US government fires opening shots in Microsoft trial

The US government fired the opening shots in its historic antitrust case against Microsoft yesterday, focusing its opening argument on attempting to show how the software giant first tried to get rival Netscape Communications to divide up the Internet browser market, and then when this move was rebuffed, how it tried to 'crush the company.' Parts of Bill Gates' video testimony were shown in court and with snippets of e-mail and memos.

The US government fired the opening shots in its historic antitrust case against Microsoft yesterday, focusing its opening argument on attempting to show how the software giant first tried to get rival Netscape Communications to divide up the Internet browser market, and then when this move was rebuffed, how it tried to "crush the company."

In a packed courtroom, the government showed and contrasted parts of Microsoft CEO and Chairman Bill Gates' videotaped testimony of August 27 this year, with snippets of e-mail and memos, in an effort to show what it alleges to be a pattern of Microsoft 's attempts to stifle competition.

Displaying the memos and the videotape segments on two television monitors and a projection screen, the government attempted to show Gates contradicting earlier, written statements, and portray him as a puppeteer, directing his subordinates to try to make Netscape take the non-Windows 95 part of the Internet browser software business and have Microsoft dominate the Windows 95 segment.

The proposed deal to divide up the market was discussed in a June 1995 meeting between Microsoft and Netscape officials, according to the government

In the videotaped testimony, Gates said "it surprised me" when he learned that the June 1995 meeting was cast in this nefarious light. He said the first inkling that he had that the meeting was being portrayed as a Microsoft attempt to get Netscape to divide the market was when he read a Wall Street Journal article to that effect.

But the government contrasted the videotaped testimony with an email Gates wrote five days before the June 1995 meeting, in which he wrote, "A new competitor on the Internet is Netscape, and their browser is dominant ... allowing them to determine which network extensions will carry on." The e-mail also maintained that Netscape's threat to Microsoft is that it would "commoditise" the Windows operating system.

The government contrasted this email from Gates with his videotaped statement that "I wasn't involved in setting up the (June 1995) meeting."

In his videotaped testimony, Gates also said, in response to questions, "Somewhere about this time someone asked if it made sense for us to consider investing in Netscape ... I didn't see that as something that made sense."

But the government today also displayed memos and e-mail in which Microsoft officials suggest that the company "buy a piece of them (Netscape)."

One memo displayed here was an e-mail that Gates wrote to several executives including Paul Maritz, saying in part "I think there is a very possible deal of some kind we can do with Netscape -- there are things we can do in the client ... and then we will help them out with the server." He added: "I would really like to see something like this happen!!"

To bolster its argument, the government also displayed a memo written by a Netscape official to an America Online official describing the June 1995 meeting, saying that Microsoft offered to share insider information with Netscape but that if Netscape refused then Microsoft "would crush them."

Stephen Houck, the attorney for the 20 states that joined the DOJ in the lawsuit, then proceeded this morning to show how, once Netscape rejected Microsoft's alleged offer, it engaged in a pattern of activity designed to "choke" Netscape. These included giving away the Microsoft Internet Explorer browser for free and making comments about the company's ability to survive.

Houck also called on Gates to testify for cross examination, noting that Gates declined to answer questions throughout his videotaped testimony.

"Given Mr. Gates' key role one can attribute his inability to appear to a lack of intestinal fortitude ... and fear of subjecting his story to the crucible of cross examination."

Microsoft, on its part has said that it expected to the government take email and memos out of context. Microsoft lawyers are expected get a turn to make opening arguments later today.

The trial opened five months after the US Department of Justice and 20 state attorneys general filed broad antitrust actions against Microsoft on May 18 in US District Court in the District of Columbia. Justice department officials said the suits sought to end the software giant's “chokehold” on the Internet software market and to lay ground rules for how software is produced, sold and distributed in the future.

The lawsuits, which were later joined into one, were filed to attempt to level the playing field in the Web browser market by suggesting remedies for Microsoft's integration of its browser into its desktop operating system and turning control of the first screen, or "bootup sequence," over to computer manufacturers. The suits also seek to prevent Microsoft from demanding that Internet and online service providers not distribute competing browsers.

But in the contentious months since, government lawyers seem to have been pressing for more long-term fixes for Microsoft, if they can prove in court that the company has a monopoly and used that power illegally. They have asked the judge for a separate court proceeding to weigh remedial measures.

Experts say that there are many “remedies” for the court to consider, in the event that Microsoft loses. Those would include mandating that Microsoft change certain business behaviors, such as requiring computer manufacturers to take the Microsoft browser integrated into the Windows operating system. More extreme remedies would be structural changes to the company, such as a breakup along the lines of what was done to Standard Oil in the early part of the century or to AT&T in the 1980s.

