Microsoft Outsmarts Itself

When Microsoft
Corp entered US District Court to defend itself against a Justice Department

antitrust suit in October, it had what many people assumed would be

a surefire defense in one area-a June US Court of Appeals ruling that

upheld the software maker's right to combine products as it saw fit.

The higher court said that as long as the integration provides "some

technological value" that can't be achieved if users combine the

features themselves, there was no problem. That ruling, legal experts

said, would make it all but impossible for the government to prove that

Microsoft violated tying laws when it combined its Internet Explorer

browser with Windows.






So much for the experts. Throughout, the government has been able to
produce evidence disputing Microsoft's claim that integrating the browser

was simply the next step in the Windows' evolution-and not a way to

force computer makers to offer its browser rather than one from Netscape

Communications Corp.






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What's worse, for Microsoft, the recent setback on integration is just
one in a series for the company's defense. Even though it is now Microsoft's

turn to call witnesses and put forth its version of events, it is government

that seems to be scoring most of the points in recent weeks. "It

is certainly not the start that Microsoft envisioned," says Washington

Antitrust Attorney Timothy JO'Rourke.






Perhaps most discouraging, Microsoft's own witness, Sr VP James E Allchin,
has provided some of the most damning testimony. Under cross-examination

by Justice attorney David Boies, Allchin conceded on February 1 that

a consumer with Windows 95 could install Internet Explorer later and

achieve many of the features offered in Windows 98, with its integrated

browser. Washington antitrust attorney James R Loftis III says Allchin's

testimony was "another nail in the coffin of Microsoft's argument

that (Windows 98) is integrated and not separate products."






Allchin's testimony also raised serious questions about Microsoft's
credibility, from which it may not easily recover. On February 2, Boies

began a cross-examination aimed at discrediting a videotaped demonstration

that Microsoft had entered into evidence. The purpose of the tape was

to prove that government witness Edward W Felten of Princeton University

was wrong when he asserted that he could remove browsing capability

from Windows 98 without harming the system.






After Boies pointed out to Allchin problems that suggested doctoring
of the tape, US District Judge Thomas Penfield Jackson noted that "doubt"

had been cast "on the reliability" of the Microsoft tapes.

At press time, Microsoft was planning to restage the demonstration.






By itself, the video snafu could be viewed as just an embarrassing gaffe.
But it's part of a pattern that leaves the impression that Microsoft

is losing points. The Microsoft witnesses who preceded Allchin to the

stand also fared badly under government cross-examination. Boies attacked

Richard L Schmalensee, Microsoft's economist, over his earlier writings,

which seemed to contradict his current testimony. When the economist

insisted that high profits don't imply monopoly power, Boies showed

him a 1982 article in which Schmalensee wrote that persistently high

profits do indicate barriers to entry by rivals. To that, he said, "My

immediate reaction: `What could I have been thinking?'"






Another Microsoft witness, Paul Martiz, wound up giving Justice some
ammunition for its allegation that Microsoft attempted to divide the

browser market with Netscape at a June 21, 1995, meeting. Boies managed

to get Martiz to concede that Microsoft had tried to persuade Netscape

to become less of a direct rival by using more Windows technology in

its browser.



Most worrisome for Microsoft should be Jackson's demeanor during these
cross-examinations. Several times, he ordered Martiz to answer Boies

with a simple "yes" or "no"-something he never did

with government witnesses, even when Microsoft lawyers sought his help.

He also challenged Schmalensee's reasoning several times. "In many

ways, he has been revealing his skepticism with their arguments,"

says William E Kovacic of George Washington University Law School.






But it's the widening crack in the integration defense that could prove
most damaging to Microsoft. To show a violation of antitrust law, the

government must prove that Microsoft's browser and operating system

are separate products and that there would be consumer demand for each

alone. To that end, Justice has introduced many Microsoft emails showing

that even Microsoft execs monitored the marketshares of the two products

individually. In a January, 1996 email, for instance, Microsoft Chairman

William H Gates III noted, "Winning browser share is a very, very

important goal for us."






Less choice


As for consumer demand, executives from Packard Bell NEC, Gateway and
Hewlett-Packard all testified that they would like to make the browser

choice themselves. "I would prefer that we had that choice to make,"

said Scott Vesey, a Boeing Corp executive who testified that his company

chose Netscape as the standard because it could work on top of all operating

systems.






Although Allchin insisted he wanted to integrate Internet Explorer because
it was a "cool technology", Justice has introduced emails

indicating that the company may have intended to foreclose competition.

Said one executive in February, 1997, "It...will be very hard to

increase browser marketshare on the merits of Internet Explorer alone.

It will be more important to leverage the (operating system) assets

to make people use Internet Explorer instead of ."






There is still considerable evidence on Microsoft's side on the issue.
And even if justice wins this point, finding the right remedy could

be a headache. Does Judge Jackson order a company to pull apart its

product-one used by millions of consumers? And is he really ready to

dictate what should be in an operating system? For these reasons, Microsoft

may still come out with Windows fully intact. Then again, Judge Jackson

doesn't seem one to take the easy way out.

By Susan B Garland



Copyrighted


Issue dated February 15, 1999.

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