Microsoft on Trial: MS witness concedes DoJ points

An economist testifying for Microsoft in its antitrust case this morning said software companies that "tie" separate software programs into their operating systems may harm consumers if that integration makes competing programs malfunction.

The admission by MIT Dean Richard Schmalensee cut to the heart of the government's case against Microsoft Corp. But, as the distinguished economist hastened to tell government lead attorney David Boies, "tie-ins can be pro-consumer or anti-consumer, depending on the instance."

Since beginning their case against Microsoft, government antitrust officials have argued the world's largest software company tried to run Netscape Communications Corp. and its Navigator browser from the marketplace by bundling its Internet Explorer browser with the Windows operating system. The government says that combining Explorer with the operating system effectively forced Netscape to give away its browser, depriving Netscape of nearly $60m (£36.6m) it had collected in browser sales each quarter. Antitrust officials want Microsoft punished for that and other actions which they claim violate federal and state laws against "predatory" behaviour by monopoly firms.

Microsoft has fought the charges by arguing it has an unlimited right to add new features to its operating system, regardless of whether it has a monopoly over the operating system or not. In addition, Microsoft says that since it has integrated the browser into the operating system, the two have ceased to be two products. As such, government claims based prohibitions on "tying" products together are baseless, they say.

Boies pressed Schmalensee for more details. If Microsoft has a right to integrate its browser into the operating system, couldn't the company integrate its market leading word processor into the operating system and make the same claim? In that case, Schmalensee said economists would probably still say there were two products. Then again, "You would want to inquire into the effects and rationale and benefits," he added.

Earlier in the trial, government witnesses including University of Pennsylvania Professor David Farber and Princeton University Professor Edward Felten testified Microsoft's Internet Explorer browser hampered Netscape's browser by taking over functions it normally performed, even when users specified they wanted Netscape to be the dominant software on their computers. Boies continued the analogy. If Microsoft's word processor made Corel Inc.'s Word Perfect program malfunction, would Schmalensee argue the combination was just as legal, too? Schmalensee said no. "Let's say if in some obvious way I can't do as well as I did before. Then that's a harm."

Later in the day, the two sparred over Schmalensee's claim that Microsoft's control of what programs come bundled with Windows gave it no advantages over rivals in getting others to use Microsoft software. According to Schmalensee, software makers that want consumers to use their software need not fear Microsoft's control of what is bundled with Windows.

Developers, he said, remain free to pay computer makers to bundle sample programs with their products, sell directly to consumers over the Internet, or pursue traditional channels such as wholesale, retail or catalogue sales. In his direct testimony he wrote: "Preinstallation of software by Microsoft on the Windows desktop is not a significant method of software distribution by Microsoft or anyone else." But the government says otherwise. Since Microsoft can guarantee sales of its programs simply by bundling its products with Windows, consumers are naturally steered to use Microsoft programs for which they pay nothing more.

Boies produced slides from a May 1998 presentation that seemed to back his version of the story. Beneath a heading titled "Situation Analysis," Microsoft officials wrote: "'Connection to the Internet' is a top 3 reason for buying a computer - 71 percent of 1997 computer buyers are online." Just below that bullet point were three more:

• 'It came with my computer' is the #1 reason people switch to IE."
• "Users follow OEM's (computer makers) lead onto Internet," and
• "Conclusion: OEM's are the best vehicle to gain browser share." Boies suggested that Microsoft knew that bundling its browser meant consumers would overwhelmingly use their browser and not Netscape's. "Do you understand that Microsoft thought (computer makers were) important for the browser?" he asked.

"Obviously for Microsoft, preinstallation was an important channel," Schmalensee replied. A short time later Boies asked if Schmalensee wanted to clarify his statement that the Windows desktop was not important for software distribution. "I was referring to software other than the browser," he said. "I see your point."

Take me to the DoJ/Microsoft page.