Mr. Chairman, I very much appreciate the opportunity to testify today about issues that are critical to the software industry. Unfortunately, the subject of the use of monopoly power in the software industry has too often been viewed as a matter largely of concern to a few prominent companies or as a competitive battle about internet browsers. However, the issues we are discussing today extend throughout the entire software industry. The fact that the largest trade association of software companies, the Software Publishers Association, has recently issued a report entitled "Competition in the Network Market: The Microsoft Challenge" is indicative of the concern felt throughout the industry.

I have been active in the software industry for 30 years. It is an exciting and rapidly evolving industry that historically has been characterized by tremendous innovation and widespread opportunities for new technologies and businesses to emerge and grow. I believe that the abuse of monopoly power within the industry now threatens the innovation and entrepreneurship that have been the key contributors to the success and dominance of the United States software industry.

Antitrust laws were established to prevent the abuse of monopoly power and to promote competition and innovation. I have always been under the impression that these laws applied to all industries, except major league baseball. Although the software industry is unique in many regards, its complexity should not exempt it from the laws carefully constructed to promote fair competition and innovation in our society. I do not believe in excessive government regulation and would not welcome the micro-management of the software industry generally. However, I strongly believe that the effective enforcement of antitrust laws in the software industry now is absolutely essential to the industry's vitality in the future and that meaningful enforcement of antitrust laws today could prevent the need for new regulations in the future.
I. Sybase's Role in the Software Industry

Sybase, Inc. is one of the ten largest global independent software companies. Our software offerings consist of high-performance relational database products that are used primarily for online transaction processing, occasionally connected computing, and data warehousing applications; middleware products that provide connectivity, interoperability and data movement in heterogeneous computing environments; and leading application development tools that enable customers to develop software applications. Our products are primarily sold to businesses and support their information technology infrastructure. This diversified product set results in Sybase participating in many different sectors of the software industry. In this regard we have both worked with and competed against Microsoft and have an extensive history of dealing with them for nearly twelve years. For example, Microsoft's relational database product, which we now compete with, is based on products developed by Sybase and licensed to Microsoft. Our application development tools are used by developers to build application programs that run on Microsoft's operating system.
II. Operating System Monopoly

The existence of a monopoly in the personal computer operating system by Microsoft is well documented. Microsoft uses this monopoly position to leverage itself into, and ultimately dominate, other software markets through a variety of means. The use of its control over standards and programming interfaces and the bundling of products with its operating system to expand its business has been described to this Committee by others. An excellent summary of how Microsoft is seeking to leverage this monopoly into the market for network computer servers and business infrastructure has recently been released by the Software Publishers Association, an association with over 1,200 members. That paper highlights the array of anticompetitive practices Microsoft is employing in the network market. What is striking about the analysis of the Software Publishers Association is that all of the activity described – hidden application programming interfaces, manipulation of technical standards, bundling, predatory prices, tied pricing, vaporware announcements, to name a few – were used by Microsoft and expand its original monopoly. So in many cases, what is new is not the practices, but the markets in which those practices are being applied.

My principal objective today is not to repeat for you the facts and analysis presented to you by others, but to provide you with two specific, and I believe very reflective, examples of the harmful affect on innovation resulting from the abuse of a monopoly position.
III. Intimidation

Monopoly power can be maintained and abused in many ways, including simple intimidation and coercion. I would like to describe an illustrative incident which occurred last year.

On March 31, 1997 Sybase introduced a new product, Jaguar CTS, which provides an easy-to-use, scalable and secure platform for developing and deploying transaction intensive business applications on the Internet and intranets which is essential for the expansion of full-scale internet commerce. Approximately one week after we described the Jaguar CTS product at the April 2, 1997 JavaOne developers conference, I received a message labeled "urgent" to call David Vaskevitch, an executive of Microsoft, as soon as possible. I returned the call and reached Mr. Vaskevitch. He advised me that they had seen our announcement of the Jaguar product and then inquired if I understood that this product would compete with a similar product then under development by Microsoft, now named "Microsoft Transaction Server" or "MTS." I indicated that we did know the products would be competitive. He then emphasized that Microsoft did not think that was a good idea. The overall tone of the call left me with the singular impression that we had just received a threat that competition in the market with Microsoft was not acceptable behavior. On May 5, 1997, just weeks after that conversation, Microsoft announced that it was bundling MTS with its Windows NT operating system.

As described earlier to this Committee by others, the bundling of a product with the Windows operating system has been the principal method used by Microsoft to chill or eliminate the market for competitive products. By bundling, Microsoft is able to engage in predatory pricing. In December 1996, four months before Sybase's announcement, Microsoft had stated that MTS would be available for an introductory price of $2,000. A month after our announcement, Microsoft announced that MTS would be bundled with a price below $100. The unchecked ability to add any product deemed by Microsoft to be of significance to the operating system poses a threat to the development of any new product or innovation which can conceivably be bundled. This would seemingly encompass all types of software products that support the information technology infrastructure of businesses. Microsoft’s practice of bundling coupled with predatory pricing where, as here, there is clear evidence of intent to harm competitors, is a blatant abuse of monopoly power that, in my opinion, must be stopped if competition is to exist in software markets. Each of these practices yield anticompetitive results, and each should be viewed as separate violations of the law. Only a monopolist like Microsoft could engage in this kind of behavior in the first place. Microsoft has waged a public relations campaign centered on the principle that antitrust enforcement of any kind is tantamount to unwanted government intrusion and intervention in the marketplace. I am frankly alarmed by the suggestions that it is exclusively up to Microsoft to decide which products to bundle together with or integrate into their monopoly products without application of any other laws or restrictions. If those decisions are solely to be made by Microsoft, we should not expect Microsoft to exercise restraint. If Microsoft’s vision becomes the law, it will mean that the antitrust laws have been effectively eliminated. Is that the right policy for this country? I hope all members of this committee would agree that the answer should be “no”.
IV. Abusing Monopoly Power to Deprive Others of Patent Rights

In addition to using its monopoly power to chill future innovation and eliminate competition, Microsoft uses its monopoly power to deprive companies of the their valuable innovations by essentially robbing them of patent protections created by Congress to incentivize innovation. One example of this unconscionable behavior is demonstrated in Microsoft's contract terms affecting application development tools.

