 19 conservative. And after all, he's a computer 20 security expert. He's written software code. 21 He's been dealing with these types of issues 22 for a number of years. 23 So for the ordinary user, we might 24 expect time to greatly exceed this very minimal 25 three minutes. 4079 1 For example, let's just take a look at 2 one bulletin. And there are bulletins for 3 every patch. Some might just be a couple of 4 pages and some are multiple pages. 5 Now, this particular patch, which is 6 -- excuse me -- bulletin is about 20 pages 7 long, and this is Plaintiffs' Exhibit 9309. 8 So three minutes is obviously very 9 conservative to page through this 20-page 10 bulletin, understand it, and then take action 11 in response to this particular bulletin. 12 Now, after Mr. Smith determined these 13 amounts of time for each of the 113 patches, he 14 provided those to Doctor Gowrisakar. Then he 15 used a formula to calculate damages. 16 The first step that he took, he took 17 with each patch -- he took the time that 18 Mr. Smith provided to him. He determined the 19 average wage for Iowans and multiplied the two, 20 and then came up with a damage per license per 21 patch. 22 So it's the time involved for each 23 patch, the average wage for Iowans, multiply 24 the two, and you get damages per license per 25 patch. 4080 1 Now, of course, all Iowans didn't earn 2 the same amount of money, but Doctor Gowrisakar 3 used the average wage number to determine a 4 reasonable number to be applied for each of the 5 patches for each Windows user. 6 And of course, you know some users 7 might be students. They might be retired. 8 They're not in the workplace. But they were 9 all subject to these security vulnerabilities. 10 And Doctor Gowrisakar says that even 11 though they are not losing employment time, 12 that time still has value to each and every 13 user and has an economic value. 14 Now, next he took the total number of 15 Windows licenses purchased by class members in 16 Iowa for each Windows product and multiplied 17 the damage by each patch by the total number of 18 Iowans whose computers would be affected by the 19 patch. 20 So here's that formula. 21 So it's the time for each patch again 22 times the average wage times the total number 23 of licenses to which that patch applied, and 24 that gives the total damage per patch. 25 So Doctor Gowrisakar will explain how 4081 1 he's come up with this total number per patch, 2 and that way you will be able to decide based 3 upon the evidence which patches have caused 4 damage to class members as a result of the 5 anticompetitive conduct. 6 It also allows you to determine, if 7 the three minutes is too conservative, with the 8 formula you would be able to adjust the time 9 frame from three minutes up or down in 10 calculating damages. 11 Now, Microsoft will likely tell you 12 that, well, not everyone has Internet access so 13 they weren't damaged by security 14 vulnerabilities. But most users today do have 15 Internet access, and if they don't have it 16 right now, they could connect in the future. 17 Also, people that don't have Internet 18 access share files, and so forth, regardless of 19 whether they're on the Internet or not. 20 In addition, Microsoft has instructed 21 Windows users, regardless of whether they're 22 connected to the Internet, to install the 23 security patches because simply put, these 24 users could be connected to the Internet or 25 share files at any time. 4082 1 Now, Microsoft will also suggest that 2 there's no anticompetitive conduct that led to 3 these security vulnerabilities. 4 Keep in mind Judge Rosenberg gave you 5 some findings of fact, particularly findings of 6 fact 173 and 174, that specifically talked 7 about security issues. 8 In addition, Microsoft may suggest 9 that while a few minutes per patch, if it's 10 only three minutes per patch, you know, that 11 that amount of time doesn't matter. It's 12 really meaningless, but -- and that class 13 members shouldn't be compensated for that 14 minimal amount of time. 15 But keep in mind that the number of 16 licenses -- operating systems licenses are in 17 the millions during the class period. And if 18 you just took even one million operating 19 systems licenses times three minutes, that's 20 three million minutes, and that's 50,000 hours. 21 And so obviously Microsoft wouldn't 22 like to lose 50,000 hours of Microsoft employee 23 time. 24 And in a class action, the idea is 25 aggregating smaller claims together because 4083 1 class members, you know, aggregate their claims 2 together in that fashion. 3 So what you'll have to decide with 4 regard to these security damage claims is how 5 much time is at issue, whether it should be 6 compensated, and at what amount, and, of 7 course, whether or not the damages are a result 8 of anticompetitive conduct. 9 Now, you've heard from the government 10 case that Microsoft broke the law. 11 You've also heard from Ms. Conlin 12 about additional anticompetitive acts that we 13 believe the evidence will show. 14 We also believe that the evidence will 15 show that Microsoft's anticompetitive conduct 16 resulted in harm to the competitive process, 17 harm to consumers, and that the class members 18 should be compensated as a result. 19 And, of course, if you do something 20 wrong and you own up to it, you should be held 21 to be accountable for that wrongdoing. 22 Now, Microsoft is likely to offer a 23 number of excuses as to why it shouldn't be 24 held accountable. 25 As I've told you, we've -- the experts 4084 1 have come up with an average overcharge damage 2 number of $329 million, and there will be proof 3 of the damages resulting from the increased 4 security vulnerabilities in the tens of 5 millions of dollars. 6 So I want to discuss with you a few of 7 the excuses that you might hear from Microsoft. 8 Microsoft is likely to suggest that 9 monopoly is the natural state of the world in 10 relevant software markets, and one of the 11 reasons it might say this is due to what's 12 called network effects. 13 Now, network effects describe the 14 benefits that end users get from more customers 15 participating in a particular network. 16 So if you think of a telephone 17 network, if there's only one customer, who is 18 that customer going to call? I mean, you know, 19 if they've got their phone, but nobody else has 20 a phone, it doesn't -- there's not a lot of 21 value associated with that. 22 But obviously as more and more people 23 become connected, individuals can network, they 24 can call more and more people, and, of course, 25 different telephone companies around the world, 4085 1 they interconnect so that, you know, you can 2 call people from here in Iowa, you can call New 3 Zealand, China, virtually anywhere in the world 4 as a result of these connections. 5 Now, software markets can exhibit 6 these network effects as well. 7 For example, you might be sharing word 8 processing files or spreadsheets, things of 9 that nature, but Microsoft takes the position 10 that network effects come about from using 11 Microsoft's standards, and as a result, 12 Microsoft's monopoly in each of these software 13 markets, the operating system, word processing 14 spreadsheet, and office suite is the natural 15 result of these network effects. 16 Now, think about that for a moment. 17 Let's take another example. 18 If you have E-mail and, you know, 19 different people may have different Internet 20 access providers to get onto the Internet, and 21 so forth, and to E-mail different people. 22 Somebody might be on AOL, somebody 23 might be on Sprint, Roadrunner, EarthLink, 24 Comcast. The list goes on. 25 But what if there was just one 4086 1 standard, and AOL had it so that nobody else 2 could access the Internet unless it was just 3 AOL, and that's the only route you can take to 4 get and share E-mails. 5 Well, if AOL had taken steps to 6 preclude anybody else, now you don't have 7 competition. You don't have the ability of one 8 company to say, well, I see AOL is charging 9 21.95 per month, maybe we don't have all the 10 bells and whistles that AOL does, but we'll 11 offer it at 9.95 a month. So there's price 12 competition going on. 13 But the fact that there's network 14 effects and there's compatibility allows people 15 to make use of the Internet, and it isn't 16 restricted by some confined standard. 17 Now, Plaintiffs' experts will come in 18 here to explain network effects, and they will 19 tell you that network effects do not 20 necessarily lead to a monopoly. 21 So rather the more appropriate issue 22 is whether or not a company has taken steps 23 through exclusionary means to propose standards 24 or to restrict access. 25 And so our experts will explain that 4087 1 the more compatibility, the more network 2 effects, and the more network effects, the more 3 beneficial to consumers. 4 So the ultimate conclusion of our 5 experts is that network effects do not, 6 contrary to Microsoft's assertion, do not 7 result in a natural monopoly in these 8 particular four software markets. 9 Another thing that Microsoft's experts 10 talk about is a concept called economies of 11 scale. 12 And Microsoft experts suggest that 13 economies of scale also suggest that the 14 natural result is a monopoly. 15 In other words, they're suggesting 16 that like network effects, economies of scale 17 are a reason why Microsoft has a monopoly in 18 each of these four products, the operating 19 systems, word processing, spreadsheet, and 20 office suite. 21 Of course, a real simple example or 22 response to that, and our experts will talk to 23 you about this, is the fact Microsoft has other 24 products. 25 You've seen some references in the 4088 1 charts with the rate of return method, the 2 profit margin method, and our experts will talk 3 to you about, you know, the fact there are 4 other products. 5 There's not monopolies held by 6 Microsoft in those other products. They 7 compete. And despite the fact that material on 8 those software products -- for instance, 9 Microsoft Access, it's a database that might be 10 able to be shared with another type of 11 software. So there is network effects. 12 And, of course, there could arguably 13 be economies of scale. And I'll explain a 14 little bit more about what that means. 15 But you could have these two economic 16 principles applying to these other Microsoft 17 products, but you don't see a monopoly with 18 respect to those other products. 19 So the issue of economy of scale 20 refers to a situation where most of a product's 21 costs are incurred up-front. Sometimes they're 22 referred to as sump costs. 