Microsoft earnings come under question

Despite Microsoft Corp.'s boasts that Internet Explorer caught up to Netscape's Navigator because it is a better browser, even the software giant's own executives were not convinced of this, according to evidence introduced in the U.S. government's antitrust trial vs. Microsoft.

Despite Microsoft Corp.'s boasts that Internet Explorer caught up to Netscape's Navigator because it is a better browser, even the software giant's own executives were not convinced of this, according to evidence introduced in the U.S. government's antitrust trial vs. Microsoft.

According to a marketing report dated May 8, 1998, Microsoft indicated that it believed that Explorer was "fundamentally not compelling" compared to Netscape's Navigator and "not differentiated" from the rival browser.

The comments in that internal document were a striking contrast to the courtroom revelation that Microsoft spent about $500 million developing Explorer. Richard Schmalensee, dean of the Sloan School of Management at the Massachusetts Institute of Technology and Microsoft's first witness, revealed that figure under cross-examination by the government's lead attorney, David Boies.

While on the subject of money, Boies grilled Schmalensee about Microsoft's impressive earnings report this week. The Redmond, Washington-based company reported earnings of US$1.98 billion in the second quarter of its fiscal year, almost double what the company earned in the same period of the previous year.

"You can't infer monopoly power from quarterly profits," Schmalensee said, prompting Boies to ask if profits of that magnitude over time might indicate monopoly power.

"A valuable piece of intellectual property can indeed yield a long string of profits," Schmalensee said. "The firm is highly profitable. The operating system is highly profitable. How highly profitable, I don't consider relevant."

In his written testimony Schmalensee had concluded that if Microsoft had the type of monopoly power the government alleged, the company would be charging 40 times what it currently charges for each copy of Windows. That would translate to about $2,000 per copy, instead of the current $50 price.

Boies also pointed to an e-mail from Bill Gates to subordinates dated Jan. 5, 1996, in which the Microsoft chairman and chief executive officer indicated he was not pleased that manufacturers had placed icons for Netscape's browser "FAR more prominently" on the Windows screen than they had placed icons for Explorer.

Schmalensee conceded that other Microsoft officials drew a connection between computer makers' placement of icons for Explorer and its online service, Microsoft Network (MSN), and the restrictions the company imposed on the start-up screen. A memo from another Microsoft executive, Joachim Kempin, listed "control over start-up screen, MSN, and IE placement" under the heading: "What we missed in the first half of 1996."

Microsoft's insistence on control of the start-up screen enraged several PC makers, who argued that the restrictions would force them to undertake costly product redesigns. A Hewlett-Packard official complained to Microsoft, "If we had a choice of another supplier, based on your actions in this area, I assure you would not be our supplier of choice."

Microsoft's second witness -- Paul Maritz, company vice president of platforms and applications group -- is expected to be called this week. Maritz, through his numerous e-mail messages entered as evidence throughout the trial, has already been a prominent figure in court. He is one of the key decision-makers at Microsoft, particularly on issues involving Explorer.

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