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EDITIONS
Monday, 29 March, 1999, 07:48 GMT 08:48 UK
USA versus Microsoft: The sixth week
Computer trial of the century: USA versus Microsoft.
By Graham Lea

The acquisition of Netscape by AOL, and to a lesser extent the Japan Fair Trade Commission's decision about Microsoft's competitive practices, proved to be of more interest than the events inside the courtroom.

The tedious cross-examination of consultant economist Frederick Warren-Boulton by Microsoft lawyer Michael Lacovara proceeded, with the company maintaining that it does not have monopoly power, and is threatened by competitors all the time.

Because of the Thanksgiving holiday, the court only sat for two days.

Warning from Japan

In January, the JFTC raided Microsoft's offices in Tokyo to gather evidence. Fujitsu had complained that Microsoft had been tying the licensing of Excel to Word, insisting that both had to be licensed, in a move by Microsoft to compete with JustSystem's Ichitaro word processor.

Some 11 Internet service providers also complained that they did not like having to license Internet Explorer, rather than Netscape's Navigator, in order to take part in cross-marketing. In both instances, Microsoft backed down, so on 20 November the JFTC just issued a warning and closed the matter.

Microsoft
In its news release, Microsoft quoted Masaru Kitamura, "a lawyer and former Japanese Foreign Ministry official" saying that "a warning simply means that the JFTC started an investigation with suspicion about an allegation, but found no evidence of improper conduct," adding that "this ruling represents a significant legal victory for Microsoft in Japan".

Microsoft did not mention that Mr Kitamura is in fact a paid Microsoft consultant. According to Washington lawyer Jeffrey Zuckerman, "for the JFTC even to do any investigation is unusual ... The JFTC is notoriously reticent about enforcing Japanese antitrust laws."

This did not square with a statement from Brad Smith, Microsoft's international counsel, that "Japanese competition law is in fact stricter than the United States, so we have satisfied a higher legal standard in Japan than we are going to have to do in Washington, DC".

The focus of interest in Washington had turned to which side would benefit from the news that AOL would acquire Netscape for $4.2 billion, with an associated agreement with Sun Microsystems.

Since AOL announced it intended to continue using Internet Explorer, it looked as though not much would change.

David Boies, the Department of Justice's special trial counsel, said that any deal was "not going to remove any obstacles that Microsoft has put in the path of competition".

If AOL felt compelled to use IE after it owns Navigator, this would be "very powerful evidence". Mr Boies also noted that "what you see here is an exit strategy for Netscape", which cynics translated as "take the money and run".

In court, Mr Lacovara announced that Sun [sic] was going "to acquire Netscape's software technology."

Judge Jackson expressed his surprise, so Mr Lacovara elaborated: "It was reported on MSNBC, a reliable news source, half-owned by Microsoft, your honour." It was an embarrassing mistake.

Much of Mr Lacovara's cross-examination probed Mr Warren-Boulton's knowledge of the computer industry, which turned out to be less than might have been expected, except in economic matters where he was on firm ground.

Microsoft's monopoly power

Mr Warren-Boulton gave as his opinion, backed up in his written testimony, that Microsoft had monopoly power, and that its prices were above competitive levels by a significant amount. He pointed to Microsoft's 38.5% net profit margin as being the largest of the Fortune 500 companies.

An internal Microsoft document showed that the cost of Microsoft's operating system to PC makers had gone up from an average of $19 to $49 per system between 1990 and 1996, in contravention of Microsoft's claims.

Mr Warren-Boulton also introduced data that Microsoft's actual and projected share of the PC Intel-compatible operating systems market from 1991 to 2001 was in the range of 92 to 95 per cent, according to market analyst IDC.

Mr Lacovara tried to suggest that Microsoft's success was potentially ephemeral, and that Microsoft was constantly challenged, for example by Linux. Mr Warren-Boulton countered this by pointing to the confidence that the financial market had about Microsoft's future, since its price/earnings ratio was over 50.

Microsoft is accused of exploiting its operating systems dominance
He also added that "if you really believe that [Linux] is going to severely constrain Microsoft's monopoly profits, run, don't walk, to your nearest broker and short Microsoft [stock]."

As is usual in antitrust cases, Microsoft challenged the market definition used by the Department of Justice, in an attempt to make its dominance seem less. Microsoft wanted the Apple Mac market to be included.

So far as Java was concerned, Microsoft's approach to Java was a "fight them on the beaches" strategy, Mr Warren-Boulton said, and that Microsoft's non-standard Java [now banned by another court] was a "Trojan horse".

There was earnest discussion of switching costs (a legally important notion as to how much it would cost a user, reseller or PC maker to switch to a non-Microsoft operating system), but neither side appeared to win any points.

The other legal notion was network effects (essentially that the winner takes all, because the operating system with the most applications is likely to dominate).

Mr Lacovara won the point that there could be consumer benefits with a dominant vendor.

Just before the holiday break, and playing to an almost deserted gallery, Mr Lacovara asked Mr Warren-Boulton if a clock radio was one product or two. Mr Warren-Boulton did not hesitate: It was three, he claimed initially, but elaborated: "It is, if you like, a third product that's a combination of two separate products."

Judge Jackson had become impatient with Mr Lacovara's pace of the cross-examination and said he expected this to be completed on Monday.

The next witness will be James Gosling of Sun, the Java pioneer.


Graham Lea is a leading computer industry analyst specialising in Microsoft and who will be following the case for News Online. His views do not represent those of the BBC.

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