23 So with a product like software, 24 there's, of course, research and development. 25 We've got software developers working on the 4089 1 code and putting the product together and 2 testing it and so forth. 3 And then once the product is 4 completed, the costs of reproducing that 5 software can actually be pretty minimal. 6 If it's distributed, you know, in the 7 finished goods channel like this, you've 8 obviously got packaging costs, a manual, some 9 CDs that are in here. 10 So there are some smaller costs with 11 that type of product. 12 That's the finished goods channel. 13 In the OEM channel, you'll hear that 14 when, for instance, Ms. Conlin mentioned the 15 Acer story, and you heard about the gold 16 master, well, the gold master, that type of 17 description refers to the fact that when a 18 software company, whether it's Novell, 19 Microsoft, or whomever, sells their software to 20 an OEM, they're not selling them, you know, 21 millions of disks, what they're doing is they 22 get in one piece, so to speak, the software, to 23 be installed by the OEM on all of the 24 computers. 25 So the actual costs then of 4090 1 reproducing the software falls on the OEM, not 2 on a Microsoft or Novell. 3 So actually in the OEM channels, you 4 don't even have the additional costs like this 5 incurred by a company like Microsoft. 6 The additional costs for the disks 7 that you might get with the computer, those are 8 actually incurred by the computer manufacturer. 9 So the idea of these up-front sump 10 costs and then the marginal costs decreasing is 11 part of the concept of economies of scale. 12 As you produce more and more, in other 13 words, the volume increases, Microsoft says, 14 well, the average cost, and if we graft it -- 15 if you're dealing with high sump costs up here 16 and you're -- and you have your access, and as 17 the number of products increases, then you're 18 going to see the average costs decrease in 19 relation to the total number of products sold. 20 Now Microsoft suggests that based upon 21 the economies of scale, of course, you have a 22 monopoly, but our experts will tell you that's 23 not the case. 24 Number one, you can look at other 25 software products that are not monopolized. In 4091 1 other words, where there has not been illegal 2 conduct to take monopoly share and maintain 3 that in the marketplace. 4 But number two, you see with other 5 software products that when there's 6 competition, you don't -- a company that has 7 these sliding average costs and you graft that 8 against the prices, the monopolist can keep 9 those prices higher than they would be in 10 competition, despite the falling average costs. 11 And Doctor Warren Boulton for one will 12 come in and explain that although those average 13 costs are falling, competition and elasticity 14 of demand then forces the prices down toward 15 the marginal cost. If that makes sense. 16 So, in other words, with the 17 competition, those prices have to approach 18 marginal costs because if it's greatly in 19 excess of marginal costs; in other words, the 20 costs of producing this, for instance, each 21 additional copy, the more profit built in, if 22 there's competition, that competitor's going to 23 come in, undercut those prices, and of course 24 the competition then squeezes those profit 25 margins. 4092 1 Doctor Warren Boulton, I'm sure, and 2 others, will explain that in greater detail. 3 But the long and the short of it is 4 that they will tell you that economies of scale 5 are not a reasonable conclusion or 6 justification for Microsoft's monopoly in these 7 monopolized markets. 8 I guess one other example you could 9 think about in not a software market, you can 10 think about, you know, an artist, you know, a 11 singer. 12 You could think about an author. You 13 know, they have a lot of up-front time built in 14 in, you know, writing music and so forth, or 15 writing a book. And obviously the more 16 products they sell, the greater the return on 17 their investment in time. 18 But the difference between those, of 19 course, is that in the author of a book -- you 20 know, there's thousands of authors out there 21 over the course of time. We've got classic 22 books from long ago, classic novels, fiction, 23 nonfiction. 24 Nobody's got a monopoly on books. I 25 mean, there isn't just one book out there. 4093 1 There isn't just one singer out there. There's 2 not just one musician. So there's competition 3 between them. 4 Obviously, if you could ever think of 5 a world where there was only one author, you 6 know perhaps, and that author was able to 7 somehow exclude all other authors from printing 8 their books, you know, what you would likely 9 see, and economists would tell you, well, if 10 that's -- if there is such exclusionary conduct 11 going on, you'd probably see the prices rise 12 then as a result of the lack of competition. 13 So whether you're talking about, you 14 know, musician Johnny Cash, or whoever, and 15 author J. K. Rawling, whoever, economies of 16 scale don't lead to a monopoly. 17 And that's what the experts will 18 explain. 19 So neither network effects nor 20 economies of scale require the conclusion that 21 a monopoly would be present, because as we've 22 seen, there are, and you'll be told there are, 23 lots of software markets where there are 24 economies of scale, where there are network 25 effects, but there's not a monopoly. 4094 1 So the experts will also explain the 2 difference is with regard to these markets, 3 with regard to these four types of products, 4 the difference is the illegal anticompetitive 5 exclusionary conduct. 6 Now, Microsoft's also almost certain 7 to claim that it's achieved its monopoly 8 because it sold its products at low prices. 9 And I've touched on this before. 10 If that's true, then why did Microsoft 11 believe it was necessary to engage in 12 anticompetitive conduct? 13 Why did Microsoft need to bundle 14 certain products to leverage the operating 15 system monopoly? 16 Why did Microsoft need to exclude 17 DR-DOS or OS/2 through, you know, exclusionary 18 licensing agreements? 19 Remember that internal Microsoft 20 E-mail that Ms. Conlin showed you from the time 21 period around the divorce with IBM? 22 All key OEMs are committed to DOS 5.0 23 and Win 3.x for the next two to three years, 24 most of them per processor, at least per 25 system. This will give us time to respond 4095 1 technically. 2 The questions the experts will be put 3 and answer is if Microsoft was simply competing 4 on the merits, why did it need to give itself 5 time to catch up technically? 6 Why did it need to engage in 7 exclusionary contracts to control the outputs, 8 to foreclose the distribution channels? 9 Back in 1988, one of Microsoft's top 10 executives, Nathan Myhrvold, wrote and this is 11 Plaintiffs' Exhibit 49, usually we win on the 12 basis of our static entrenched position, not by 13 quality or by beating the competition because 14 there is none. 15 This was Plaintiffs' Exhibit 49. 16 Now, this next one is 49. 17 As Ms. Conlin read to you, the same 18 executive said we can lie, cheat, or steal in 19 an E-mail entitled do we have a future. 20 When Microsoft gets up here and says 21 it wins because of low prices, remember what 22 Mr. Myhrvold wrote. 23 Usually we win on the basis of our 24 static entrenched position, not by quality or 25 by beating the competition because there is 4096 1 none. 2 And remember Mr. Allchin who said just 3 a few years ago, in 2004, because of the 4 problems that he saw with security and 5 resilience and so forth, if he didn't work for 6 Microsoft, he'd buy a Mac. 7 Now, a similar excuse Microsoft is 8 likely to offer is that the competition 9 supposedly wasn't very good. 10 Now, that's a great statement to make 11 in hindsight. So what you have to do is you 12 have to take a look at what the documents say 13 at the time. 14 Let's take a look at Plaintiffs' 15 Exhibit 682. 16 And this is Mr. Barrett, Phil Barrett, 17 and this is -- he had one of his subordinates 18 take a look at DR-DOS 5.0. 19 Mr. Barrett wanted to know how well 20 DR-DOS 5.0 worked. 21 I used DR-DOS 5.0 with a huge number 22 of apps. I found it incredibly superior to 23 MS-DOS 3.31 and IBM-DOS 4.01. 24 One, DOS compatibility. The most 25 important reason to use any version of DOS is 4097 1 to run DOS apps. DR-DOS 5.0 runs every DOS app 2 I know. 3 In conclusion, DR-DOS 5.0 is vastly 4 superior to MS PC-DOS 3.31 and 4.01. It's 5 about as good as MS-DOS 5.0. 6 So Mr. Barrett, looking at the 7 conclusions of this testing, believed that 8 DR-DOS was a good product. Despite what you're 9 likely to hear is that, you know, Microsoft 10 beat out DR-DOS because it was not a good 11 product. 12 So keep in mind, take a look at the 13 internal documents to see what Microsoft was 14 saying at the time and not some excuse many 15 years later. 16 Similarly, Plaintiffs' Exhibit 1554, 17 this is Mr. Gates talking about OS/2. 18 I am really concerned over everything 19 I am hearing about OS/2 2.1. 20 As usual, they get total credit for 21 being crash proof. Our inability to explain 22 that they are not crash proof is going to kill 23 us. 24 I don't understand what they did 25 technically, but I am very impressed. 4098 1 And you recall this from Ms. Conlin's 2 Be story in Plaintiffs' Exhibit 9875. 3 As you may recall, she talked to you 4 about Be and several of the related documents. 5 This is from Carl Stork, you know, 6 Microsoft individual, to Jim Allchin, David 7 Cole, Brad Chase, David Williams, Paul Maritz, 8 and Eric Rudder. 9 The key feature that Be is leveraging 10 is that BeOS is a far better AV editing 11 environment than Win 98 or NT. 12 One telling example is that multiple 13 OEMs have pointed out problems to us with our 14 DV capture support in WDM for Win 98. We have 15 not committed to fixing them or given people a 16 time line they can count on. 17 We are hearing from OEMs that they 18 don't think they can count on us. Hence, Be's 19 product is very appealing as a consumer AV 20 editing environment. 21 Intel is very actively encouraging 22 this. Note that Intel today announced a 5 23 percent equity investment in Be. 24 And, of course, Ms. Conlin previewed 25 some additional documents where based upon 4099 1 Microsoft's concern about Be, it actively 2 undertook anticompetitive conduct to foreclose 3 Be, its operating system from the marketplace. 