Microsoft and AOL: How Did This Relationship Come Together?

c. The Online Services Folder Agreements

272. In late 1995 and early 1996, senior executives at Microsoft recognized that AOL accounted for a substantial portion of all existing Internet access subscriptions and that it attracted a very large percentage of new IAP subscribers.

     
     

     Indeed, AOL was and is the largest and most important IAP. The Microsoft executives thus realized that if they could convince AOL to distribute Internet Explorer with its client software instead of Navigator, Microsoft would — in a single coup — capture a large part of the IAP channel for Internet Explorer.

     
     

     In the early spring of 1996, therefore, Microsoft exchanged favorable placement on the Windows desktop, as well as other valuable consideration, for AOL’s commitment to distribute and promote Internet Explorer to the near exclusion of Navigator. AOL’s acceptance of this arrangement has caused an enormous surge in Internet Explorer’s usage share and a concomitant decline in Navigator’s share.

     
     

     To supplement the effects of the AOL deal, Microsoft entered similar agreements with other OLSs. The importance of these arrangements to Microsoft is evident in the fact that, in contrast to the restrictive terms in the Windows Referral Server agreements, Microsoft has never waived the terms that require the OLSs to distribute and promote Internet Explorer to the near exclusion of Navigator.

i. AOL

273. Prior to 1995, OLS subscribers used proprietary access software to view only their OLS’s specialized content. Beginning in 1994, however, the public became increasingly interested in accessing information on the Web. So to keep from losing subscribers and to attract new ones, OLSs upgraded their services to provide access to the Web. In November 1994, for example, AOL purchased BookLink and incorporated its Web browsing software into AOL’s proprietary access software to enable AOL’s subscribers to access and view Web content.

274. While public awareness of the Web was taking hold, companies like Netscape and Microsoft were hard at work developing Web browsing software. By the fall of 1995, a number of OLSs, including AOL, had decided not to devote the considerable resources that would have been required to keep up with this rapid pace of innovation.

     
     

     They chose instead to license state-of- the-art Web browsing technology from a separate supplier. Microsoft saw AOL, with its subscriber base then approaching five million, as a potential breakthrough opportunity — a way for Microsoft quickly to obtain credibility in Web browsing technology as well as usage share for the current version of its browsing software, Internet Explorer 3.0.

275. In November 1995, David Cole of AOL advised Pete Higgins of Microsoft that AOL was looking for Web browsing software to license and incorporate into future versions of its proprietary access software. Bill Gates and AOL’s Chairman, Steve Case, subsequently spoke several times on the telephone. In those conversations, Gates urged that AOL representatives meet with Microsoft technical personnel in order to get a better sense of the quality and features of Internet Explorer 3.0.

     
     

     For his part, Case told Gates that he wanted Microsoft to include AOL’s client software with Windows such that AOL received the same desktop promotion that MSN enjoyed. Gates insisted that such favorable treatment of AOL within Windows was out of the question.

276. Lower down in Microsoft’s chain of command, executives took issue with Gates’ reluctance to grant AOL favorable placement in Windows. In October 1995, before Gates and Case began talking, a group of Microsoft executives prepared for Gates a memorandum on the company’s Internet Explorer efforts entitled, “How to Get to 30% Share in 12 Months.” The executives wrote that

we need to remove barriers to browser adoption by Online Services and Internet Access Providers. Today MSN is an access service . . . , an online service . . . , and an Internet site . . . ; in other words, it competes with everyone. By bundling MSN in the Windows box, we are threatening ISV’s in each of these areas, who in turn have no incentive to promote our Internet Browser.

277. One of the proposals the executives put forward was that Microsoft “Open Up the Windows Box.” In other words, the executives believed that, in exchange for favorable treatment of Internet Explorer, Microsoft should include the client software of IAPs in Windows and give those services prominent placement on the desktop, even if such placement drew attention away from MSN. Over the months that followed, senior Microsoft executives came to the conclusion that opening up the Windows box to MSN’s competitors was a necessary price to pay for increasing Internet Explorer’s share of browser usage.

