Who's ahead at this point

At the end of Week Two of the Microsoft antitrust trial, you could plausibly lean either way about which side was faring better. What seemed indisputable, however, was this: The high-tech business is not too different from the Kremlin.

At the end of Week Two of the Microsoft antitrust trial, you could plausibly lean either way about which side was faring better.

What seemed indisputable, however, was this: The high-tech business is not too different from the Kremlin. Power brokers work in a ruthless, labyrinthine world of secret agendas, where friends aren't afraid to stab each other in the back.

That seemed clear in the complex machinations that led America Online ((NYSE:AOL) in 1996 to strike a critical deal with Microsoft (Nasdaq:MSFT). That deal, in which AOL agreed to use Microsoft's browser within the online service, essentially allied AOL with a company it had distrusted, and, in fact, still regards as an enemy.

It was also clear from court documents that the deal was a painful betrayal for Netscape (Nasdaq:NSCP), which, e-mails introduced at trial this week show, had regarded AOL as a comrade-in-arms in a war against Microsoft. Microsoft is a partner in MSNBC.

"I absolutely agree ... that if we fight them together we can win, and what a victory it would be," Netscape CEO James Barksdale wrote in a 1995 e-mail to AOL CEO Steve Case, whom he called "Franklin D.," as in Roosevelt.

Indeed, in late 1995 and early 1996, Netscape and AOL were discussing a broad, strategic alliance that would put Case and Barksdale on the boards of each other's companies. Netscape would have agreed not to compete with AOL in online services, and AOL would have stayed out of Netscape's business of making software, and Netscape would have been the default browser on the AOL service.

Sewed up
Netscape officials thought they had a default placement deal all sewn up in a browser partnership announced by AOL on March 11, 1996. But the next day, AOL announced a deal giving Microsoft the default placement, leaving Netscape officials with "egg on their face," as AOL senior vice president David Colburn, a government witness, acknowledged in an internal e-mail to Case and others.

Colburn testified that AOL is likely to continue its exclusive Microsoft deal past a January 1999 opportunity to opt out because of its eagerness to continue receiving promotion within the dominant Windows operating system.

But, in 1997, the company signed a contract for Netscape to build a browser that can be integrated into the AOL service. Colburn testified that a test version of the browser was delivered to AOL within the past two months. As part of that deal, Netscape agreed to distribute a co-branded version of AOL's Instant Messenger online communications service from Netscape's Web site. One key provision - that the Instant Messenger service not accept advertisements for Microsoft's Internet Explorer browser.

Those talks prompted Microsoft officials to accuse AOL and Netscape, respectively the dominant online service and browser maker, of being the ruthless monopolists, and not Microsoft.

Their market-splitting proposal was much "more specific than anything Microsoft proposed," Microsoft lead attorney William Neukom said outside the courthouse Thursday afternoon, at the conclusion of trial proceedings for the week.

Neukom was hearkening back to a key government charge that Microsoft sought an illegal, market-splitting agreement for browsers in a disputed June 21, 1995, meeting with Netscape executives.

Microsoft contends that it was simply warning Netscape of its plans to bundle the browser into Windows 95 and that Netscape has misinterpreted the company's intentions, perhaps in a deliberate plot to whip up an antitrust suit. Barksdale vehemently denies the charge but acknowledged on the witness stand having a half-dozen meetings with Justice Department antitrust chief Joel Klein before the charges were filed.

Case perspectives
William Kovacic, a visiting professor at George Washington University in Washington, D.C., says Microsoft's finger-pointing at AOL and Netscape could help the company support an important point - that detailed talks between rivals, which include discussions about where to cooperate and where to compete, are commonplace in the high-tech industry.

But he says it's also a dangerous and perhaps weak argument for Microsoft. As anyone who has gotten a traffic ticket knows, it doesn't help your case if you argue that others were speeding, too.

Furthermore, regulators could reasonably conclude that they need to step up antitrust enforcement on Microsoft - and others in the high-tech industry, too.

"To the extent everyone does this all the time, one conclusion of the Justice Department and the FTC [Federal Trade Commission] might be, 'Well, maybe we ought to spend a lot more time looking at this.'"

As for who got the better of Week Two, Kovacic rates it a draw. He says Microsoft succeeded in raising questions about Netscape's version of the June 21 meeting, by pointing out the company's potentially mixed motives and the commonplace nature of detailed alliance talks in the high-tech business.

But Kovacic says he believes the evidence favors the government in another crucial point tested in the trial in Week Two - whether America Online entered the browser bundling deal with Microsoft to get big promotion in Windows, or because Microsoft's technology was better. Microsoft argued that it was technology. But Kovacic said the document trail indicates a strong interest on AOL's part in Windows promotion, which he says supports the government contention of a monopoly abuse.

San Jose antitrust attorney Rich Gray, a partner in Bergeson Eliopoulos Grady & Gray, has a different take. He thinks the government was the clear winner, making big progress in supporting both the Netscape market-division claim and the AOL muscling argument.

What's coming up
Meanwhile, at the current pace, it now seems likely to many people sitting in the courtroom that the proceedings will last well into January. So far, two weeks into the trial, questioning has been completed for only two of the scheduled 24 witnesses, leaving Judge Thomas Penfield Jackson's initial plan to conclude the trial in four weeks "seeming pretty quaint," Kovacic said.

The trial adjourned for the week before the government could show videotaped excerpts of three days of depositions of Microsoft CEO Bill Gates - an event that had been anticipated as early as Oct. 27.

Justice Department trial attorney David Boies said Thursday that he is now unsure when the video will be shown. Boies laid out a schedule through Nov. 9 that doesn't include the Gates testimony.

Microsoft trail attorney John Warden will begin cross-examination Monday of Avadis Tevanian, a senior executive of Apple Computer. Tevanian will testify to government claims that Microsoft illegally tried to muscle Apple out of a multimedia software market.

If Warden finishes questioning Tevanian before Thursday, Boies said the government will call as its next witness computer consultant Glenn Weadock, who is expected to address technical questions related to bundling the Web browser into the Windows operating system, a key issue in the antitrust suit.

On Monday Nov. 9, Boies plans to call as the government's fourth witness Intel Corp. vice president Stephen McGeady, who, unlike other government witnesses, will testify orally, rather than provide a written statement, in keeping with Intel's desire to avoid being seen as supporting the government suit. McGeady is expected to address government claims that Microsoft pushed Intel to drop a competitive multimedia technology.

When the government finally shows the Gates videos, they could be crucial to the suit, in which the Justice Department and 20 states have charged Microsoft with illegally exploiting an operating system monopoly to squash rivals.

The government is expected to juxtapose Gates' videotaped statements against e-mails to assert that the billionaire Microsoft founder directed his company into a series of monopoly abuses, which he sought to deny to government attorneys during under-oath questioning this summer.


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