4 Now, we could go on and on here, but 5 you're going to hear more evidence of this 6 type. So the point is, when you hear this type 7 of excuse that, gee, these other potential 8 competitors in the marketplace weren't 9 successful because they were no good or their 10 management was poor, keep in mind look at what 11 the documents say at the time. 12 And, again, you will hear experts and 13 other witnesses testify that the quality of 14 competitor's products relative to Microsoft's 15 does not account for the illegal 16 anticompetitive conduct. 17 Rather, Microsoft was concerned about 18 the competition. Microsoft was concerned that 19 these other products would encroach in the 20 marketplace and reduce Microsoft's control of 21 the markets. 22 You lose control of the markets, as we 23 saw in some of these prior E-mails, if you lose 24 control of the markets, you got to compete on 25 price, and as Bill Gates has said, that means 4100 1 competing on price, we're going to get many 2 percentage points less. 3 So Microsoft has asked -- is going to 4 ask you to believe that all of its illegal 5 conduct was really unnecessary because DR-DOS 6 OS/2, GO, Be, and the list goes on, that they 7 all would have failed on their own. But that's 8 not what Microsoft truly believed. 9 It's a convenient fiction that years 10 later to prevent you from looking at the real 11 world facts. 12 And the real world facts are contained 13 in those documents. They're contained in those 14 E-mails. 15 And also keep in mind with regard to 16 an argument like this the causation 17 instruction, number 14, the anticompetitive 18 conduct need only be a material cause, not the 19 sole cause of the harm. 20 Microsoft additionally is likely to 21 suggest that conduct that harmed competition 22 actually benefited consumers. 23 You've heard about bundling and tying, 24 commingling, bolting, and you may hear well, 25 gee, look at products that are put together, 4101 1 maybe a radio/alarm clock or, you know, things 2 like radios being put into a car, but you have 3 to consider any such analogies in light of the 4 findings of fact that have been read to you, 5 and you've seen them and you have them in your 6 jury notebooks. 7 From the government case, Microsoft -- 8 as you recall, it was anticompetitive for 9 Microsoft to commingle Internet Explorer code 10 with the operating system. 11 But Microsoft, of course, offers what 12 it calls pro-competitive justifications. 13 It suggests that putting these two 14 products together are beneficial. But, of 15 course, we've seen findings of fact which say 16 that some consumers didn't want Internet 17 Explorer. They didn't want it bolted. 18 The Federal Court found that as a 19 result of that bolting, there was actually 20 memory used up as a result of that, and so if 21 people wanted to use Netscape, now they've got 22 the memory being used up by Internet Explorer, 23 and they've got to use additional memory to 24 install and operate Netscape. 25 So the Federal Court found several 4102 1 reasons why the bolting was not beneficial to 2 consumers. 3 So if we take a situation where you 4 have an alarm -- you know, you have clocks. I 5 mean, clocks have been around for centuries and 6 radios have not been around for centuries. But 7 somebody along the way decided, well, it would 8 be kind of nice to have an alarm clock and a 9 radio put together. 10 Now, if that's an example that 11 Microsoft's experts want to use, you have to 12 ask yourself, is there a monopoly on clocks? 13 Is there a monopoly on radios? 14 Because what we've seen here is, the 15 difference with regard to the Microsoft 16 bundling is taking a monopoly position in one 17 market and using that monopoly to lock up 18 another market, whether it's the Windows GUI, 19 whether it's the Internet Explorer or something 20 else. 21 So a clock/radio analogy, our experts 22 would be happy to tell you is not anything like 23 what Microsoft has done with regard to its 24 bolting of products together. 25 And, of course, the same thing could 4103 1 be stated with regard to an automobile. 2 Just imagine if there was only one 3 automobile manufacturer, and the only way it 4 could get a radio was to have its radio from 5 its subsidiary installed in that car. And if 6 you want an additional radio, number one, you 7 can't remove the radio because if you do, it 8 will mess up the electrical system, for 9 instance. 10 And so the only thing you can do is 11 you have to go out and buy a different radio, 12 and you got to set it up on top of the dash or 13 something, if you want to have satellite radio 14 or something like that. 15 Well, our experts will suggest if 16 asked, that that type of analogy is similar to 17 what Microsoft did. It's foreclosing access to 18 consumers. It's foreclosing access to 19 competitors to the operating system. 20 Let's just take a look at finding of 21 fact 177 for a moment. 22 In here the Federal Court says, as 23 with Windows 95 -- and this is referring to 24 Windows 98 -- as with Windows 95, there is no 25 technical justification for Microsoft's refusal 4104 1 to meet consumer demand for a browserless 2 version of Windows 98. 3 Microsoft could easily supply a 4 version of Windows 98 that does not provide the 5 ability to browse the web and to which users 6 could add the browser of their choice. 7 Indicative of this is the fact that it 8 remains possible to remove web browsing 9 functionality from Windows 98 without adversely 10 affecting nonweb browsing features of Windows 11 98 or the functionality of applications running 12 on the operating system. 13 In fact, the revised version of 14 Professor Felten's prototype removal program 15 produces precisely this result when run on a 16 computer with Windows 98 installed. 17 So there Microsoft, the excuse was 18 that you couldn't separate them, because if you 19 did so, you'd lose functionality of the 20 operating system. 21 So they had to remain together. The 22 Federal Court found that they didn't have to 23 remain together. 24 So, you know, we don't have any 25 monopoly for car manufacturer. We don't have a 4105 1 monopoly in radios. We don't have a monopoly 2 for clocks. 3 So when useful products are put 4 together in that sense, there's not the 5 exclusionary anticompetitive effect that 6 resulted from the type of bolting that 7 Microsoft did with regard to its products. 8 And keep in mind finding 166. This is 9 -- why did Microsoft offer only the bolted 10 product? 11 As I mentioned to you before the lunch 12 break, you saw the one E-mail where they're 13 talking about cloning Netscape. They needed to 14 clone Netscape to try and catch up. 15 Well, I'm not going to go through and 16 read this in detail, but you can take a look at 17 166. 18 But this talks about the different -- 19 you know, the particular threats that were at 20 issue with Netscape. It talks about what 21 Microsoft believed it had to do to overcome 22 Netscape's lead with regard to browsers. 23 This is Jim Allchin writing to Paul 24 Maritz in December of 1996, and he wrote, among 25 other things, I don't understand how IE, 4106 1 Internet Explorer, is going to win. The 2 current path is simply to copy everything that 3 Netscape does packaging and productwise. So 4 let's just copy the functionality of Netscape, 5 copy the packaging, and let's try and get out 6 there, but we know that's not going to be 7 enough. 8 So he goes on and says, my conclusion 9 is that we must leverage Windows more. He 10 said, we should dedicate a cross-group team to 11 come up with ways to leverage Windows 12 technically more. 13 Further on in that lengthy finding, it 14 refers to a follow-up message from Allchin to 15 Maritz, January 2, 1997. 16 We are not leveraging Windows from a 17 marketing perspective and we are trying to copy 18 Netscape and make IE into a platform. We have 19 a strong OEM shipment channel. I am convinced 20 we have to use Windows. This is the only thing 21 they -- Netscape -- don't have. 22 If you agree that Windows is a huge 23 asset, then it follows quickly. We are not 24 investing sufficiently in finding ways to tie 25 IE and Windows together. 4107 1 Then, of course, you've seen other 2 findings where even leveraging off of Windows 3 wasn't enough. They were concerned that we 4 have to take an additional step. 5 We have to not only control access to 6 the operating system by shutting that down for 7 purposes of Netscape. We have to go further 8 with regard to how Netscape distributes its 9 products. We've got to tie that up. We've got 10 to enter into agreements with Internet access 11 providers. We've got to enter into an 12 agreement with Apple. 13 And so all of these other agreements 14 that you've heard about are the exclusionary 15 contracts that were utilized to foreclose 16 Netscape, that middleware threat, from the 17 marketplace. 18 So Microsoft understood the threat at 19 the time. It acted on the threat. It took 20 anticompetitive actions to address the threat, 21 and it's done that with regard to OS/2, DR-DOS, 22 and the other products that Ms. Conlin 23 discussed with you. 24 So don't be fooled by some statements 25 made years later that, well, we really didn't 4108 1 have to do those things. We would have won 2 anyway. 3 When I began talking with you last 4 Friday, I mentioned that the fundamental 5 premise underlying the antitrust laws is that 6 competition is a good thing for consumers. 7 Now, sometimes competition does hurt 8 individual competitors while delivering 9 benefits to consumers. 10 You know, individual companies can 11 come and go as part of the free market forces. 12 Some might call competition at times rough and 13 tumble, but the anticompetitive conduct at 14 issue here is far more than rough and tumble. 15 When you have a Home Depot, for 16 instance, or a Wal-Mart move into a community, 17 oftentimes local businesses might get hurt, but 18 the benefit to consumers may be lower prices 19 through that store -- through the chain store. 20 If local businesses are -- go out of 21 business, then it's always interesting to 22 follow what happens to the prices if that 23 competition disappears. 24 But Microsoft is likely to suggest 25 that dealing with like IBM, DRI, GO, Be, Lotus, 4109 1 WordPerfect, these are all like the local 2 hardware store when a Home Depot moves in. So 3 Microsoft will suggest, gee, it's just 4 rough-and-tumble competition. 5 But the evidence will show, and the 6 witnesses will tell you, that is not the case. 7 Think about a scenario with where a 8 Home Depot moves into town and there's a local 9 hardware store. 