278. Case ultimately agreed to visit Microsoft’s Redmond campus in January 1996. In preparation for that meeting, Microsoft purchased PC systems from five different OEMs (Compaq, Hewlett-Packard, IBM, Packard Bell, and NEC) at retail outlet stores. When they turned these systems on, employees at Microsoft discovered that the OEMs were already shipping AOL’s software pre-installed on their PCs and giving the AOL service more prominent placement than MSN on the Windows desktop.

     
     

     From the fact that AOL was already enjoying broad distribution and promotion on the Windows desktop through agreements with OEMs, several senior Microsoft executives, in particular Paul Maritz and Brad Chase, concluded that Microsoft would not be giving up all that much if it traded placement on the Windows desktop for AOL’s commitment to promote and distribute Internet Explorer.

     
     

     At least initially, Gates took a different lesson from the experiment with the five PC systems. He seems to have felt that Microsoft should react not by ‘opening up the Windows box,’ but rather by clamping down on the ability of OEMs to configure the Windows desktop.

     
     

     Indeed, the discovery that OEMs were promoting AOL on the Windows desktop was one of the things that led him to complain to Joachim Kempin on January 6, 1996 about OEMs that were bundling non-Microsoft Internet services and software and displaying it on their PCs “in a FAR more prominent way than MSN or our Internet browser.”

279. Case’s insistence that Microsoft promote AOL on the Windows desktop stemmed partly from factors other than the additional subscriptions expected to come from the OLS folder. After all, AOL already enjoyed distribution agreements with major OEMs that placed an AOL icon on the desktop of millions of new PC systems.

     
     

     But given that its OEM agreements tended to be short-term and somewhat tenuous, and considering how sensitive the OEMs were to Microsoft’s will, AOL executives realized that AOL’s position on the Windows desktop would be more secure if it met with some degree of contractual acquiescence from Microsoft.

     
     

     After all, whereas Microsoft retaliated in subtle and not-so-subtle ways against OEMs, such as IBM, that pre-installed software on their PCs that Microsoft found minatory, it pronounced more extreme sanctions against OEMs, such as Compaq, that had the temerity to remove icons and program entries from the Windows desktop that Microsoft had placed there.

     
     

     Case had reason to see value, then, in shifting AOL from being a source of software at whose promotion Microsoft took umbrage to the dispenser of software whose placement on the Windows desktop Microsoft guaranteed.

     
     

     Moreover, obtaining Microsoft’s commitment to include the AOL client software and prominent promotion for AOL in every copy of Windows would place AOL on all Windows 95 PC systems, including those sold by the multitude of OEMs whose shipment volumes were too low to warrant the negotiation of separate distribution deals.

     
     

     Furthermore, placement on the desktop in some fashion would improve AOL’s negotiating position when it asked individual large OEMs to place an AOL icon directly on the desktop of their PC systems.

     
     

     Whatever the reason, and irrespective of the considerable value that Microsoft offered AOL apart from desktop placement, Case made clear to Gates his sincere conviction that AOL would not recruit its subscribers to Internet Explorer unless Microsoft included AOL’s client software in Windows and promoted AOL in some form on the Windows desktop.

280. Four days before Case was due to arrive at Microsoft’s campus, Gates sent an Email outlining Microsoft’s goals in negotiating a deal with AOL to the responsible Microsoft executives. He wrote:

     
     

What we want from AOL is that for a period of time — say 2 years — the browser that they give out to their customers and the one they mention and put on their pages and the one they exploit is ours and not Netscape[’]s.

We need for them to make our browser available as the browser to existing and new customers. We have to be sure that we don’t allow them to promote Netscape as well. We want all the hits that come off of AOL to register on servers as our browser so people can start seeing us as having measurable browser share.

Gates understood that if AOL gave assurance that its subscribers used Internet Explorer when browsing the Web, the measure of browser usage share data to which application developers paid most attention — i.e., server “hit” data — would show a significant rise in Internet Explorer’s usage share. Gates also realized that such a commitment by AOL was worth seeking even if it lasted for only a couple of years.

