MS/DOJ: Trial resumes, economist testifies

A government economic expert, who had warned of living in a 'Microsoft World,' was back in court yesterday as the first rebuttal witness in the US Department of Justice's antitrust lawsuit against Microsoft. Fisher called a colleague's analysis that Microsoft isn't a monopoly 'muddled,' 'mixed up' and 'confused.'

A government economic expert, who had warned of living in a "Microsoft World," was back in court yesterday as the first rebuttal witness in the US Department of Justice's antitrust lawsuit against Microsoft .

Franklin Fisher, a professor of economics at the Massachusetts Institute of Technology, was called to refute testimony of Microsoft's expert witness -- and his colleague -- Richard Schmalensee, dean of MIT's Sloan School of Management.

Fisher called Schmalensee's analysis that Microsoft isn't a monopoly "muddled," "mixed up" and "confused."

Judge Thomas Penfield Jackson said it felt like "old home week," shortly after taking the bench this morning to resume the trial after a 13-week recess.

Jackson had been hearing another case during the recess, which a jury is now deciding. He warned that he may have to interrupt the Microsoft trial once that jury reaches a verdict.

Fisher, questioned by lead government trial counsel David Boies, said that many of the problems in Schmalensee's analysis stem from his decision not to define operating systems as a separate market.

Instead, operating systems in Schmalensee's analysis were included as part of the software market generally. "That's not relevant," said Fisher. "That's not what this case is about."

Microsoft customers, said Fisher, do not believe that they have any serious commercial alternatives to the Windows operating system. Moreover, Microsoft has the ability to raise prices without fearing that its customers will go elsewhere.

Schmalensee had argued that Microsoft's operating systems faced numerous threats from existing competitors and from unknown developments -- all of which constrained the company's behavior and pricing.

But Fisher said that notion that a "wolf might come out of the forest" to challenge Microsoft is not a serious analysis, said Fisher.

Fisher said the possibility of future threats "doesn't prevent Microsoft from having monopoly power today."

Fisher said Microsoft engaged in behavior intended to preserve its monopoly in operating systems. Microsoft's decision to bundle the Internet Explorer Web browser with the Windows 98 operating system is an example, said Fisher. "That was a product that it not only gave away for free but bribed people to take," he said.

Giving the browser away was not a profitable act for the company except for the protection it offered its operating system monopoly, said Fisher.

"Microsoft has plainly taken actions which only make sense when they believed they have a monopoly to protect," said Fisher.

Fisher was one of two government economic witnesses to testify in the main part of the trial. Each side will present three witnesses during the trial's rebuttal phase.

Fisher argued that Microsoft had the power to control PC makers by the prices it charged them for its Windows operating system. Fisher presented data, in an earlier closed-door courtroom session, which the government said provided evidence of price discrimination.

In earlier testimony, Fisher warned of living in a "Microsoft world," bereft of competition and consumer choice.

The government will seek to boost that argument with testimony from Gary Norris, a top IBM Corp. executive who was lead negotiator in IBM's Windows licensing agreements for its PCs.

In a deposition last week in a Raleigh, North Carolina, courtroom, Norris said Microsoft threatened to retaliate against PC makers that offered IBM's OS/2 operating system.

Norris, describing events that largely occurred between 1995 and 1997, said its royalty fees to Microsoft increased from US$9 per copy for Windows 3.1 to $45.90 per copy for Windows 95.

Microsoft's rebuttal case is expected to focus on the implications of America Online's acquisition of Netscape Communications . The agreement, originally announced as a $4.2 billion acquisition on Nov. 23, later increased in price to around $10 billion as stock prices increased.

Microsoft will contend that the deal offers proof of competition in the software industry, and helps refute government arguments that the company has put a "chokehold" on the Internet browser market.

Other government witnesses are Edward Felten, a Princeton University computer expert, who developed a computer program that removed Internet Explorer from Windows 98. Microsoft contends that Felten's program merely hides its functionality.

Microsoft is calling David Colburn, an AOL senior vice president, as a rebuttal witness. He is a former government witness in this case who is being called as a "hostile" witness by Microsoft. Colburn will testify on the AOL/Netscape merger. Microsoft officials are questioning the truthfulness of Colburn's earlier testimony.

Other Microsoft witnesses include Gordon Eubanks, CEO of Oblix Inc., the former head of Symantec Corp., a business software company. MIT economist Schmalensee will also be called on Microsoft's behalf.

(Thibodeau is a senior writer at Computerworld.)

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