One segment of the software industry consists of application development tools. Application development tools are used by software developers to design and build application programs. While there are a number of prepackaged applications widely used today, such as word processing, spreadsheets, human resources management, and email, a majority of the computer applications used by businesses are internally developed through the use of application development tools. Major vendors of application development tools include Sybase, Oracle, IBM, Sun Microsystems, and Forte Software.

An application development tool can only be successful if it allows the developer to write programs that will operate with the operating system software used by the computers in a business. Because nearly all desktop computers run on Microsoft's Windows, application development tools must be able to write to Microsoft's operating system to achieve any practical utility and market acceptance. I understand that Microsoft has said, “What’s the big issue regarding application programming interfaces and other technical specifications? We, Microsoft, make them fully available to all of our business partners.” Some of their language would appear to suggest they believe in open standards, and in freely sharing information with all potential business partners. I would like to describe the situation from a different perspective.

In order for an application development tool to enable development of applications to run on Windows, the tool vendor must incorporate certain interfaces and other code into its products that can only be licensed from Microsoft. Microsoft currently offers licenses to that essential code through an Open Tools License Agreement. In short, a company can not be in the application tools business unless it signs an Open Tools License Agreement with Microsoft.

Microsoft Open Tools Licenses contain provisions that prevent the tools vendor from suing Microsoft for infringing the vendor's patents with respect to any of the software licensed under that license agreement (a copy of which is attached as Appendix A). This immunity for patent infringement does not extend just to Microsoft, it also applies to its licensees, original equipment manufacturers (such as computer manufacturers) or end users (90% of the computer users). Thus, once a software vendor signs this agreement with Microsoft, it has agreed that it can not sue virtually anyone for violating its related patents, whether the infringement is accidental or intentional. Moreover, Microsoft has advised us that similar or identical provisions are, or will be included, in Microsoft Foundation Class licenses and in certain other license agreement types necessary for tool vendors to offer products for developing Windows applications.

It does not matter that Congress created patents to encourage and protect innovation. It does not matter that the United States Patent and Trademark Office has reviewed the vendor's inventions and determined that they are novel innovations entitled to patent protection. All that matters to Microsoft, is that they do not want the vendor to benefit from its patented innovations and they have the power to take away what the United States Government has granted.

In short, Microsoft uses its monopoly power to force tools vendors to make a choice -- get out of the tools business or give up valuable patent rights.
V. Conclusion

I have today highlighted only two examples of how Microsoft's use of its monopoly position is adversely affecting innovation in the software industry. I have not been a long-time opponent or competitor of Microsoft. The company I founded, Powersoft, was one of the first to embrace Windows and became the leading independent application development platform based on Windows. However, I am now firmly convinced that the unchecked use of Microsoft's monopoly position poses the most serious threat to the vitality and strength of the software industry. It has been argued by some that it is simply too complex to apply existing antitrust laws to software. Our government has dealt with many other issues no less complex and no less vital to our society. I respectfully suggest that antitrust laws were established specifically to protect against the threats to competition and innovation posed by monopolies and that vigorous enforcement now of those laws at this critical time in the evolution of the software industry is essential.

Thank you very much.

APPENDIX 1
SECTION 3(i) OF MICROSOFT CORPORATION OPEN TOOLS LICENSE AGREEMENT

(i) COMPANY agrees not to (a) sue or (b) bring, prosecute, assist or participate in any judicial, administrative or other proceedings of any kind against MS or its licensees (including without limitation end users and OEMs) for infringement of COMPANY Patents (as defined below) during the Immunity Period (as defined below) on account of the manufacture, use, sale, distribution, offer for sale, or importation to the U.S. of:

(i) any releases of the Software licensed to COMPANY hereunder, except as otherwise provided in (1) below; or

(ii) future releases of the Software, or replacement or successor product(s) to the Software, to the extent such future releases or replacement or successor product(s) use or embody inventions used or embodied in a version of the Software licensed to COMPANY hereunder.

(a) “COMPANY Patents” as used in this Section3(i) means all patents and patent applications throughout the world, other than design patents or the equivalent, owned, acquired by, or otherwise enforceable by COMPANY having an effective filing date prior to termination or expiration of this Agreement, or for which COMPANY has or acquires rights prior to the termination of this Agreement. The “Immunity Period” shall commence upon the first to issue and shall terminate upon the last to expire, of any of the COMPANY Patents (in any jurisdiction).

(b) In the event that MS provides COMPANY a new release of Software under this Agreement, and COMPANY determines that such new release uses or embodies inventions not used or embodied in a prior release of Software licensed to COMPANY hereunder, COMPANY may elect to not license such new release by so notifying MS in writing within sixty (60) days after its receipt and prior to COMPANY’s shipment of such new release. COMPANY’s election under this paragraph shall not affect COMPANY’s obligations above with respect to any prior release(s) of Software licensed hereunder.