Netscape-AOL merger could affect Microsoft trial

The spectre of the possible merger of America Online Inc. and Netscape Communications Corp. reared its head both inside the courtroom and on the courthouse steps during the Microsoft antitrust trial here Monday.

During the cross-examination of Frederick Warren-Boulton, Microsoft attorneys tried to get the economist to acknowledge that the possible deal reflected a dynamic marketplace where leaders in the browser and Internet service spaces could band together to compete against Microsoft.

Instead, Warren-Boulton launched into a soliloquy lamenting the pending demise of Netscape. "To the extent that this potential merger is the result of Microsoft's actions -- in these exclusive contracts and other actions -- it is unfortunate to see the disappearance of a firm like Netscape, the brightest newest star," Warren-Boulton said.

Warren-Boulton also testified that Microsoft is exaggerating the threat of potential competitors in its effort to show it does not exercise monopoly power in the marketplace. New entrants to the desktop operating system market, such as Linux and Be, cannot approach Microsoft's market share because of steep "switching costs" users face, he said. In addition, Warren-Boulton said, incompatibilities between non-Windows computers pose huge hurdles for companies and individuals who would change their operating systems. Microsoft itself recognises the need for a large number of applications, Warren-Boulton said. "Microsoft documents are full of discussions about applications and the need to have applications," he said. I just don't believe that's particularly disputed by anyone."

Microsoft attorney Michael Lacovara did get Warren-Boulton to acknowledge that AOL's choice of a browser would materially affect the browser market. AOL -- which is used by about 22 percent of all Internet users -- has a deal with Microsoft to use the company's Internet Explorer browser in exchange for a spot on Microsoft's Windows channel bar. But the deal expires in about six weeks. Warren-Boulton said he doubted AOL would actually switch to Netscape's Navigator, because the position on Microsoft's real estate was too valuable.

Outside on the courtroom steps after the testimony, DoJ attorney David Boies said that the merger, and its outcome, may have a bearing on the current case. "If AOL believes that Microsoft's desktop monopoly is so powerful and so essential that it has to use Microsoft's browser software even after it owns Netscape, that is pretty strong evidence of the power of the monopoly," Boies said. When asked whether it bothered him that two of the government witnesses were probably in negotiations to merge at the time of their testimony, Boies said he was not particularly troubled.

He also downplayed earlier comments by Microsoft attorney William Neukom that the possible merger pulled the rug out from under the government case. "I think that if the rug had been pulled out of our case as many times as Microsoft said during the trial, we'd all be on the floor by now," Boies said.

For its part, Microsoft painted the potential merger of Netscape and AOL -- along with a possible partnership with Sun Microsystems Inc. -- as evidence of a dynamic and competitive marketplace. "What we are witnessing is apparently a wholesale change in the competitive landscape," Neukom said on the steps of the courthouse during the midday break. "It does seem particularly strange to us that the government feels the need to put a finger on the scales of justice."

In other happenings inside the courtroom, Microsoft attorney Lacovara said industry analysts' numbers show that Microsoft will only have about 62 percent of the U.S. browser market by 2001 -- a number he said does not indicate a monopoly. He said "a third of everyone in the whole world" will be using a browser other than Microsoft's. Lacovara also pointed to recent trade press articles about Be Inc. getting Hitachi to ship its alternative OS with some of its machines, in another of several attempts to show that other operating systems are gaining momentum in the market.

But Warren-Boulton disputed that testimony: "The existence of fringe competitors who are in the OS market doesn't in any way mean that Microsoft doesn't have monopoly power," the economist said. It did not come out during the testimony that Hitachi is shipping Windows along with Be, nor that Be founder Jean-Louis Gassee has said he has no intention of competing with Microsoft.