281. On January 18, 1996, Case arrived at Microsoft’s campus with three other AOL executives. During the first meeting, Microsoft described the componentized architecture of Internet Explorer 3.0 that would allow AOL to embed the browsing software into AOL’s access software.

     
     

     The AOL executives viewed componentization as a highly attractive feature, because AOL wanted its subscribers to feel they were using an AOL service whether they were viewing proprietary AOL content or browsing content on the Web. In fact, Case and the other AOL representatives told their Microsoft hosts that AOL wanted total control over the “browser frame” (the windows in which Web content is displayed) to make it distinctive to AOL. In other words, AOL wanted no menus, dialog boxes, or other visible signs that would alert AOL users to the fact that they were using Web browsing software supplied by a company other than AOL.

282. At the end of the meeting, Case expressly acknowledged the attractiveness of Microsoft’s componentized approach. Notably, Netscape had not yet developed a componentized version of Navigator. Netscape had assured AOL that it would do so, and AOL believed that Netscape was capable of eventually making good on its pledge, but the fact remained that Microsoft had already completed a componentized version of Internet Explorer.

     
     

     Case was impressed enough with Internet Explorer 3.0 that when he returned to AOL he told a number of fellow executives that, when it came to AOL’s technical considerations, Microsoft perhaps enjoyed an edge over Netscape. Still, the AOL executives saw Navigator as enjoying better brand recognition and demonstrated success in the marketplace.

283. Later in the day on January 18, Case and his team also met with Gates, Chase, and Chase’s direct superior, Brad Silverberg, to discuss the business aspects of a potential AOLMicrosoft alliance. At one point during the meeting, Case again told Gates that AOL needed inclusion of its client software in Windows and prominent placement on the Windows desktop if there was to be a closer relationship between the two companies.

     
     

     Gates expressed frustration that Case continued to insist on getting an AOL icon on the Windows desktop in addition to the technology, engineering assistance, and technical support Microsoft was offering AOL. Despite the obvious importance that Case attached to desktop placement, Gates said he would not agree to that condition.

284. A week after the January 18 meeting, Chase and Silverberg met with Gates. They reiterated that, whether Gates liked it or not, an AOL icon already appeared on the desktop of the major OEMs’ PCs. Given that fait accompli, they argued, Microsoft would gain much more than it would lose by agreeing to place AOL on the Windows desktop in exchange for AOL’s commitment to promote and distribute Internet Explorer.

     
     

     This time, Gates agreed to give AOL some sort of promotion in Windows. He continued to insist, however, that Microsoft not place an AOL icon directly on the Windows desktop. Rather, Gates agreed to include AOL, along with other OLSs, in a generic “Online Services Folder,” an icon for which would reside on the desktop. Since MSN enjoyed a branded icon directly on the desktop, including AOL in the OLS folder would maintain its inferior status to Microsoft’s service.

285. Still, Gates viewed the concession as a significant one; he understood that it meant undermining MSN’s success in the pursuit of browser share. As he told an interviewer in the spring of 1996:

     
     

We have had three options for how to use the “Windows Box”: First, we can use it for the browser battle, recognizing that our core assets are at risk. Second, we could monetize the box, and sell the real estate to the highest bidder. Or third, we could use the box to sell and promote internally content assets. I recognize that, by choosing to do the first, we have leveled the playing field and reduced our opportunities for competitive advantage with MSN.

286. In light of AOL’s success in having gained access to the Windows desktop through the expedient of OEM pre-installation without Microsoft’s acquiescence, Gates’ abiding reluctance to grant AOL access through Microsoft’s front door may have stemmed from a preoccupation with the message such a move would send — both to other firms in the computer industry and to consumers deciding which Internet service to use.

     
     

     Although Gates viewed it as a significant concession, he acquiesced in granting AOL a place in Windows because he believed that Microsoft could not pass up the opportunity AOL presented to drive Internet Explorer’s usage share dramatically upward and to exclude Navigator from a substantial part of the IAP distribution channel.

