MS/DOJ: Gov't not alerted on AOL-Netscape deal

America Online chairman Steve Case testified during his deposition in the Microsoft antitrust case on Friday that government attorneys were not told AOL was in acquisition talks with Netscape Communications -- only that there were 'sensitive discussions' -- prior to an AOL official's testimony. Case was questioned for two hours in a Washington hotel .

America Online chairman Steve Case testified during his deposition in the Microsoft antitrust case on Friday that government attorneys were not told AOL was in acquisition talks with Netscape Communications -- only that there were "sensitive discussions" -- prior to an AOL official's testimony.

Case, who was questioned for two hours in a hotel here, said that one of his top executives had alerted the US Department of Justice's lead attorney about the talks in October, before David Colburn, AOL's senior vice president of business affairs, testified for the government against Microsoft. On the eve of AOL's purchase of Netscape Nov. 24, Case testified, government attorneys were "quite surprised" to learn that those talks had involved an acquisition, and were not focused on AOL's interest in using Netscape's browser.

The Case deposition, which was conducted in public under an archaic rule regarding antitrust cases, was sometimes rambling, exploring a host of other issues, including AOL's marketing efforts, interest in providing subscribers more engaging broadband services and the company's policy on purging old electronic mail. The main reason that U.S. District Court Judge Thomas Penfield Jackson granted Microsoft the right to depose officials from AOL, Netscape and Sun Microsystems Inc., another company AOL reached a pact with, was to explore how that three-way-deal would affect the competitive landscape.

Case maintained that the deal had nothing to do with Microsoft's core business of producing the Windows operating system software, which runs on an estimated 90% of personal computers worldwide. Referring to an interview that Case granted to The Washington Post during the trial, and after the Netscape deal, Justice Department attorney David Boies pressed Case to confirm comments that he made that AOL has no intention of battling Microsoft's core business. "Nothing we're doing can compete with Windows," Case said.

During the trial, which has been in recess since the end of February and is expected to resume June 1, the judge introduced the article as evidence and indicated he was interested in hearing from Case. But Case's deposition today seemed to provide little new fodder for Microsoft to use in its defense, except remaining questions about when and what the government was told about the Netscape negotiations.

"Are you aware of any document in AOL's files that suggests it was the Department of Justice's call as to when AOL would say it had informed the Department of Justice of the proposed Netscape transaction?" Microsoft's lead attorney, John Warden, asked Case.

Case said that he didn't know of any document and that "it's a ridiculous thing to contemplate."

Warden pressed on with questions about whether one of Case's top executives, senior vice president George Vradenburg, had warned Boies, with whom Vradenburg had worked at a law firm years ago, to avoid asking questions that would result in information about the merger talks coming to light during Colburn's testimony. Case denied this. When Colburn was questioned, at AOL's insistence, there were certain lines of questioning that were conducted privately. Boies said today that attorneys on both sides were allowed to ask AOL anything about its dealings during those closed-door sessions but that both sides assumed the talks with Netscape were about AOL licensing its browser.

Boise labeled Warden's line of questioning as "a sideshow" and "an effort to detract from the central issue" in the case, which he said is Microsoft's abuse of monopoly power in the operating system market to compete unfairly. The government has charged that Microsoft used its leverage to "cut off Netscape's air supply" by convincing computer manufacturers and Internet service providers to offer customers Microsoft's browser and not Netscape's browser. "Microsoft is totally unwilling to come to grips with the basic issue in this case," he said.

In fact, Case said that the deal for Netscape -- which was ultimately valued at US$10 billion as it involved an 8% stake in AOL -- had nothing to do with Netscape's browser, which the government has charged in its far-reaching antitrust case was impaired by unfair competition from Microsoft.

"We did not buy Netscape because of the browser," Case said, "but rather in spite of it. ... We believe Netscape's browser business was in significant decline since the release of Windows 98, and that has happened. ... One of the concerns AOL had was whether the decline on their watch might embarrass AOL."

AOL went ahead with the purchase because the company believed that Netscape's other attributes -- such as its Netcenter Internet portal, staff and e-commerce strategy -- were far-more appealing.

While the case is scheduled to resume with rebuttal witnesses June 1, both sides are expected to meet at least once more try to hammer out a settlement.

(Wasserman is Washington bureau chief for The Industry Standard).

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