10 If Home Depot drives the local 11 lumberyard or hardware store out of business 12 because Home Depot is offering lower prices, 13 that's what competition is about. But what if 14 the local hardware store or the local 15 lumberyard is offering, you know, service that 16 the -- personal service that the Home Depot 17 doesn't offer. You call up your local 18 lumberyard and say, John, gee, I need some 19 trim, I'm remodeling, and I'd like this kind of 20 specification, what can you do for me? 21 So there might be a personal service 22 aspect. There might be a better quality 23 product. There could be any number of reasons 24 that the people still use the local lumberyard 25 and don't go to Home Depot. 4110 1 Maybe it stocks certain items that 2 Home Depot does not stock. 3 But what if Home Depot says to its 4 suppliers, whether for hardware, wood, plywood, 5 and those same suppliers supply the lumberyard, 6 and Home Depot says to those suppliers, we're 7 not -- we buy, you know, $100,000 a month of 8 materials from you, and we're going to go to 9 somebody else unless you cut off supplying that 10 other store. 11 That the experts will say is not 12 rough-and-tumble competition. It's 13 anticompetitive conduct. 14 Or another example. Suppose Home 15 Depot has contractors coming in. There might 16 be a, you know, contractor check-out lane, and 17 the contractors go to that check-out lane, and 18 maybe they've even got some better pricing 19 because they're contractors. In other words, 20 the contractors might have a little bit better 21 pricing than, you know, ordinary individuals 22 going into the Home Depot. 23 But what if the Home Depot finds out 24 some of those contractors are also purchasing 25 the same types of materials from the local 4111 1 lumberyard or the local hardware store and the 2 Home Depot says we don't like that. We really 3 don't like you going over to that local store 4 and buying anything. So if you're going to 5 continue to do that, you're no longer going to 6 get the contractor price here. You're no 7 longer going to get any discounts. In fact, 8 we're going to charge you a little bit more. 9 Again, the experts will say is that 10 rough-and-tumble competition? No. 11 They'll say that that's exclusionary 12 conduct. The purpose is to try and eliminate a 13 competitor. It's not beneficial for consumers. 14 So the experts and the other evidence 15 we believe will show that Microsoft did not win 16 on the merits. 17 It gained its market share or 18 sustained its market share in these product 19 markets as a result of anticompetitive conduct, 20 exclusionary conduct. 21 So just like the examples with -- like 22 I just mentioned with raising the prices to the 23 contractors if they were dealing with the local 24 business, think about what Microsoft did with 25 per processor, per system contracts. What it 4112 1 was doing was it's raising its rival's costs. 2 In other words, when that OEM, if it 3 was going to -- it had to pay for every per 4 system, but when it went out the door, every 5 per processor, it had to pay a license fee to 6 Microsoft, regardless of whether or not that 7 computer actually had Microsoft's operating 8 system on it. 9 So if somebody wanted DR-DOS or OS/2 10 on there, for instance, there was an additional 11 charge. So the OEM had to pay Microsoft, plus 12 there would have to be the additional payment 13 for the competing software. 14 So it's not unlike the analogy with 15 Home Depot. 16 So why does -- why did Microsoft do 17 these things? Again, it isn't to lower prices. 18 It's to make monopoly profits as a result of 19 the anticompetitive conduct. 20 Now, another thing I want you to keep 21 in mind is keep in mind what the issues are. 22 In other words -- and hopefully you'll 23 recognize when you see it happen. But they are 24 what I call diversions. 25 If there's a particular proposition 4113 1 that is explained by one expert, for instance, 2 sometimes others will change the proposition 3 and sort of create a straw man to then shoot 4 down. 5 And so keep your -- you know, keep 6 listening intently for those types of 7 situations. 8 And Microsoft may want you to actually 9 look at each of its anticompetitive acts in a 10 vacuum, and they'll say, well, maybe that act 11 wasn't so bad. I mean, can't really say 12 anything -- any harm resulted from that. But 13 as Plaintiffs experts will explain, the conduct 14 together enabled Microsoft to monopolize 15 illegally monopolize these markets. 16 Now, another thing, and I've touched 17 on this, is that Microsoft may bring in 18 witnesses -- we know they're going to bring in 19 witnesses, and they might be asked about some 20 of the E-mails you've seen here, some of the 21 internal documents that you've seen, and, of 22 course, many more that you will see during the 23 course of this trial. 24 And you've seen some pretty frank 25 statements in these documents, and the 4114 1 witnesses will more than likely say, well, I 2 didn't really mean that. 3 So you also have to keep in mind that 4 these people that wrote these statements didn't 5 think that these documents would see the light 6 of day. 7 So keep that in mind when you hear the 8 excuses for the statements made in the 9 documents. 10 Now, Microsoft's also likely to assert 11 that its products won because consumers chose 12 them. But again, keep in mind the contracts, 13 the locking down of the distribution channels. 14 Really, the choice was take it or leave it. 15 You either buy your computer with the Microsoft 16 operating system installed or you go without. 17 So you have to ask yourself is that a 18 choice. 19 And our economists will tell you that 20 that's not a true choice. 21 Our economists will also tell you that 22 because it's not a true choice, it also means 23 that those products were not popular in the 24 true sense of the word. 25 When you have a -- when you go out to 4115 1 buy a particular CD of music, that's your vote 2 as to who you believe is popular, who you like, 3 and you've got a variety of music CDs to choose 4 from. So that is a choice. 5 And when somebody comes out and their 6 album -- that's, of course, an old term, their 7 CD, goes platinum, that's a result of true 8 choice, and that particular CD is popular. 9 There's a choice, but the experts will 10 say here, there's not a true choice. 11 And keep in mind on the choice issue, 12 you heard about Acer, for instance. 13 Acer was going to install some Lotus 14 products. What happened? They got cut off at 15 the pass. 16 The evidence shows that based upon 17 Microsoft's ability to leverage off the 18 systems, the applications software could not be 19 installed because of the threat, potential 20 threat, actual threat, you decide, of Acer 21 having -- losing access to the Microsoft 22 operating systems if it did, in fact, carry 23 through with installing competing applications, 24 applications that competed with Microsoft's 25 applications. 4116 1 Gets a little bit dry talking so much. 2 Microsoft also suggests that if it 3 didn't have its monopoly things would not work 4 well together. Operating systems and software 5 would be incompatible. But as the experts will 6 tell you, the incompatibility was the result of 7 Microsoft's conduct. 8 All you have to do is think about, you 9 know, the many, many circumstances in which 10 competitors engage in competition, different 11 companies engage in competition, and there are 12 shared standards. 13 We've talked about telephones. 14 There's companies all around the world. 15 There's benefit to consumers from the sharing 16 of standards and the fact that people can call 17 all the way -- all around the world. 18 Cell phones, there's all sorts of 19 different cell phone manufacturers. There's 20 different wireless cell phone providers, Sprint 21 and various others. 22 You can call -- you can have a Sprint 23 service and you can call somebody with a 24 Verizon service. There's compatibility and 25 it's beneficial to consumers. 4117 1 Microsoft was probably going to also 2 suggest that the monopoly in these products has 3 resulted in lower prices. And as we've 4 discussed, the experts and other witnesses will 5 show you why that is not correct. 6 Remember, Microsoft said there's huge 7 value. That's that memo to Bill Gates. 8 There's huge value to a monopoly. 9 So you've now heard an overview of 10 what the Plaintiffs' case is about. 11 It's a preview of the evidence you're 12 going to hear over the next many weeks. 13 You've heard a lot about Microsoft's 14 tactics with regard to controlling the inputs 15 and the outputs to control the marketplace to 16 exclude competitors, to control consumer 17 choice, to limit the choice. 18 So I'm going to sit down in a few 19 minutes, and this is our last chance to talk to 20 you before the end of the evidence. 21 But there's a few things I'd like you 22 to keep in mind. 23 So these few things I'd like you to 24 keep in mind during our presentation of 25 evidence and during Microsoft's presentation of 4118 1 evidence. 2 I don't want you to be picky. I want 3 you to be curious and review the evidence and 4 listen to it carefully. 5 Sometimes people like to not explain 6 the whole story. 7 You may have heard of Paul Harvey. 8 Gives a little bit of a teaser, then they go to 9 a commercial break, and we'll be right back 10 with the rest of the story. 11 Well, keep in mind that sometimes 12 things can be told partially, and if things are 13 told partially, you have to decide whether or 14 not it's a half truth, is it the complete 15 truth, is it a partial story, is it a complete 16 story, is it a half lie, is it a deception. 17 Let me give you an example. 18 If I told you I'm 29, you'd probably 19 look and say boy, if he's 29, he looks a little 20 bit old for being 29. But in a sense, that 21 statement is true because there are 29 years on 22 this body. 23 And I could also say well, I'm 35. 24 Well, that's also a partial truth because there 25 are also 35 years on this body. 4119 1 But I'm going to stop there. I'm not 2 going to keep going. 3 But the point is, you can see that 4 it's a partial truth, but it isn't the whole 5 truth. It's not the rest of the story, as Paul 6 Harvey would say. 7 So what we ask is that when you hear 8 statements that appear complete, ask 9 yourselves, is there something more to the 10 story. 11 And, of course, keep also in mind that 12 Judge Rosenberg has given you an instruction 13 that in certain circumstances he might allow 14 questions that you ask to be answered. 15 Now, the second point I want you to 16 keep in mind, and we've talked about this a 17 little bit, is that well, we may have done some 18 things wrong, but we really didn't harm 19 anybody, and if we harmed somebody, it's just 20 way too complicated to figure out those 21 damages, if there are any. 22 And again, because it's such hard 23 work, because it's so complicated, no harm, no 24 foul. 25 And we've talked about the 4120 1 instructions. 