An internal Microsoft Corp. document that showed the company raised some prices more than 140 percent from 1990 to 1996 set off a pitched debate here in the ongoing Microsoft antitrust trial Tuesday morning. At issue: The company's ability to control the market for PC operating systems.
In addition, a government witness testified that the company could use pricing as a club to exclude competitors at will. The memo, which was first released last week, came up again in Tuesday morning's examination of Frederick Warren-Boulton, one of two economists called by the government to argue that Microsoft has abused monopoly power in the market for operating systems in violation of U.S. antitrust laws.
The questioning was part of the government's "redirect" examination in which it had an opportunity to respond to doubts Microsoft may have raised in its cross-examination of Warren-Boulton.
According to a March 1996 Microsoft memo, the world's largest maker of PC software increased the price it charged PC makers for its operating systems from $19.03 (£11.60) to $49.40 (£30). Those prices rose at a time when the average cost of computers was falling precipitously. Indeed, company figures showed that, when measured as a percentage of total computer cost, its operating systems rose fivefold in price during that time, from 0.5 percent to 2.5 percent. Moreover, a separate memo by Microsoft executive Joachim Kempin theorised that the advent of the $500 PC meant the company in some cases would collect 10 percent of the cost of some PCs -- up 1,900 percent in just eight years.
Those price increases meant only one thing, Warren-Boulton said: That Microsoft could raise its prices significantly without fearing a competitor would enter the market to compete with the company that sells at least 95 percent of the PC operating systems sold each year. In one case, company executives theorised that raising prices for its operating system to computer makers from $49 (£30) to $89 (£54) would result in only a 30 percent sales decline. "The fact that they were able to raise the prices that much higher indicates they have monopoly power in the relevant market," Warren-Boulton said.
Microsoft officials, who have long said the price of their operating systems have remained steady, rejected Warren-Boulton's analysis. "The government is lying with statistics," Microsoft spokesman Mark Murray said on the courthouse steps.
In fact, he said, individual operating systems such as Windows 95 and Windows 3.11 have not increased in price. The apparent increase in price was due to changes in the "product mix" to computer makers.
As makers moved from older Microsoft software such as the now-obsolete MS-DOS and Windows 3.1 to Windows 95 and Windows 98, they naturally paid more for the software -- even, said Murray, as other hardware and software prices plummeted.
Intel Corp., he added, had increased its average revenue per computer from $108.41 (£66) to $236.37 (£144). Murray did not specify, however, how much of that revenue included dollars from Intel's recent moves into chip sets beyond the central processor that dominated its business in the early 1990s.
In other testimony Tuesday morning, government attorneys read excerpts from the earlier deposition of Microsoft executive James Allchin. Allchin described Netscape Communications Corp. as a "complete competitor" that posed a solid threat to Microsoft's control of the OS market by offering a "cross-platform" alternative -- one that would give software developers the freedom to write programs for Netscape's Navigator Internet browser or the Java "virtual machine" packaged with it.
Since Netscape had developed browsers for all major computer platforms, its browser posed a real threat to the Microsoft market lock.
At first, few at Microsoft worried about the browser, Allchin said. "[Then,] in the blink of an eye, it became a platform. It became a platform to replace the operating system."
"Mr. Allchin probably said it better than I could," Warren-Boulton said after New York state attorney Richard Schwartz finished reading the deposition.