After the government wrapped up its antitrust case yesterday, Microsoft called as its first witness an economist who said it was irrelevant whether Microsoft holds a monopoly in the desktop personal computer operating system market because potential competition will come from alternative computer platforms.
Microsoft's key economic witness, Richard Schmalensee, dean of the Sloan School of Management at the Massachusetts Institute of Technology, testified that he did not consider the Intel-based PC desktop operating system as a "relevant market" because Microsoft is threatened by cross-platform technologies, such as Java, and Internet browsing technologies.
The argument is at the cornerstone of the government's case against Microsoft. If no "relevant market" can be pinpointed, then Microsoft can not have a monopoly, even if its operating system software runs on 90% of the world's personal computers.
"The market definition did not coincide with the argument about where competition was taking place," Schmalensee said during his first hour of cross-examination. He said the government's allegations that Microsoft attempted to forestall other technologies in order to hold monopoly power over the operating system included comparisons of "apples and oranges."
"Java and Windows are rather different creatures," Schmalensee said.
The government's lead attorney, David Boies, rested his case this afternoon after taking testimony and entering into evidence hundreds of e-mail, internal memos and other documents for more than three months.
The final government witness, another MIT economist, Franklin Fisher, wrapped up his testimony earlier today that Microsoft not only has monopoly power in the desktop operating system market but also used it to thwart competitive threats, thereby denying consumer's choice between such technologies as Internet browsers.
Microsoft attorney John Warden made a motion to dismiss the case, briefly arguing that "no essential elements" to the government's case have been established. But the judge outright denied that routine motion.
Then Boies, who defended IBM in its long antitrust battle, took aim at Schmalensee, who has worked with Microsoft on and off since 1992. Schmalensee is one of a few scholars who refuse to concede that Microsoft's hold on an estimated 90% of PCs around the world amounts to a monopoly and Boies sought to paint his testimony as untraditional.
"What companies supply viable alternatives to the PC operating system?" Boies asked at one point.
Schmalensee then listed two "short-run" alternatives – the Linux and Be operating systems. The Red Hat Software version of Linux, an open source operating system, has an estimated 7.5 million users. And Be is estimated to have far fewer users than that.
US District Court Judge Thomas Penfield Jackson revealed some curiosity about Be, butting in with a question. "Are they making any money?" he asked.
"I would be stunned if they were making a lot of money," Schmalensee conceded. But he pointed out that such companies as Intel and Hitachi had invested money in Be and that the company has signed agreements with some computer manufacturers and software developers. He said the significance of Be and Linux were not that they were making money, or signing up millions of users, but that they appeared to be new entrants into the desktop operating system market that could rival Microsoft in years to come.
"I don't want to claim that they are about to take on the world," Schmalensee added.
In Schmalensee’s 328-page written direct testimony, he argued that Windows' dominance is threatened by competition ranging from network computers to handheld devices such as 3Com's Palm Pilot. Despite its dominance of desktop PCs, Microsoft does not have a monopoly, Schmalensee said, because many other companies are developing new software products that could someday displace the operating system.
"Far from living the quiet life of a monopolist immune from entry [competition], Microsoft perceives itself as being in a constant competitive struggle to maintain its leadership in operating systems," Schmalensee said.
(Elizabeth Wasserman is the Washington bureau chief for The Industry Standard.)