MS/DOJ: Microsoft: we were set up

Microsoft has suggested in its antitrust trial that a 1995 meeting with Netscape Communications was a 'setup,' orchestrated to lobby the US federal government to intervene and prevent Microsoft from competing with Netscape. The June 21, 1995, meeting has become one of the hot buttons of the trial. Netscape and the government allege that during this meeting Microsoft proposed an illegal division of the Internet software market, and when the idea was rebuffed, set out to crush Netscape.

Microsoft has suggested during its antitrust trial that a 1995 meeting with Netscape Communications was a "setup," orchestrated to lobby the US federal government to intervene and prevent Microsoft from competing with Netscape.

The June 21, 1995, meeting has become one of the hot buttons of the trial. Netscape and the government allege that during this meeting Microsoft proposed an illegal division of the Internet software market, and when the idea was rebuffed, set out to crush Netscape.

Microsoft attorney John Warden today produced an electronic mail record that shows notes of the meeting taken by Netscape co-founder Marc Andreessen were forwarded the following day to the company's attorney and soon after to the law firm Netscape retained to pursue antitrust claims.

Those notes were sent on June 23 by a lawyer at that firm, Gary Reback of Wilson Sonsini Rosati & Goodrich of Palo Alto, California, to attorneys at the US Department of Justice, including Joel Klein, head of the antitrust bureau. The notes were sent with a letter urging the government to take action against Microsoft – a letter that Microsoft only learned of on Saturday.

Warden today confronted James Barksdale, president and chief executive officer of Netscape, with the e-mail trail in an attempt to prove that Netscape used the meeting to setup Microsoft for government scrutiny.

Asked Warden: “Isn't it a fact, Mr. Barksdale, that the June 21 meeting was held for the purpose of creating something that could be called a record that could be given to the Department of Justice to spur them on?”

“That's absurd,” Barksdale shot back.

Barksdale concluded his fourth day of cross examination this afternoon under repeated questioning from Warden about whether Netscape’s drop in Internet browser market share and drop in revenues were due to the company's own mistakes rather than unfair competition from Microsoft. Warden presented e-mails and memos documenting Netscape’s loss of such important clients as America Online Inc. and Intuit Inc. to Microsoft that suggested Netscape’s lack of a compartmentalised browser product, lax responsiveness to business customers’ needs and other issues were the cause.

“I can think of a couple of things we would have done differently,” Barksdale said. “Like any executive or any person, sure, I've made mistakes.”

The cross-examination ended with Warden's production of a document from an internal employees’ message group – the “bad attitude” news group – that poked fun at Netscape. “Next Monday, Netscape will release two or three more bug-ridden betas and maybe an actual release version of something which was obsolete months ago,” the document began. “Today, we'll give you some vapourware (sic) announcements and outright lies.”

The exhibit was supposed to help illustrate Microsoft's contention but Barksdale dismissed the postings to this internal group. “They grouse about the cafeteria food and everything,” he said.

After his cross examination concluded, Microsoft officials maintained that attorneys raised serious questions about the antitrust case brought by the US Justice Department and 20 state Attorneys General in May. “The big question remains as to whether this case was designed to help Netscape and a handful of Microsoft competitors or whether this case was designed to help the American consumer,” said company spokesman Mark Murray. “The facts seem to show this case was developed to help Netscape and a handful of Microsoft competitors."

On Tuesday, the Justice Department's hired attorney, David Boies, will question Barksdale for the first time in public because the judge in the case is having each witness testify in writing and face cross examination on the witness stand. Boies didn't elaborate on his plans of rehabilitating some of the damage Microsoft attorneys did to Barksdale's version of events today.

Netscape’s attorney, Christine Varney, said outside the courthouse that the cross-examination has backfired and "shown that Netscape is an incredibly agile and nimble company that has survived relentless pounding and predatory acts by Microsoft." She said Boies will use documents that they obtained from Microsoft's own files "that will confirm Microsoft began to take Netscape out the moment it entered their consciousness that the Internet was going to be the next wave of personal computing and Netscape was positioned to ride that wave to its crest."

Earlier in the day, Microsoft attorneys had complained that they had only learned about Reback's letter to the Justice Department on Saturday and asked Judge Thomas Penfield Jackson to sanction the government. Jackson has not yet ruled on that request.

Murray alleged the trail of e-mail and letters following the June 21, 1995, meeting presents “a timeline that can hardly be called a coincidence.” He alleged that Netscape arranged the June 21 meeting as “a set up” to try to lobby the government.