2 We're going to have the experts here 3 to talk to you about how damages are 4 calculated, how the fact of the harm is 5 determined. 6 So keep in mind those instructions as 7 you listen to the evidence. Are these excuses 8 to try and build on the no-harm, no-foul theme? 9 You're going to have to ask yourself 10 whether it's okay to let Microsoft, the one 11 that has caused -- excuse me -- has engaged in 12 anticompetitive conduct as found by the Federal 13 Court. 14 You're going to have to decide whether 15 or not that conduct and the additional conduct 16 to be -- that will be addressed during the 17 course of this case has indeed harmed class 18 members and by how much. 19 The other thing, you saw the Microsoft 20 tactics. Now, these are tactics that 21 Ms. Conlin went through and explained in 22 different circumstances, and I'm not going to 23 go back and go through each one of these. 24 But keep in mind you will hear from 25 the experts, particularly Professor Noll, that 4121 1 these -- that these types of tactics can and do 2 cause anticompetitive harm. 3 It's -- they cause harm to the 4 competitive process, and as a result, there's 5 harm to consumers. 6 So when Microsoft presents its case to 7 you, think about these tactics and think about 8 what are the excuses being offered. 9 Are there any diversions to try and 10 pull you off track? Keep these types of 11 tactics in mind. 12 And ask yourself if these are the 13 tactics they used to harm consumers in the 14 marketplace, what are they going to try to do 15 here? 16 Now, Ms. Conlin over the course of 17 several days spent about 17 hours, I think, 18 talking with you, and between last Friday and 19 today I've spent probably four hours, a little 20 bit more. 21 And, as I mentioned, this is our 22 opportunity to give you a preview, an overview 23 of the case prior to the very end of the case, 24 when we do our closing arguments. 25 So we thank you for your attention. 4122 1 Plaintiffs thank you for your attention and 2 your hard work that we know you will do. 3 We thank you for that. The Plaintiffs 4 thank you for that. 5 As I know Microsoft and its attorneys 6 thank you for your attention and hard work in 7 the weeks to come. Thank you. 8 THE COURT: Thank you, counsel. 9 Take a 15-minute recess. 10 Remember the admonition previously 11 given. Leave your notebooks here. 12 Thank you. 13 (A recess was taken from 1:19 p.m. 14 to 1:35 p.m.) 15 THE COURT: Everyone may be seated. 16 Defendant's opening. Mr. Tulchin. 17 MR. TULCHIN: Thank you, Your Honor. 18 Ladies and Gentlemen of the jury, good 19 afternoon. 20 Judge Rosenberg, opposing counsel. 21 As you know, I'm David Tulchin. I 22 feel like I've waited for a long time to get to 23 give you my opening statement. 24 And as you may have noticed, I 25 probably wasn't waiting all that patiently at 4123 1 times, but I do have a number of things of 2 course to say. 3 It is a great honor for me, really an 4 honor to be able to represent Microsoft in this 5 case and to be able to appear before the 12 of 6 you. 7 I want to introduce again, as we did 8 on voir dire, because that was a long time ago, 9 a few of my colleagues who you will see 10 throughout the trial. 11 And maybe we'll start in the back 12 table, this time Sharon Nelles, Steve Holley. 13 Next to him is Rich Wallis from Microsoft. 14 Then Chris Green and Bob Rosenfeld. And I'm 15 sure you'll have a chance in this trial to get 16 to know all of us. 17 You may recall that when the 18 Plaintiffs began their opening statement on two 19 Fridays ago, Friday, December 1st, the 20 Plaintiffs said that this case and the issues 21 were confusing. 22 Counsel said it has taken me many 23 years to understand this material, and later 24 said again that the facts seem to be very 25 confusing. 4124 1 Plaintiffs said that it may take a 2 very long time for some of you to figure things 3 out. And I must say that for Microsoft, we 4 think that the important things, the key facts, 5 the things that will make a difference to you 6 are not confusing at all. 7 The real issues you will see. You 8 will understand. I'm sure you will appreciate. 9 And even this morning, counsel said 10 that the issue of pass-through -- I'm quoting 11 -- is the easiest part of the case to 12 comprehend. You'll remember that long 13 discussion about pass-through. 14 Again, we disagree. The real issues 15 are not complicated. The real issues will be 16 clear. 17 First, no one in Iowa has been harmed 18 by anything that the Plaintiffs can show that 19 Microsoft has done. 20 It is Plaintiffs burden to prove that 21 they were overcharged; that, for example, a 22 price of $50 for a copy of the Windows 23 operating system was a price that was too high; 24 that had an overcharge element to it. 25 The evidence will show that the price 4125 1 is not too high; that there is no overcharge. 2 Indeed, last Friday, the second 3 Friday, December 8th, Plaintiffs said this: 4 Microsoft used its unlawful monopoly to raise 5 prices. You may recall that statement. 6 And before we get into any detail the 7 issues, the facts, the background, it seemed to 8 me that we ought to get straight what the real 9 facts are when it comes to prices, to 10 Microsoft's prices. 11 Here's what the Plaintiffs said on 12 Friday. Here is -- 13 Let's go to the next slide. 14 Here are the average prices that 15 Microsoft has charged for Word. Word, as you 16 know, is Microsoft's word processing software. 17 Now I'm going to explain very briefly 18 why there are two lines in just a moment. 19 But more importantly, in the period 20 1988 -- and you'll remember that the Plaintiffs 21 often went way back into the late '80s or early 22 '90s in talking about Microsoft's conduct. 23 In the period 1988 through 2005, this 24 is what's happened to the price of Word, and 25 this isn't a little sliver of the prices. 4126 1 You'll remember the Plaintiffs talking 2 about calculations they made where they 3 included only prices at the retail level, and 4 they had a discussion about upgrades for 5 Windows 98. 6 And at one point -- these are all 7 prices, all the revenue to Microsoft divided by 8 the number of copies or licenses to get the 9 average price over time for Word. 10 In a case where the key claim is an 11 overcharge. The key claim -- because, of 12 course, they have two. They have the claim 13 about an overcharge in each of the markets, and 14 then they have a claim about security 15 vulnerabilities. The price of Word over time 16 has gone from over $200 down to, on average, 17 less than 40, $38. 18 Now, this, of course, as Microsoft's 19 market share increased, and we'll come to that. 20 We'll come to that. 21 I just -- I have to pause for a 22 minute. 23 There's a reason why there are two 24 lines there. The lines come close to 25 overlapping for the years where they covered 4127 1 the same product. 2 One is from a company called IDC that 3 the Plaintiffs mentioned, and then starting 4 around '93 or '4 when Microsoft's own data 5 began recording prices from a database at the 6 company called MS Sales, we use the prices from 7 that source. 8 But as you can see, the two sources 9 come very close to overlapping. 10 So let's look at prices for Excel. 11 It's the same general story; a case 12 about an overcharge. 13 The allegation that Microsoft charged 14 too much is a case, and I think you're learning 15 this now for the first time after the 16 Plaintiffs spoke for six days in their opening, 17 is a case where the price of Excel over the 18 years, same time period, again went from above 19 $200 down to below 40. 20 Here it's $36. 21 And, again, we counted all the data. 22 We didn't take a little sliver of data where 23 the only thing that's being reported are the 24 highest possible prices such as the retail 25 channel. This is all data. 4128 1 For operating systems there are two 2 slides. First, what we call consumer operating 3 systems. These are data through the OEM 4 channel, and I know you recall that the 5 Plaintiffs explained to you that about 85 6 percent, roughly, of all Microsoft operating 7 systems are sold through the OEM channel; that 8 is, by computer manufacturers when they sell 9 computers. 10 And the price of Windows, first 11 MS-DOS, and now Windows, has stayed about the 12 same over many, many years. 13 We think it's a very low price. 14 Again, even as of 2005, a price of $50 for 15 Windows. 16 And we will talk about what that means 17 and what Windows is, and the improvements that 18 have taken place in it. 19 And then let's look at what's called 20 the professional Windows like Windows 21 Professional. 22 This is a slightly higher version of 23 Windows. 24 And, again, over the years, consumers 25 can pick either one. You can go with the 4129 1 consumer version or Professional, that's your 2 choice, and over the years you will see that 3 the price has stayed about the same, now about 4 $98. 5 So that's just a little preview about 6 prices. I will come back to that, I'm sure you 7 appreciate, as we go through the opening. 8 Secondly, and closely related, 9 Microsoft's strong market position, its high 10 market shares in all three of these markets has 11 not been the result of any anticompetitive 12 conduct. 13 On the contrary, Microsoft's high 14 market share has been the result of 15 pro-competitive conduct, good products at low 16 prices, beating the competition fair and square 17 on the merits, and we'll show you this too. 18 Not through argument and not through 19 debater's tricks. We will show you in the 20 evidence. 21 And I might just say here as a preview 22 of what's to come, that when the Plaintiffs 23 spoke about the applications side of the case, 24 the points they made about alleged 25 anticompetitive conduct were very few and 4130 1 pertained to a period long ago. 2 They're wrong about the facts. 3 The evidence will show there was no 4 anticompetitive conduct. But even still, that 5 conduct, even if you believe it took place, and 6 we'll show you, does not explain Microsoft's 7 high market share. 8 And when we come to the key issue of 9 causation, causation, we'll talk a lot about 10 it. The question of how you explain 11 Microsoft's success. Is it through good 12 business decisions, good products, low prices? 13 Or is it because, Plaintiffs say, of 14 anticompetitive conduct? 15 When we get to that, you will see 16 Microsoft's success in every case is 17 attributable to pro-competitive conduct. 