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Monday, 8 February, 1999, 16:59 GMT
US versus Microsoft: the 12th week
Microsoft packaging
Few people accept that Microsoft is not a monopoly
by independent computer industry analyst Graham Lea

Professor Richard Schmalensee, Dean of the MIT Sloan School of Management, was Microsoft's expert economist witness. He spent the past week answering questions from David Boies, the Department of Justice special trial counsel.


His written testimony was more than 400 pages long, although he was assisted in writing it by a research team from NERA (National Economic Research Associates, a private Cambridge, Mass.- based consultancy retained by Microsoft).

Ironically, he is a former student of Professor Franklin Fisher (the previous witness for the government), who gave contrasting evidence.

Few people accept that Microsoft is not a monopoly, but Professor Schmalensee is one of them. At one stage, an incredulous David Boies asked him: "Sir, you're not telling this court, are you, that you have not been retained by Microsoft to help them convince other people, the FTC, the Justice Department, the court in the Bristol case, this court and other courts, that Microsoft does not have monopoly power?"

It was very unusual that Professor Schmalensee declined to define what is known as the relevant market in the antitrust case, claiming that it was "not relevant or necessary". Normally a monopolist tries to extend the market definition to show a lesser degree of control over a market where it is accused of monopolisation.

Windows 98 stand
Microsoft says changes in the industry mean its dominant position is not secure
In this case, for example, the PC Intel-compatible desktop market could arguably be extended to include the Apple Mac and Unix workstations markets. Monopolies are not in themselves illegal: it is the abuse of monopoly power that forms the basis for antitrust actions.

Professor Schmalensee claimed that Microsoft was potentially threatened by many competitive operating systems, including Linux, BeOS, IBM's OS/2, Palm OS and others. He also included what he described as a platform threat from Netscape and the cross-platform threat of, although he eventually admitted that no threat was imminent.

However, it was clear that market conditions have been changing since the trial started in October. For example, several PC makers are now pre-loading Netscape's browser, in response to user demand, while some offer Linux as an option, especially if PCs are bought in quantity.

A few small companies are offering Linux exclusively on their PCs. Microsoft suggests that these dynamic changes in the industry are evidence that its dominant position is not secure.

During his cross examination, David Boies confronted the witness with statements he had made in earlier cases to show that he had not always held the same views either about Microsoft, or the economic principles being discussed.

Having stressed the threat of Linux, Professor Schmalensee found it difficult to comment on a statement from Bill Gates in which he said: "The competition is the status quo and staying with what you already have, and that popular newcomers such as Linux pose no threat to Windows. Like a lot of products that are free, you get a loyal following even though its small. I have never had a customer mention Linux to me."

Much of the legal jousting centred on Internet Explorer and its relationship with Windows. Microsoft maintains that IE is part of the operating system, a "browsing technology", but most see IE as a separate product.
Professor Michael Dertouzos, Director of the MIT Laboratory for Computer Science, who was going to be an expert witness to testify for Microsoft on the "technological benefits of Microsoft's decision to build Internet features into Windows".

It turned out he had described Internet Explorer as an application and not part of the operating system in his deposition, so he was dropped by Microsoft, leaving the company without an independent expert witness on computing issues.

Perhaps it was envisioned that Professor Schmalensee would cover this ground, but David Boies led him into making statements about computer science issues and industry matters where it was clear that he had insufficient expertise.
There were many disputes about the validity and interpretation of survey data that mostly concerned the Netscape and Microsoft browser market shares that were not resolved, and it increasingly appeared that the data were insufficient to prove either side's claims.

The most surprising analysis by Professor Schmalensee was that, in his view, if Microsoft were maximising its monopoly profits, it would be charging between $900 and $2,000 for Windows. DoJ witnesses had suggested that Microsoft was already charging a monopoly price, and pointed to Microsoft's profits for evidence.

Microsoft flag
Microsoft: taking court battering
During the week, Microsoft made a low-key announcement of its results for the quarter ending 31 December, but profits of $2bn, up 75% on the previous year, strongly supported the view that Microsoft had monopoly power.

Microsoft investors were delighted, and the financial analysts were proved wrong yet again, but probably were unconcerned as the share price rose to new heights.

The revelation of the week was a comment from Professor Schmalensee: "The state of Microsoft's internal accounting systems do not always rise to the level of sophistication one might expect from a firm as successful as it is.

"That explanation is consistent with other information I had received about the nature of their internal systems and records. . . . I was interested in . . . revenues, say, from applications programs that Microsoft might expect as a consequence of Windows sales. I said, can you separate the company into the two pieces, so I might be able to address that question?

"The answer was there were a lot of common costs that aren't allocated between those two businesses, and the records just don't let you do it."

Next week there will be a final secret session in which Professor Schmalensee will answer questions from Richard Urowsky, who is conducting Microsoft's redirect examination. Then Microsoft executive Paul Maritz will take the stand, probably for the whole week.

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.
Links to more Microsoft stories are at the foot of the page.

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