287. The negotiations between Microsoft and AOL proceeded throughout February and early March 1996. On March 11, 1996, AOL announced that it had selected Navigator as the primary Web browsing software for GNN, which was AOL’s basic ISP service at the time and had a subscriber base only two to three percent the size of the subscriber base of AOL’s flagship online service.

     
     

     The GNN arrangement was thus eclipsed the following day when AOL announced that it had chosen Internet Explorer as the primary Web browsing software for its flagship service.

288. Under the March 12 agreement, Microsoft gave AOL access to, and the right to modify, Internet Explorer source code in order to customize it for use with AOL’s proprietary access software. This concession went far beyond the freedom that the IEAK granted IAPs to place their own branding on Internet Explorer. Microsoft also agreed to provide AOL with significant engineering assistance and technical support to enable AOL to integrate Internet Explorer into AOL’s proprietary access software.

     
     

     Further, Microsoft agreed to provide AOL with certain specific features of Internet Explorer 3.0 by precise target dates and to ensure that future versions of its Web browsing software would possess the latest available Internet-related technology features, capabilities, and standards. Finally, Microsoft granted AOL free world-wide distribution rights to Internet Explorer and agreed to distribute AOL’s proprietary access software in Windows and to place an AOL icon in the OLS folder on the Windows desktop.

     
     

289. In return for Microsoft’s commitments, AOL agreed to base the proprietary access software of its flagship online service for Windows and the Mac OS on Internet Explorer 3.0 and to update that software as newer versions of Internet Explorer were released. Another provision in the agreement provided that “AOL and AOL Affiliates will, with respect to Third Party Browsers, exclusively promote, market and distribute, and have promoted, marketed and distributed, Internet Explorer on or for use by subscribers to the AOL Flagship Service.”

     
     

     Specifically, AOL agreed to ensure that in successive six-month periods, neither the number of copies of non-Microsoft Web browsing software it shipped (through any sub-channel, including GNN), nor the number of new subscribers accessing AOL (including GNN) with non-Microsoft Web browsing software, would exceed fifteen percent of the total number of copies of proprietary access software that AOL distributed through any channel (i.e., through the Windows desktop or otherwise). AOL retained the right to distribute non-Microsoft Web browsing software to subscribers who affirmatively requested it, as long as doing so did not did not raise the relevant shipment quotients above fifteen percent.

     
     

     AOL also retained the right to provide a link within its service through which its subscribers could reach a Web site from which they could download a version of Navigator customized for the AOL service. At the same time, however, the agreement prohibited AOL from expressing or implying to subscribers or prospective subscribers that they could use Navigator with AOL.

     
     

     Nor did it allow AOL to include, on its default page or anywhere else, instructions telling subscribers how to reach the Navigator download site. In any event, as the Court has found above, downloading large programs over the Internet involves considerable time, and frequently some frustration, for the average user with average hardware and an analog connection.

     
     

     The prospects were slim that many AOL users (who tend to be novice users with average equipment) would expend the effort to download Navigator when they already had browsing software that worked well with the AOL service.

     
     

     Finally, while the agreement permitted AOL (subject again to the fifteen-percent shipment quotas) to distribute non-Microsoft Web browsing software when requested by thirdparty providers, distributors, and corporate accounts, it obligated AOL to use all reasonable efforts to cause the third party to distribute that software on its own and to minimize the use of AOL’s brand name with the distribution.

290. The Microsoft executives responsible for closing the deal with AOL recognized that AOL had agreed to distribute and promote Internet Explorer to the virtual exclusion of Navigator. Two days after Microsoft signed the agreement with AOL, Chase sent to Microsoft’s executive staff a memorandum answering questions he thought the executives might have about the agreement. One such question was, “I find it hard to believe that AOL is using Internet Explorer as its browser. Are there exceptions?”

     
     

     Chase responded: “Yes the[re] are some but they are pretty remote. An AOL customer could choose to use Navigator and it will be available to be downloaded from the AOL site, though not in a prominent way. There are some circumstances with 3rd party distribution deals where AOL has some limited flexibility. On its GNN service, AOL can do what it wants. But for all intents and purposes it is true, AOL will be moving its 5M customers to a new client integrated with Internet Explorer 3 starting this summer/fall.”