18 Now, thirdly, for the moment. 19 Plaintiffs just a short while ago, maybe a half 20 an hour or 45 minutes ago, again said that -- 21 predicting what I would argue to you or what I 22 would tell you, the Plaintiffs said well, 23 Microsoft will say that the work done by 24 Plaintiffs' experts is too difficult, too 25 complicated. And Microsoft's excuse here, they 4131 1 say, is that you're not going to be able to 2 understand it, so you shouldn't award damages. 3 That's what they said. 4 On the contrary. On the contrary. 5 What we do think you will conclude and 6 what the evidence will show is that the experts 7 for the Plaintiffs, we'll talk about them in a 8 little while, the experts for the Plaintiffs 9 created this so-called but-for world; that is, 10 a world that they say would have existed but 11 for the conduct they claim was wrongful. 12 And that but-for world is nothing more 13 than imaginary. It is not in any way, shape, 14 or form a reasonable or realistic alternative 15 world, a world that could ever have existed in 16 the absence of the conduct that the Plaintiffs 17 say was wrongful. 18 And before proceeding too much 19 further, I want to stop here and say a word 20 about Professor Noll. 21 Remember Professor Noll is the 22 Plaintiffs' expert, and you might say why would 23 Microsoft's lawyer start his opening statement 24 talking about an expert for the other side? 25 And the reason is this: It's 4132 1 important to note right at the outset that the 2 experts agree on a number of points, a number 3 of points that we think will be of interest to 4 you. 5 Professor Noll testified in another 6 proceeding, and he was asked about Windows, and 7 here's what he said. 8 In May 1990, we talked about Windows, 9 and Microsoft came out with Windows 3.0 in May 10 1990. 11 We'll talk more about dates, and I 12 know there have been a lot of dates thrown 13 around. 14 This date turns out to be important 15 for reasons we'll discuss. 16 And Professor Noll referred to Windows 17 3.0 as a revolutionary technological leap, 18 revolutionary technological leap that Microsoft 19 came out with in May of 1990, and then we 20 talked about Windows 95. 21 And he testified that Windows 95, 22 which as you know came out in 1995, was an 23 operating system that made it possible to 24 implement the advanced features of 25 microprocessors coming out at that time. 4133 1 And the question was: In other words, 2 Windows 95 was also an improvement in the 3 technology? 4 Professor Noll's answer: Yes, every 5 single edition of Windows has been an 6 improvement in the technology. 7 I emphasize this now right at the 8 beginning because when we talk about 9 overcharges, inevitably we're talking about 10 products and their value, what they're worth. 11 And we start with the proposition that 12 the expert for the other side, a man on whom 13 the other side relies very heavily, 14 acknowledges that every new edition of Windows 15 has been an improvement. 16 And yet as you saw, the prices of 17 Windows have not gone up as the product gets 18 better and better, and the prices of Excel and 19 Word have gone down dramatically, and we'll 20 show you that those products have gotten better 21 and better too. 22 And I want to note here that the 23 Plaintiffs really did resort to what I called 24 earlier a little bit of an old debater's trick 25 of setting up what counsel called a straw man, 4134 1 because you heard many times today and Friday, 2 and before that well, Microsoft will say this 3 and Microsoft will say that, and Microsoft will 4 offer this as a reason. 5 And, of course, I hope you were 6 patient enough to understand that you should 7 hear from Microsoft about what Microsoft says 8 and not necessarily accept the 9 characterization, this argument of making a 10 false argument about what we'll say and then 11 trying to shoot it down. 12 The primary issue in this case, the 13 one that will be the focus of most of your 14 attention and ours is whether Microsoft 15 overcharged Iowans for software as a result of 16 some alleged violation of the Iowa Competition 17 Law. 18 And the class period, although I don't 19 know if the Plaintiffs ever explained to you 20 what the class period means, the class period 21 is 12 years; May 18, 1994, to June 30, 2006. 22 What that means here is that the 23 Plaintiffs will be seeking damages. They will 24 be asking you to award them damages for sales 25 of software to members of the class in Iowa 4135 1 throughout that 12-year period, sales in let's 2 say second half of '94, all the way through the 3 middle of this year, a lengthy period. 4 I know that you noted that much of the 5 conduct that the Plaintiffs referred to took 6 place well before the class period ever 7 started. 8 And we will talk later about the need 9 to show causation, some link between what the 10 Plaintiffs say happened and an overcharge in a 11 much later period. 12 In other words, the Plaintiffs say, 13 well, Microsoft did X in 1990. I'll cover X. 14 We'll get to some of these points. 15 And the Plaintiffs say that resulted 16 in an overcharge in 2002 and 2003 and '4 and 17 '5, all the way through June 30 of 2006. 18 One of the issues Plaintiffs I don't 19 believe ever touched on with you is whether or 20 not that causal link can be made, whether you 21 can find some causal connection that an 22 overcharge that took place, let's say in 2005, 23 resulted from some supposed conduct 15 years 24 earlier. 25 And many, many of the witnesses that 4136 1 the Plaintiffs will call by videotape 2 deposition are people who testified in the 3 government case, or other cases, many years 4 ago. 5 Now, I want to pause here. 6 I think you understand the Plaintiffs 7 have chosen to play videotapes of old 8 depositions to you of witnesses who testified 9 in many cases years and years ago. 10 Perhaps you'll ask yourself when 11 listening to those depositions, could a witness 12 testifying in 1998, let's say in the government 13 case, could that witness be offering testimony 14 in support of the claim that Microsoft 15 overcharged anyone anywhere, let alone in Iowa? 16 As you know, the government case had 17 no claim and there was no finding about any 18 overcharge. 19 So, I'll do this in more detail with 20 you. There's a half an hour left today, so I'm 21 going to just cover the introduction. 22 The Plaintiffs will be required to 23 prove to you that Microsoft violated the Iowa 24 Competition Law; that any violation of that law 25 resulted in an overcharge; and that the 4137 1 Plaintiffs themselves suffered actual injury as 2 a result. 3 And while there was an awful lot said 4 about conduct going way back when, none of 5 which is anticompetitive, the evidence we 6 believe will show that to you, to your 7 satisfaction. 8 There was very little said about the 9 question of causation, of some link that would 10 show you that any of this conduct resulted in a 11 price too high. 12 And the Plaintiffs said also on 13 December 1st, during the beginning of the 14 opening statement, one thing they offer is very 15 low-bundled prices for MS-DOS and Windows 16 together. 17 That's correct. We agree on some 18 things with the Plaintiffs. 19 We agree that one thing they offer is 20 very low-bundled prices for MS-DOS and Windows 21 together. Very low prices. 22 And we'll talk some more about the 23 argument that Microsoft shouldn't have combined 24 MS-DOS and Windows into one product, this 25 so-called bundling or bolting, putting two 4138 1 products together for consumers. 2 The idea that if you go back far 3 enough, if you're selling a shirt, you 4 shouldn't tie the buttons to it. Somebody 5 else, after all, sells buttons. 6 If you are selling shirts and you make 7 it easier for a consumer by already sewing the 8 buttons to your shirt, one would have a hard 9 time seeing how consumers are injured. 10 We know how the company that sells 11 buttons would be injured, but the question 12 there, of course, is consumers. 13 And we'll talk more about bundling. 14 None of these analogies are perfect, 15 and I don't mean to tell you that that one is 16 either. 17 And you heard just less than an hour 18 ago, I noted on my watch it was about 1:15, you 19 heard the Plaintiffs say that sometimes things 20 can be partially true. You'll remember that 21 just a little while ago. 22 Well, I noted that on my legal pad 23 because it had occurred to me even before then 24 that the Plaintiffs had shown you during their 25 opening statement many times just little 4139 1 snippets, little pieces of a document without 2 letting you see the full sentence even, or the 3 full paragraph, or the document as a whole. 4 And showing little snippets, just 5 little pieces, drawing out a phrase or a 6 sentence, I think you all realize can be 7 dangerous and it can be misleading. 8 Very often one has to see the full 9 sentence or paragraph to understand the 10 meaning. 11 One of the examples that I noted -- 12 this occurred last Thursday -- was Plaintiffs' 13 Exhibit 111. 14 This is an E-mail in 1989 from Bill 15 Gates to others at Microsoft. 16 The E-mail contains some reference to 17 pricing of Windows 3, which, of course, hadn't 18 come out yet. It would come out in May 1990. 19 So nothing was being priced yet. It was an 20 E-mail in which Mr. Gates is batting around 21 some ideas. 22 And let's look at what the Plaintiffs 23 showed you last Thursday from this E-mail. 24 This is their slide. We didn't make 25 up a new one. This is what they showed you 4140 1 last Thursday from Plaintiffs' Exhibit 111. 2 And remember, they highlighted for you 3 what we've highlighted in yellow, and they 4 stopped, I thought a lot about having us price 5 it super -- and they didn't show you the next 6 line, and you can't actually see it on the 7 document itself. 8 So I thought maybe we'd uncover what 9 the Plaintiffs had not given you and give you a 10 little bit more of what Mr. Gates was then 11 saying. 12 Here's the document in full, 13 Plaintiffs' Exhibit 111. 14 And what we've done here is to show 15 you again just the piece, the snippet, as I've 16 called it, that the Plaintiffs used, and now 17 we're going to show you a little bit more of 18 what Mr. Gates was saying. 19 The line that they had cut off said, I 20 thought a lot about having us price it super. 21 And this is a case, after all, about 22 prices. 23 The Plaintiffs say there was an 24 overcharge; that the price was too high. 25 And here's Mr. Gates in 1989 -- it's 4141 1 now 17-plus years ago -- talking about prices. 