Netscape's outside counsel, Christine Varney, today countered that Microsoft is grasping for straws. “One day Microsoft tells you, ‘If this meeting happened, why didn't you tell the government,’” Varney said. “The next day, they walk in and say, ‘Hey, you made it all up because you called the government the next day.’”

DOJ lawyer David Boies today said, outside the courthouse, “Any time the defendant begins to say, ‘We were set up,' I think that tells you how things are going.” He said that Microsoft did not receive the Reback letter until recently because they never asked for it during discovery. Regardless, he said, the document shows that Microsoft made threats at that meeting to withhold key technical information that Netscape needed in order to make a browser compatible with Windows 95 operating system, which was then in development.

In the letter to the DOJ, dated June 23, Reback did not mention a Microsoft proposal to “divide the market.” But he did write that “Microsoft has told Netscape that it will not provide critical APIs [application programming interface] (which it has admitted that it is able to provide immediately) to Netscape unless, among other things, Microsoft is given an equity stake in the company, a board seat, and essentially is able to control Netscape's ability to compete with Microsoft platforms.”

Barksdale is seen as key to the government's claims that Microsoft engaged in illegal attempts to use its monopoly position in the operating system software market to gain advantage and compete unfairly in other markets. Those other markets include the one for Internet browsing software, in which Microsoft and Netscape are fierce rivals.

Microsoft contends that Netscape has prodded the government to intervene to help the company protect its market share. Microsoft has tried to show Netscape’s market share eroded from estimates of 70% to 85% to, by some estimates, around 50% today because of Netscape’s own business failures.

One of Barksdale's key contentions is that Microsoft won an important business contract with AOL because the company offered AOL a position on the “first screen” of the market-dominant Windows operating system. But Warden questioned Barksdale about whether there weren't other reasons why Netscape lost out on the deal, which entailed building an AOL browser that would be distributed to AOL subscribers, who now total more than 13 million.

Barksdale conceded that AOL was interested in a browser that was made up of components, as was Microsoft's Internet Explorer browser, instead of one that was “monolithic” --- as was Netscape's Navigator browser. But Barksdale also said that Netscape would have built a compartmentalised browser for AOL in order to win the deal.

“We offered to do what it took to get the business, whether it was compartmentalising or making peanut butter,” Barksdale said.

In one of the lighter moments in court, Barksdale was shown an e-mail exchange between himself and AOL's Chairman Steve Case, talking about competition both companies were facing from Microsoft.

“Didn't you in fact liken Microsoft to the enemy --- a repugnant enemy at that?” Warden charged.

“A scorpion?” Barksdale responded.

“I was thinking more of the Nazis,” Warden responded.

“Well, at one time, we were the Allies and they were the Axis powers,” Barksdale said.

In the e-mail Barksdale wrote to Case on Nov. 19, 1995, he addresses Case as “Franklin D.” – as in US President Franklin Roosevelt, who was in office during World War II. Barksdale signed the e-mail “Your Comrade --- Josef Stalin.”

“He never let me be Winston Churchill,” Barksdale joked in court.

In the body of the e-mail, Barksdale wrote that Andreessen was doing a feasibility study of the two companies fighting Microsoft. “I totally agree with his conclusion that if we fight them together we can win … and what a victory it would be.”

After AOL decided to enter into a contract with Microsoft to design an AOL browser --- the day after AOL announced an agreement to distribute Netscape browsers --- Barksdale said he believed Netscape hadn't been treated properly by AOL because they had not been informed about the Microsoft offer.

“You thought AOL treated you improperly,” Warden said.

“They did and I've said that,” Barksdale responded.

Meanwhile, Microsoft entered into evidence a document that indicates Netscape officials were fully aware of Microsoft's plans to incorporate browser functions into the operating system long before that June 21, 1995, meeting. Barksdale has testified that he was unaware of such plans until the meeting and he viewed Microsoft's suggestion they would make the browser part of the operating system and give it away for free as a “threat” to his company's core business of selling browsers.

The document was a preferred stock offering letter sent out in 1995, before the company's stock was publicly sold. “In particular, the company believes that PC software vendors may become particularly formidable competitors,” the letter reads. “Microsoft Corp. is already licensing browser software from Spyglass and has announced its intentions to add functionality to the browser and to bundle it with its Windows 95 operating system.” The memo then goes on to say that other companies that make software operating systems, including Apple Computer and IBM, were considering the same type of bundling of the browser functions.

(Elizabeth Wasserman is Washington bureau chief for The Industry Standard. Patrick Thibodeau, a senior writer for Computerworld, also contributed to this report.)