     
     

291. As with the restrictive provisions in the Referral Server agreements, the provisions in the March 1996 agreement constraining AOL’s distribution and promotion of Navigator had no purpose other than maximizing Internet Explorer’s usage share at Navigator’s expense. Considering that the restrictions applied to AOL’s proprietary access software regardless of the sub-channel through which it was distributed, and that Microsoft collected no revenue from Internet Explorer, the restrictions accomplished no efficiency.

     
     

     They affected consumers only by encumbering their ability to choose between competing browsing technologies. In order to gain AOL’s acceptance of these restrictions, Microsoft accorded AOL free desktop placement that undermined its own MSN, in which Microsoft had invested hundreds of millions of dollars.

     
     

     Significantly, Microsoft did not waive any of the terms of its agreement with AOL (nor of its agreements with other OLSs) when it waived some of the restrictive provisions in its Referral Server agreements in April 1998. The reason was Microsoft’s recognition that holding OLSs, particularly AOL, to exclusive distribution and promotion terms was more important to maximizing Internet Explorer’s usage share than holding ISPs to similar terms.

292. Microsoft closely monitored AOL’s compliance with the restrictive provisions in the March 1996 agreement. Microsoft employees periodically inspected AOL’s service for any sign of promotions for Netscape. The scrutiny was close enough to prompt an AOL executive to write Microsoft’s Chase: “We are not selling NS advertising around its browser or otherwise — let’s move on. . . . [I]t is not time to be paranoid . . . .”

293. Ever since the negotiations with Microsoft intensified in early 1996, it had been AOL’s intention to select one firm’s Web browsing software and then to work closely with that firm to incorporate its browsing technology seamlessly into the AOL flagship client software.

     
     

     Regardless of which software it chose as its primary offering, though, AOL still wanted the ability to satisfy consumer demand for competing Web browsing software. AOL did not want users who preferred a certain brand of Web browsing software to have to go to a competing OLS in order to obtain it.

     
     

     Therefore, even once it selected Internet Explorer as the software that it would integrate seamlessly into its client, AOL would have preferred to make an AOLconfigured version of Navigator readily available to subscribers and potential subscribers.

294. Despite its preference, however, AOL did not make Navigator readily available to subscribers after the agreement with Microsoft took effect. To the contrary, AOL made it relatively difficult for new subscribers to obtain a version of Navigator that would work with its client software, and it pressured existing subscribers who used Navigator to abandon it in favor of client software that included Internet Explorer.

     
     

     In essence, AOL contravened its natural inclination to respond to consumer demand in order to obtain the free technology, close technical support, and desktop placement offered by Microsoft.

295. On October 28, 1996, Microsoft and AOL entered into an additional agreement called the Promotional Services Agreement, whereby AOL agreed to promote its new proprietary access software that included Internet Explorer to existing AOL subscribers, and Microsoft agreed to pay AOL for such promotion based on results.

     
     

     Specifically, Microsoft agreed to pay AOL $500,000, plus twenty-five cents (up to one million dollars) for each subscriber who upgraded from older versions of AOL’s proprietary access software to the version that included Internet Explorer, plus $600,000 if AOL succeeded in upgrading 5.25 million subscribers by April 1997.

     
     

     In addition, AOL’s Referral Server agreement with Microsoft provided that AOL would receive a two-dollar credit on referral fees for each new subscriber who used Internet Explorer. So while the March 12, 1996 agreement ensured that nearly all new AOL subscribers would use Internet Explorer, the Promotional Services and Referral Server agreements enlisted AOL in the effort to convert the OLS’s millions of existing subscribers to Internet Explorer.

     
     

     In fulfillment of these agreements, AOL began to prompt its subscribers to download the latest version of its client access software, complete with Internet Explorer, every time they logged off the service.

296. It is not surprising, given the terms of the 1996 agreements between Microsoft and AOL, that the percentage of AOL subscribers using a version of the client software that included Internet Explorer climbed steeply throughout 1997.