2 I thought a lot about having us price 3 it super aggressively, $50, he says on order, 4 maybe it should be in order, to get it to take 5 off really fast. 6 In the next paragraph, and you can 7 read as much as you want, I have decided I want 8 us to leave the price at $99 instead of raising 9 it to 129. I know this hurts the profit a lot 10 of the two '86 product, and I am open-minded 11 about changing it after six months, et cetera. 12 This is just an example. That 13 sometimes little snippets in an opening 14 statement, where you're given a little piece of 15 a document one after the other, and documents 16 come and go very quickly. Sometimes it can be 17 a little dangerous unless you see what 18 surrounds the words that are extracted. 19 I also noted when counsel was telling 20 you at 1:15 that sometimes the partial truth 21 can be worse than no truth at all. 22 I also noted this. Throughout the six 23 days that the Plaintiffs spent in their 24 opening, they told you time and time again, 25 both lawyers, that the most effective tactic -- 4142 1 those three words were used a number of times 2 together -- the most effective tactic that 3 Microsoft had in the operating system when 4 combatting DR-DOS and OS/2 and other 5 competitors was the per processor licenses that 6 the Plaintiffs referred to as exclusionary 7 contracts. 8 The most effective weapon -- and 9 counsel again today used the phrase chokehold. 10 He said per processor licenses are the 11 chokehold. 12 That was the weapon that they say was 13 anticompetitive and that they say was the 14 chokehold that prevented competitors from 15 competing effectively. 16 How many of you knew after six days of 17 the opening that the last time Microsoft used a 18 per processor license was July 15, 1994, more 19 than 12 years ago? 20 So when they told you it was the most 21 effective tactic and the chokehold, they left 22 out a little piece of information talking about 23 partial truths. Those contracts have not been 24 used now in almost 12 1/2 years; since July 15, 25 1994. 4143 1 And one other thing along the same 2 lines. 3 We've heard day after day about the 4 notion that Microsoft should be held 5 accountable for what occurred in the government 6 case. And I will get to the government case, I 7 promise. 8 We've heard in voir dire and we've 9 heard in the opening statement that you should 10 hold Microsoft accountable. 11 What you didn't hear was that in the 12 government case, Microsoft was held 13 accountable; that the government case did have 14 a conclusion, a final judgment entered by the 15 Federal Court in that case under which 16 Microsoft agreed, and was ordered by the Court, 17 to change certain business practices. 18 MR. HAGSTROM: Your Honor, may we have 19 a sidebar? 20 THE COURT: Yes. 21 (The following record was made out of 22 the presence of the jury.) 23 THE COURT: Let the record reflect we 24 are outside the presence of the jury. 25 Plaintiffs have requested a sidebar 4144 1 conference. 2 Go ahead. 3 MR. HAGSTROM: Your Honor, as I 4 understand our prior discussion on the 2002 5 consent decree, actually consent judgment, that 6 number one, this is irrelevant for purposes of 7 this case. It will cause confusion with regard 8 to the jury. 9 The conduct at issue is not addressed 10 by the 2002 judgment. The fact of the matter 11 is, it's Plaintiffs' contention that conduct 12 has continued post-2002, and the purpose that 13 Microsoft is now trying to bring up the 2002 14 judgment is to give the jury the erroneous 15 impression that conduct, any unlawful conduct, 16 has ceased. 17 So it's our view that citing to that 18 judgment is going to confuse the jury. 19 Microsoft has objected to, as I 20 understand it, our reference to the 1995 21 consent decree, and it would be appropriate not 22 to refer to that judgment. 23 MR. TULCHIN: Your Honor, we discussed 24 this on November 20th; exactly this. And 25 Mr. Hagstrom well knows it. 4145 1 And the Court said, I have no problem 2 with opening statement, in response to a 3 discussion about whether I could talk about the 4 consent decree. 5 And it's November 20th at page 1033. 6 It continues on 1034 to 5. 7 I'll let you talk about accountability 8 you said to Ms. Conlin, and you told me that 9 there was no problem, no problem referring to 10 this in opening statement. 11 This sidebar I think is an unwarranted 12 attempt, which succeeded so far, of 13 interrupting my opening statement. 14 I made objections when I needed to, 15 Your Honor. I did not try to pull counsel out 16 of the room in front of the jury and waste 10 17 minutes on an issue that previously was decided 18 by the Court. 19 MR. HAGSTROM: Your Honor, at that 20 time the issue was referring to the 2002 21 judgment during voir dire. I don't have the 22 transcript in front of me. 23 MR. TULCHIN: It was not. It was 24 both. 25 MR. HAGSTROM: I do not have the 4146 1 transcript in front of me, but the central 2 issue was whether or not Mr. Tulchin would be 3 able to link up the issue of the 2002 judgment 4 to any juror qualification. 5 We did not go into any detailed 6 discussion, as I recall, with regard to the 7 reference of the 2002 judgment during opening, 8 or for that matter, during the course of the 9 case. 10 One of the motions in limine, as I 11 recall, also -- I should have the order with 12 me. 13 MR. TULCHIN: Yes, you should. 14 MR. HAGSTROM: We should not be 15 referring to settlement agreements. 16 So we shouldn't be referring to 17 settlement agreements to create any impressions 18 on liability. 19 Well, certainly referring to the 20 judgment would give the impression that conduct 21 has ceased and there can't be any liability 22 after 2002. 23 THE COURT: Is that what you are going 24 to tell the jury? 25 MR. TULCHIN: No, and I haven't. 4147 1 THE COURT: What are you going to tell 2 them? 3 MR. TULCHIN: So far I told them just 4 what I told them, your Honor, and that's all I 5 intended to right now. 6 THE COURT: How are you going to get 7 that into evidence, the consent decree? 8 MR. TULCHIN: We do -- we have a 9 witness to testify about the consent decree and 10 the changes in the business practice that 11 Microsoft made as a result. 12 This is not an argument, Your Honor, 13 that there can be no evidence of 14 anticompetitive conduct in the period 2002 to 15 the present. 16 If they have evidence, they put it in. 17 But the jury -- you've already ruled, 18 and in good faith I proceeded, on the basis 19 that the jury could be told that there was a 20 conclusion to the government case. 21 THE COURT: Okay. 22 MR. TULCHIN: And this is it. 23 THE COURT: Anything else? 24 MR. TULCHIN: No. 25 MR. HAGSTROM: Ms. Conlin just 4148 1 reminded me that the motion in limine, as a 2 result of that motion, Your Honor had ruled 3 that any discussions of any settlements were to 4 be addressed outside the presence of the jury, 5 which we are doing, and if Microsoft wishes to 6 address any change in conduct, just as 7 Mr. Tulchin stated that Microsoft ceased using 8 per processor license on a particular date, it 9 is very easy for them to say we ceased doing X 10 as of a particular date in 2002, and that would 11 be an appropriate way to do it, rather than 12 creating an aura that henceforth after November 13 2002 what Microsoft has done, or as of November 14 2002 it's no longer doing anything wrong. 15 MR. TULCHIN: Your Honor, this is just 16 a filibuster. 17 The jury is waiting. It's apparently 18 an effort to embarrass me in front of the jury. 19 The Court told me I could say this, 20 and I just did. 21 And I think what the jury should be 22 told is that the Plaintiffs made an objection 23 which was unwarranted and my -- I shouldn't be 24 penalized in their eyes as a result. 25 THE COURT: Anything else? 4149 1 MR. HAGSTROM: Well, just in regard to 2 the last, I mean Mr. Tulchin made objections 3 during our openings. 4 MR. TULCHIN: I did not ask for a 5 sidebar in the back which would throw counsel 6 off by 20 minutes. 7 THE COURT: Anything else? 8 MR. HAGSTROM: No, sir. 9 THE COURT: Very well. 10 I'm going to allow you to go into it 11 providing that you are going to link it up in 12 your evidence. 13 And again I don't want any suggestion 14 that that 2002 consent decree eliminated any 15 damage issue whatsoever. 16 MR. TULCHIN: We haven't said that, 17 Your Honor. 18 THE COURT: Well, I don't even want an 19 implication of it. It's wrong. It's 20 inaccurate. It's not the truth. 21 MR. TULCHIN: I agree with you. 22 (The following record was 23 made in the presence of the jury.) 24 THE COURT: Sorry about that. One of 25 our sidebars. 4150 1 The objection is overruled. 2 Mr. Tulchin may continue. 3 MR. TULCHIN: Thank you, Your Honor. 4 And we will have witnesses at the 5 trial who will explain to you about the 6 Microsoft business practices that were changed 7 as a result of the government case. 8 Now, I thought it was worthwhile, 9 though I suspect it's something that by now you 10 know, to talk for just a minute or two about 11 the difference between allegations and 12 evidence. And I think it's important. 13 As you know from the Court's 14 instructions, allegations include opening 15 statement, all six days that you've heard so 16 far, outlines such as the outline that 17 Plaintiffs' counsel put on the screen, an 18 outline of what they say Microsoft did wrong. 19 That's not evidence of anything. That's just 20 argument. 21 The 15 icons that the Plaintiffs 22 conveniently put on different documents, which 23 are nothing more again than their arguments, 24 their assertions about what those documents 25 mean and what they amount to legally. 4151 1 And, of course, the lawyers' 2 characterizations and argument. 3 And again, I noted at about 20 minutes 4 after ten this morning something that the 5 Plaintiffs said to you in a different context 6 about experts, but it was something that 7 literally I had in my notes to say, almost word 8 for word. 9 It's easy to take potshots at 10 somebody. You heard that from the Plaintiffs 11 at 10:20 today. 12 And indeed, it's easy to make 13 allegations, and it's easy to make argument. 14 It's not hard to come up with icons 15 which contain the lawyers' assertions about 16 what a document means or outlines, but, of 17 course, you will all be asked ultimately when 18 you deliberate to decide this case not on these 19 arguments, but on the evidence. 20 And, as Judge Rosenberg instructed 21 you, evidence is testimony and that's the 22 testimony from witnesses in the courtroom and 23 prior testimony by videotape or testimony 24 that's read to you. 25 And it's also the documents received 4152 1 by the Court, documents admitted into evidence. 