Observers agree that the court fight that began today will be the most important antitrust action since the breakup of the Bell telephone system and could change the way computer software is built, sold and used.

While the antitrust investigations of old targeted long-established industries and companies, Microsoft is a relative startup by comparison, and high-tech a nascent industry. The company was founded in 1975 by Paul Allen and Bill Gates, boyhood friends who had written a programming language for a hobby-kit personal computer a year earlier. Five years later, Microsoft was chosen by IBM to create operating system for its first PC. The software, called MS-DOS, was later improved with graphical icons for ease of use. The new operating system was called Windows.

Microsoft retained the license to its operating system software and it became a de facto standard in the PC industry, as PC sales rose and dwarfed those of Apple Computer and its Macintosh. By 1991, the US Federal Trade Commission began to investigate claims that Microsoft monopolized the PC operating system market. Within two years, the FTC had closed its investigation, but the DOJ took up an independent probe. The first round of the DOJ probe was settled when Microsoft agreed in 1994 to a consent decree requiring the company to change its contracts with PC makers and give up some restrictions on other software manufacturers.

But the battle was really just beginning. By 1995, trust-busters interfered with Microsoft's plans to buy Intuit , a maker of personal finance software. Then, with the advent of the World Wide Web, Microsoft designed a browser to compete with Netscape Communications Corp.’s popular Navigator browser. By the end of the year, Microsoft was giving away copies of Internet Explorer 2.0 with Windows 95.

Two years later, Netscape's share of the browser market had been cut to less than two-thirds of Internet users. In October 1997, the DOJ accused Microsoft of violating the 1994 consent decree by forcing computer manufacturers to take the Microsoft browser as a condition of licensing Windows. Judge Thomas Penfield Jackson agreed and issued a preliminary injunction in December, forcing Microsoft to cease requiring computer makers to install Internet Explorer on their PCs. In June, the U.S. Court of Appeals overturned the injunction and lectured the lower court about interfering in product design.

Microsoft was heartened by the decision and is seen as largely trying the case for the appellate courts, given the perception that Jackson finds the government arguments compelling.

When the antitrust cases were first filed, Microsoft Chairman Bill Gates called the lawsuits a "step backward" for America and for the computer industry. "These demands all appear to benefit a single competitor," Gates said.

After an investigation that included interviews with Microsoft's competitors and licensees and inspection of the company's internal memos – including Bill Gates' own e-mail – federal authorities alleged that the company engaged in a series of anti-competitive practices. The suit contends that Microsoft misused its Windows monopoly by requiring computer manufacturers to adopt a startup screen that promotes Microsoft products, engaging in exclusionary contracts with ISPs and online services, and forcing computer manufacturers to purchase Internet Explorer as a condition of getting Windows.

"In short," US Attorney General Janet Reno said at a press conference announcing the suits, "Microsoft used its monopoly power to develop a chokehold on the browser software needed to access the Internet."

During the investigation and subsequent discovery process in the lawsuit, Microsoft turned over more than 3 million pages of memos and company officials' e-mail. Some of the most damning evidence is in the email, which some consider more akin to a conversation than a memo. Government lawyers charged that when Microsoft first realised the threat posed to the Windows monopoly by Netscape's browser, Microsoft proposed to Netscape that, rather than compete, they conspire to divide up the market. When Netscape refused, Microsoft officials said they used Windows to "cut off Netscape's air supply," according to documents.

Microsoft officials have called that charge "an outrageous lie.” They have said that Microsoft's decision to train its sights on its young rival was natural, because Netscape had always positioned its browser as a competitor that could make Windows obsolete.

Since the appellate court ruling in June, the government case has been expanded in focus to include allegations that Microsoft engaged in a pattern of anti-competitive behavior with such companies as Intel , Apple and Sun Microsystems. Executives from those companies are expected to testify. Microsoft sought unsuccessfully for a delay in order to fight the new allegations.

In a press release Microsoft issued last week, the company alleged that the government was taking out of context snippets of e-mail and other iformation. “Since Microsoft has provided the Department of Justice with more than 3.3 million pages of e-mail and other documents, it’s not surprising that the regulators have found a handful of snippets to quote misleadingly in order to attack Microsoft,” the company said.

Due to the fast pace of the software industry, both sides were eager to bring the case to trial quickly. Jackson has limited each side to calling 12 witnesses. The witnesses have already been deposed and their witness statements will be considered direct testimony. When the witnesses take the stand, they will be cross-examined. The judge ruled that the witness statements would be made available to the public the evening before a witness testifies.

(Elizabeth Wasserman is The Industry Standard's Washington, D.C., bureau chief)

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