     
     

     By January 1998, Cameron Myhrvold was able to report to Gates and the rest of Microsoft’s executive committee that ninety-two percent of AOL’s subscribers (who by then numbered over ten million) were using client access software that included Internet Explorer.

     
     

     A year earlier, the same type of data had shown that only thirtyfour percent of AOL subscribers were using AOL client software that included Internet Explorer. The marked increase resulted in no small part from AOL’s efforts to convert its existing subscribers to the newest version of its client software.

297. Even if an AOL subscriber obtains the new client software that includes Internet Explorer, he can still browse the Web using any browsing software, including Navigator, that happened to be installed on his hard drive. It is unlikely that many users will go to this effort, however, given the ease of browsing with the software that comes with AOL’s client software.

     
     

     The average AOL user, being perhaps less technically sophisticated than the average IAP subscriber, is particularly unlikely to expend any effort to use browsing software other than that which comes included with the AOL software. AOL, acting pursuant to the provisions of the March 1996 agreement, has not made it easy for its subscribers to locate, download, and install a version of Navigator configured for its service.

     
     

     Consequently, those AOL subscribers who did not already have Navigator on their systems by the time that agreement took effect were even less likely to use Navigator.

     
     

298. So when Microsoft executives learned that ninety-two percent of AOL subscribers were using client software that included Internet Explorer, they could rest assured that virtually the same percentage of AOL’s subscribers were using Internet Explorer whenever they connected to the Internet with AOL.

     
     

     In fact, an examination of the “hit” data collected by AdKnowledge indicates that as of early 1999, only twelve percent of AOL subscribers were using Navigator when they browsed the Web (see Section V.H.1., infra, for a description of the method by which AdKnowledge collects data). AOL (and its CompuServe subsidiary), in turn, accounted for a very large percentage of all IAP subscribers.

     
     

     In fact, according to data Microsoft collected and used internally, AOL and CompuServe accounted for sixty-five percent of the combined subscriber base of the top eighty IAPs in late 1997. It is thus a reasonable deduction that the restrictive terms Microsoft induced AOL to accept in 1996 pre-empted a substantial part of the IAP channel for Internet Explorer.

     
     

299. On November 24, 1998, AOL and Netscape agreed that AOL would acquire Netscape for 4.3 billion dollars’ worth of AOL stock. In a related transaction, AOL entered into a three-year strategic alliance with Sun, pursuant to which Sun would develop and market both its and Netscape’s server software and would manage the companies’ joint efforts in the area of electronic commerce.

     
     

     AOL purchased Netscape not just for its browsing technology, but also for its electronic commerce business, its portal site, its brand recognition, and its talented work force. To the extent AOL was paying for Netscape’s browser business, its primary goal was not to compete for user share against Internet Explorer.

     
     

     Rather, AOL was interested in Navigator to the extent that it drove Web traffic to Netscape’s popular portal site, NetCenter.

     
     

     AOL was also interested in ensuring that an alternative to Internet Explorer remained viable; it wanted the option of dropping Internet Explorer to retain enough vitality so that it would not be at the mercy of Microsoft for software upon which the success of its online service largely depended. Finally, AOL was interested in keeping Navigator alive in order to ensure that Microsoft did not gain total control over Internet standards.

     
     

300. AOL had the right under its agreement with Microsoft to terminate the distribution and promotion provisions relating to Internet Explorer on December 31, 1998.

     
     

     If AOL had decided to terminate those provisions, the March 1996 agreement would otherwise have remained in effect, and AOL could have continued to base its proprietary access software on Internet Explorer, taking advantage of Microsoft’s engineering and technical support. Microsoft, however, would have had the option of removing AOL from the OLS folder.

     
     

     What is more, Chase informed AOL that Microsoft might react to AOL’s termination of the restrictive provisions by discontinuing the OLS folder altogether, which would have disadvantaged the AOL’s subsidiary OLS, CompuServe, which also enjoyed a place in the OLS folder.