2 And I do want to say that trials very 3 often are sort of long roads to go down. This 4 one will be a particularly long road, maybe 5 among the longest that any of us have ever 6 traveled. 7 And, as you appreciate, the normal 8 rule which will be the case here too is that 9 the Plaintiffs go first. 10 They went first in their opening and I 11 know you paid close attention to what they said 12 just as you'll pay close attention to what I'll 13 say. 14 But the Plaintiffs' evidence may go on 15 for a very long time. And I think I'll remind 16 you of this when I'm about done with my opening 17 statement, but it's worth saying now as well, 18 that Microsoft asks each and every one of you 19 to withhold judgment, to be patient, to wait to 20 hear from Microsoft during its part of the 21 case. 22 And weeks and weeks and weeks will go 23 by, lots of it with these videotape 24 depositions. And we will ask you to withhold 25 any judgment until you hear both sides, which 4153 1 is part of what the Court instructed you to do. 2 Now, as I said a little bit earlier, 3 the Plaintiffs and Microsoft do agree on some 4 things. We agree with this statement that 5 counsel made on December 1. It isn't illegal 6 to be successful. We applaud that. It isn't 7 illegal to grow your company from little to 8 huge. That's the American dream. We very much 9 agree with that. That's correct. 10 And in that connection, Preliminary 11 Instruction Number 1, first instruction from 12 the Court told you -- we go way back now to the 13 week before last -- Microsoft claims that it 14 has been successful because it sells what 15 Microsoft believes are high quality software 16 products at low prices. 17 Exactly what I started off with here 18 today. 19 This case is about quality of the 20 products. It is about value. It is about the 21 prices, and it's also about causation. 22 Was there anything from the government 23 case or the allegations made here by the 24 Plaintiffs that caused the market to be so 25 different from what it otherwise would have 4154 1 been that prices would have been dramatically 2 different from the very low prices that 3 Microsoft has charged? 4 All right. I want to switch to 5 another subject before we go on with the issues 6 in the case because in a very real sense, the 7 attack that the Plaintiffs launch on Microsoft 8 is an attack on the whole 30 year history of 9 the company. 10 I think they were quite explicit about 11 that. And we see the history very, very 12 differently than they do and we see the reasons 13 for Microsoft's success as very different. 14 So I want to go back to the beginning 15 and you will hear this evidence during the 16 trial of how Microsoft started and how it 17 initially became successful. 18 The story really starts in a sense in 19 December of 1974. A 19-year-old from Seattle 20 then attending Harvard College picked up a 21 magazine and, in a way, the magazine not just 22 changed his life, but changed ours too, changed 23 our country in some way. 24 The magazine had an article about 25 something called the Mits Altair 8800. And I 4155 1 think the Plaintiffs may have showed you 2 something similar during their opening sometime 3 ago. 4 This is the January 1975 edition of 5 Popular Electronics. It came out in December 6 of '74. And, of course, the 19-year-old at 7 Harvard who picked up the magazine was none 8 other than Bill Gates. 9 Now, Bill Gates had learned about 10 computing really in high school or before -- I 11 think junior high school in the 1960s by 12 working with his friend Paul Allen at a high 13 school in Seattle, Washington. 14 This is a picture of a very young Bill 15 Gates with Paul Allen working with an ASR-33 16 teletype going back to Lakeside High School, 17 1978. 18 And, of course, after graduating, Mr. 19 Gates went to Harvard, December 1974. Just to 20 set the context for you a little bit, we need 21 to cast our mind back -- at least those of us 22 who are old enough to remember it, which 23 certainly includes me, Richard Nixon started 24 that year as president. He had resigned in 25 August and Jerry Ford took over as president. 4156 1 Slide rules, some of you may remember 2 these slide rules -- I didn't have one myself, 3 but I knew people who did. 4 Slide rules were used to make 5 complicated scientific calculations. This is 6 almost an antique now. 7 And some of you may remember in 8 baseball the Oakland Athletics. They had just 9 won the World Series three years ago with 10 Reggie Jackson and lots of other great players. 11 And computers in 1974 to the extent 12 they existed at all were usually mammoth 13 machines, behemoths -- here's a picture of an 14 IBM 370 mainframe. 15 They often filled up an entire room 16 and usually cost even in 1974 prices more than 17 a million dollars. Obviously, you and me, the 18 average person on the street did not have 19 access to any personal computing, far, far from 20 it. 21 So when Mr. Gates and Paul Allen first 22 looked at the January 1975 edition of Popular 23 Electronics, and they saw this -- the world's 24 first minicomputer, the Mits Altair 8800, they 25 decided that they were going to write a 4157 1 programming language for the Altair 8800 using 2 what was known as the Basic, b-a-s-i-c, 3 computer language. 4 Now, the Basic language existed 5 already, but Bill Gates and Paul Allen decided 6 that they would rework it and improve it and 7 write a language for this new computer. 8 As you see, world's first 9 minicomputer, the Altair 8800 and, indeed, I 10 think the Plaintiffs mentioned in their opening 11 statement that this minicomputer didn't do much 12 at all. It was basically a box that flashed 13 lights. 14 But some people -- I guess the 15 visionaries -- thought it was awfully, awfully 16 cool. 17 And Bill Gates dropped out of Harvard 18 at the age of 19. He and Paul Allen moved to 19 Albuquerque, New Mexico. They moved there 20 because that's where the company was that made 21 these computers. 22 And they started working night and day 23 very often 14, 15, 16 hours a day to improve 24 the basic language. 25 Lo and behold, they were successful 4158 1 and they licensed that to the company that made 2 the Mits Altair. 3 They also managed to license what they 4 had done, their software, for a low flat fee to 5 makers of other of these minicomputers that 6 were starting to spring up in the late '70s. 7 And Mr. Gates' idea right from the 8 start, right from the start in the 1970s was to 9 charge a low price for his software, a low 10 price with the hope -- with the basic idea that 11 a low price would generate high sales. 12 It's not a new idea. High volume, low 13 sales. It goes back to Henry Ford. It goes 14 back to Frederick Maytag in Iowa with the 15 washing machine. Make a good product, keep the 16 price low, and you'll sell lots of them and do 17 well. 18 THE COURT: Mr. Tulchin, we're going 19 to take our break today. 20 MR. TULCHIN: Thank you, Your Honor. 21 THE COURT: Ladies and Gentlemen of 22 the jury, please remember the admonition 23 previously given. You can leave your notebooks 24 here. Carrie will collect them and lock them 25 up tonight. 4159 1 We will start again 8:30 a.m. tomorrow 2 morning. You are excused. 3 (The following record was made out of 4 the presence of the jury at 2:31 p.m.) 5 MR. HOLLEY: It was my understanding 6 that Mr. Reece was going to come and we were 7 going to hear from him on this question of the 8 sanctions motion and also I had understood that 9 Mr. Tuggy and Mr. Gralewski wanted to talk 10 about something. 11 THE COURT: The motion they made last 12 night? 13 MR. HOLLEY: Right. About reference 14 in the opening to the Iowa resellers, Your 15 Honor. 16 MS. CONLIN: And, Your Honor, all I 17 wanted to do is very briefly supplement the 18 record that we made in the -- out of the 19 presence of the jury. 20 Microsoft moved to exclude from 21 evidence any testimony or documents with 22 respect to Microsoft's settlements or efforts 23 to settle, and the Court granted in part that 24 motion. 25 And the Court's order was that no 4160 1 evidence of an offer to compromise a disputed 2 claim in this case, acceptance of such an offer 3 or a completed settlement is admissible. 4 The Court will decide on an 5 issue-by-issue basis the admissibility of the 6 1995 consent decree and the consent decree 7 between Microsoft and the United States 8 Department of Justice. 9 Also, on an issue-by-issue basis, 10 outside the presence of the jury, which is what 11 we were attending to, Your Honor, there may be 12 presented to the Court for ruling the 13 admissibility matters of compromise and 14 settlement not offered to prove liability or 15 invalidity of a claim or its amount, but for 16 another purpose. 17 And that, Your Honor, is just a 18 supplement to what we said in the back. 19 THE COURT: Court stands by the 20 ruling. 21 It allowed Mr. Tulchin to make a 22 reference, I guess, with the good faith belief 23 that he's going to be able to show to the Court 24 it's admissible at some point during the trial. 25 So, but the Court's ruling does stand. 4161 1 And that will be how we decide it when you come 2 to presenting any such evidence. You will go 3 through the Court first outside the presence of 4 the jury. 5 Is that -- anything else, Mr. 6 Hagstrom? 7 MR. HAGSTROM: Your Honor, I've been 8 trying to communicate through third person 9 because I've generally been here. 10 I think Mr. Reece will be here 11 tomorrow afternoon after the jury is released, 12 if that's all right. 13 THE COURT: It will have to do. 14 MR. HAGSTROM: Thank you. 15 THE COURT: Anything else? 16 See you tomorrow. 17 MR. TULCHIN: Thank you, Your Honor. 18 (Proceedings adjourned at 2:34 p.m.) 19 20 21 22 23 24 25 4162 1 CERTIFICATE TO TRANSCRIPT 2 The undersigned, Official Court 3 Reporters in and for the Fifth Judicial 4 District of Iowa, which embraces the County of 5 Polk, hereby certifies: 6 That she acted as such reporter in the 7 above-entitled cause in the District Court of 8 Iowa, for Polk County, before the Judge stated 9 in the title page attached to this transcript, 10 and took down in shorthand the proceedings had 11 at said time and place. 12 That the foregoing pages of typed 13 written matter is a full, true and complete 14 transcript of said shorthand notes so taken by 15 her in said cause, and that said transcript 16 contains all of the proceedings had at the 17 times therein shown. 18 Dated at Des Moines, Iowa, this 11th 19 day of December, 2006. 20 21 22 ______________________________ Certified Shorthand Reporter(s) 23 24 25