The New York Times

January 13, 1999

Issue du Jour at Microsoft Trial: Are Consumers Harmed?

By STEVE LOHR

ASHINGTON -- An economist testifying for the government conceded Tuesday that there was scant evidence that consumers had been harmed by practices that are central to the Justice Department's antitrust case against Microsoft Corp.

In antitrust doctrine, the damage to consumers from anticompetitive conduct is generally measured in higher prices and fewer choices of products. When asked whether consumers were being harmed by Microsoft's practices in the Internet software market, Franklin M. Fisher, an economist at the Massachusetts Institute of Technology, replied that the question was difficult to answer. But after hesitating for a moment, he added, "On balance, I'd think that the answer is no, up to this point."

Microsoft quickly seized on the comment by Fisher, the last government witness, as support for the contention that the Justice Department and 19 states suing the company have been unable to show that consumers are being damaged by Microsoft's actions. William H. Neukom, the senior vice president for law and corporate affairs, said the government's case was inspired by Microsoft competitors and based on the "raw speculation" that consumers might be harmed in some distant future if the company was not reined in.

But the Justice Department argues that it is sound public policy to intervene early in fast-moving high-technology industries when the predatory acts of a monopolist threaten to stifle innovation and consumer welfare in the long run -- and such, it contends, is the case with Microsoft.

With the prosecution case about to close, Joel I. Klein, the Assistant Attorney General in charge of the Justice Department's antitrust division, appeared on the courthouse steps Tuesday to declare that the government had presented "compelling evidence that Microsoft has engaged in a pattern of practices to crush any threat to its operating system monopoly."

The government says that Microsoft bundled its Internet browser with its industry-standard Windows operating system, gave the browser away and unfairly used its market power to force personal computer makers and Internet service suppliers to agree to anticompetitive contracts. All this was done, the government asserts, to thwart the challenge posed to Microsoft's dominance of the software industry by rivals led by Netscape Communications Corp., the early leader in browsing software, and Sun Microsystems Inc., creator of Java, an Internet programming language.

Microsoft replies that its contracts are routine business deals and that its product decisions have been guided mainly by its desire to improve its Windows operating system.

Fisher was still on the stand as court recessed Tuesday, even though the written testimony of the first defense witness for Microsoft was released Monday. That witness is Richard L. Schmalensee, an economist who is dean of MIT's Sloan School of Management. To speed up the trial, the court decided that the direct testimony of witnesses should be submitted in written form and released the afternoon before the witness is expected to take the stand for cross-examination.

In the afternoon, Fisher elaborated on his earlier remark about the effect of Microsoft's practices on consumers. He said consumers might suffer now from reduced choice because Microsoft's contracts make it more difficult for a rival's software to be distributed.

Still, the real problem, he argued, lies in the future, because Microsoft's monopoly in operating systems -- its Windows is shipped with 90 percent of all computers sold -- makes it a de facto gatekeeper on new technology in the personal computer market.

"Microsoft has shown that it will decide how innovation takes place in this industry," Fisher testified. The lesson from examining Microsoft's conduct in the browser market, he said, is that rivals "will be squashed."

Then, Fisher testified, "I don't think that's good for consumers, but those effects have only just begun."

The difficult-to-measure danger, he said, is largely prospective. "It won't be a consumer-driven society," Fisher declared. "It will be a Microsoft-driven society."

Under questioning from David Boies, the Justice Department's lead trial lawyer, Fisher sought to explain what some economists regard as an unanswered question in the government's case: why the price of Windows is not higher.

Fisher replied that Microsoft was taking its "monopoly profits" not solely from the pricing of Windows but also from increased sales of Microsoft products that run on the Windows operating system -- its Office suite of business software, including word processing and spreadsheets, for example. The Windows pricing, he added, can also be explained as a discount to increase sales and thus strengthen the Microsoft monopoly.

At one point, Judge Thomas Penfield Jackson interrupted to ask whether it was a "valid concept" that a monopolist might logically pursue a pricing strategy of "delayed gratification" to maximize its long-run gains.

"Oh, I think so," Fisher replied.

The government will begin its cross-examination of Schmalensee, the lead-off defense witness, on Wednesday, a day later than anticipated.

Before it rests its case, the government plans to introduce further excerpts of deposition testimony from Microsoft Chairman Bill Gates and from several other industry executives as supporting evidence that Microsoft planned and executed a strategy to thwart competition.