     
     

301. Despite its acquisition of Netscape, AOL did not exercise its right to terminate the exclusivity provisions of its agreement with Microsoft at the end of 1998. AOL executives made the reasons clear to AOL’s board of directors on November 17, 1998, when they presented the Netscape/Sun transactions for the board’s approval. They wrote:

     
     

In exchange for using IE as our primary browser component, Microsoft bundles [AOL] in the “Online Services Folder” on the Windows desktop. This is an important, valued source of new customers for us, and therefore something we are inclined to continue. Microsoft has made it clear that they will not continue to include us in Windows if we don’t agree to continue our “virtual exclusivity” provisions for use of IE within [AOL]. . . . There are benefits to [Netscape] of replacing IE with the [Netscape] browser — it would dramatically shift browser market share (from about 50/50 today to 65/35 in favor of [Netscape]). However, our present intent is to continue with IE, partly to get the continued marketing benefits of Windows bundling, and partly to maximize the likelihood of continued “détente” with Microsoft.

By not exercising its right to terminate the “virtual exclusivity” provisions in the agreement with Microsoft, AOL commited itself to abide by those restrictions until January 1, 2001.

302. AOL does not believe that it must make every possible use of Netscape’s browsing software, and maximize Navigator’s usage share, in order to justify its purchase of Netscape.

     
     

     Now that AOL has the capability to produce its own state-of-the-art componentized browsing software, however, the fact remains that, of the various advantages Microsoft currently offers AOL in exchange for its agreement to distribute and promote Internet Explorer with near exclusivity, the only one likely to still be of great value to AOL at the beginning of the new millennium is the inclusion of AOL’s client software, and the promotion of its service, within Windows.

     
     

     Assuming Microsoft continues to offer that placement to AOL after January 1, 2001, the extent to which AOL continues to distribute and promote Internet Explorer to the exclusion of other browsing software will depend largely on the value that AOL assigns to that placement and to any new forms of consideration Microsoft offers.

     
     

     With respect to the value of placement in the OLS folder, AOL registered approximately 970,000 new subscribers through the OLS folder in the fiscal year ending in June 1998. This represented eleven percent of the new subscriptions AOL gained that year, and it was enough to prompt AOL executives in November 1998 to describe the OLS folder to the AOL board as an “important, valued source of new customers for us.”

     
     

303. If AOL were to halt its distribution and promotion of Internet Explorer, the effect on Internet Explorer’s usage share would be significant, for AOL’s subscribers currently account for over one third of Internet Explorer’s installed base.

     
     

     But even if AOL stops distributing Internet Explorer after January 1, 2001 and updates its entire subscriber base to client software that includes its own or some other proprietary browsing software, Microsoft will still have ensured that, over the preceding four years (AOL subscribers began using proprietary access software based on Internet Explorer in November 1996), a very large majority of AOL subscribers used Internet Explorer whenever they browsed the Web through the AOL service.

     
     

     This period is significantly longer than the two years Gates thought AOL’s obligations would have to last in order for the deal to be worthwhile to Microsoft.

304. AOL’s subscribers now number sixteen million, and a substantial part of all Web browsing is done through AOL’s service. By granting AOL valuable desktop real estate (to MSN’s detriment) and other valuable consideration, Microsoft succeeded in capturing for Internet Explorer, and holding for a minimum of four years, one of the single most important channels for the distribution of browsing software.

     
     

     Starting the day Microsoft announced the March 1996 agreement with AOL, and lasting at least until AOL announced its acquisition of Netscape in November 1998, developers had reason to look into the foreseeable future and see that non-Microsoft software would not attain stature as the standard platform for network-centric applications.

     
     

     Microsoft exploited that interval to enhance dependence among developers on Microsoft’s proprietary interfaces for network-centric applications — dependence that will continue to inure to Microsoft’s benefit even if AOL stops distributing Internet Explorer in the future.

     
     

     The AOL coup, which Microsoft accomplished only at tremendous expense to itself and considerable deprivation of consumers’ freedom of choice, thus contributed to extinguishing the threat that Navigator posed to the applications barrier to entry.

     
     

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