The New York Times
January 14, 1999
Dueling M.I.T. Economists Testify at Microsoft Trial
Government Ends Case, Jabs at Witness
By JOEL BRINKLEY and STEVE LOHR
ASHINGTON, -- In the Microsoft trial Wednesday, a Justice Department lawyer opened cross-examination of the company's first witness by asking him to concede that Microsoft held a monopoly in personal-computer operating systems.
But although the witness, Richard L. Schmalensee, an economist at the Massachusetts Institute of Technology, had submitted 328 pages of written testimony addressing every aspect of the Government's antitrust case, he said he had never studied the market for personal-computer operating systems, because "I didn't see any particular purpose in investigating that question."
Three months after the trial opened, Microsoft finished questioning the Government's final witness, Franklin M. Fisher, another M.I.T economist. With that, David Boies, the Government's lead trial lawyer, rested his case -- but not before entering into evidence a raft of new documents and depositions.
One of those was an internal e-mail in which an executive of the Walt Disney Company said, referring to contract restrictions imposed by Microsoft, "We are being roughed up by the 1,000-pound gorilla of the industry."
But Schmalensee depicted Microsoft today as a company striving to hold onto a fragile lock on the market, at one point even suggesting that the operating system used in the Palm Pilot personal organizer posed a serious potential threat to Microsoft's Windows.
That prompted incredulity from Boies, leading Schmalensee to say: "Is it a significant competitor today? No. But it is a germ of a potential competitor."
Schmalensee has served as a paid consultant and expert witness for Microsoft since 1992, leading Boies to suggest that he was Microsoft's "house economist." Boies offered excerpts from Schmalensee's testimony in a previous case as evidence, attempting to show that Schmalensee offered whatever position best served the case at hand.
Testifying last fall in a suit in which Bristol Technology, a software company based in Danbury, Conn., was trying to establish that it competed with Microsoft, Schmalensee had said: "In that view of the world, essentially everybody that is writing software is competing with everybody else. And I just don't think that's useful."
That apparent contradiction stirred Judge Thomas Penfield Jackson to tell the witness, "What I'm trying to determine here is whether what you say here is consistent with what you said in that case."
Schmalensee said it was consistent because the issues were different. Bristol, he said, made a program for software programmers that did not compete with Windows.
But Schmalensee listed two small niche operating systems that he argued posed a threat to Microsoft: Linux and Be-OS.
"I think these are important not because they are a competitive threat today, but because they show that entering the operating system market is possible," he said. "And there will be others."
The judge then asked him if the tiny companies that make these systems were making any money.
"I would be stunned if they were making any serious money," Schmalensee responded.
In his written testimony, Schmalensee said: "A firm with monopoly power over the operating system would charge at least 16 times over what Microsoft charges."
Under that formula, Microsoft would charge computer makers about $800 for each copy of Windows -- the price of entire computers systems with Windows today.
In the final minutes of the Government's case, Fisher, who used to be Schmalensee's teacher, offered a long list of ways he said Microsoft's behavior had harmed consumers -- a key element of any antitrust case.
Prices for computer hardware and software have grown more than they otherwise would have, he said, and innovation has been stifled.
With the documents introduced today, the Government tried to bolster key themes of its case: that Microsoft viewed the Internet as a threat to its dominance, that it used its operating-system monopoly to bully personal computer makers and others, and that it bundled its browser with Windows to stifle competition.
Microsoft said the documents had been chosen to embarrass it but instead depicted a vigorous competitor striving to improve its products.
In an e-mail to company executives on April 10, 1995, William H. Gates, Microsoft's chairman, wrote, "We are looking at the Internet destroying our position as the setter of standards," adding that it was "taking away our power every day."
The Government says Microsoft merged its Internet Explorer browser with its Windows operating system to assure universal distribution and thwart competition in Internet software. To support that charge, the Government released a March 1997 e-mail in which a Microsoft executive wrote that the "only real chance Internet Explorer has of getting them to switch" from Netscape came when users upgraded a Windows operating system, purchased a new personal computer loaded with Microsoft's browser or signed up with an Internet service provider that promoted Internet Explorer.