The New York Times

January 18, 1999

 

Just What Constitutes a Consumer Stranglehold?

By STEVE LOHR

he Microsoft trial is a high-stakes exercise in legal warfare and the witnesses are foot soldiers. On each side they are advocates, committed to winning and thoroughly coached.

And no one expects that honesty will be presented in its undiluted form -- "the truth, the whole truth and nothing but the truth." Instead, the witnesses generally offer their facts and opinions selectively.

So when a moment of unbiased honesty occurred at the trial last week, it seemed almost endearing.

The Government's final witness, Franklin M. Fisher, a Massachusetts Institute of Technology economist, was asked if there was any present harm to consumers as a result of Microsoft business practices.

That is difficult to measure, Fisher replied. But after pausing a moment, this Government witness added, "On balance, I'd think that the answer is no up to this point."

Later, Fisher did say that he thought that Microsoft's restrictive contracts with computer makers and Internet service suppliers had the effect of reducing choice in the market for software used to browse the World Wide Web by unfairly blocking its rival, Netscape Communications, from key channels of distribution. Yet his main point was that most of what he believes will be the damage to consumers -- in higher prices and reduced choice -- from Microsoft's actions will come in the future.

Still, Fisher's comment did underline where the two sides differ on key issues. The Government contends that Microsoft has a "choke hold" on software distribution and that consumers will be harmed unless it is reined in. Microsoft replies that the Government has produced no real proof on either front.

Judge Thomas Penfield Jackson must sift through the conflicting assertions and evidence from both sides to reach a verdict, guided in large measure by antitrust doctrine and the case law that has built up around it. The challenge, though, is that just how the doctrine and the case law apply to the Microsoft case is by no means clear cut.

Take the issue of consumer harm. Microsoft's leadoff witness, Richard L. Schmalensee, dean of M.I.T.'s Sloan School of Management, testified last week that there was no evidence of consumer damage from Microsoft's conduct and the suggestion that there might be in the future was "sheer speculation."

In court, the Government did produce evidence showing that the price Microsoft charges computer makers for its Windows operating system had increased in recent years, even as the price of other PC components had declined. But Windows still accounts for less than 5 percent of the price of most PC's and, as Microsoft asserts, it has improved Windows over the years.

Showing measurable harm to consumers, antitrust experts say, is less important in a Federal antitrust suit than it would be in a private case. The Justice Department and 19 states suing Microsoft, unlike a private plaintiff, are not seeking financial damages. Instead, they are seeking court-ordered sanctions to curb what they say is Microsoft's abuse of its monopoly power.

Dueling witnesses and precedents in the Microsoft case.

To do that, the Government must convincingly show "the power and conditions from which injury can be inferred," according to Herbert Hovenkamp, a University of Iowa law professor. "Under antitrust law, we assume that markets operate more efficiently for the benefit of consumers under competition," said Hovenkamp, a consultant to the Government in the Microsoft case.

The Justice Department charges that Microsoft's contracts with computer makers and others unfairly limited Netscape's access to key channels of distribution. Microsoft replies, as Schmalensee testified, that it does not have "any significant market power over software distribution," noting that Netscape distributed more than 100 million copies of its browser last year.

Exclusive distribution deals, in most cases, are not illegal providing they do not foreclose rivals from a significant share of product distribution. Microsoft's argument is that despite its deals, Netscape could widely distribute its browser over the Internet, by direct mail and in its own deals.

A Federal appeals court ruling in 1997, Omega Environmental Inc. v. Gilbarco Inc., does seem to support that stance. The defendant, Gilbarco, a leading producer of gas pumps, had exclusive deals with nearly 40 percent of the nation's gas pump distributors. But in ruling for Gilbarco, the court noted that gas pump makers had other possible channels of distribution, like selling directly to gas stations. If competitors can reach consumers by other means, it wrote, "it is unclear whether such restrictions foreclose from competition any part of the relevant market."

The Government, however, argues that when a company, like Microsoft, has a powerful monopoly position, the prosecution does not have to show the company tied up, say, 40 percent or more of the distribution. For monopolists, the Supreme Court in 1985 endorsed a stricter standard, ruling in Aspen Skiing Company v. Aspen Highlands Skiing Corporation that a contract is illegal if it "unnecessarily excludes or handicaps competitors."

The Government also asserts that expense, difficulty and quality of access to distribution are issues in determining whether Microsoft's contracts unfairly exclude rivals. Downloading a browser for an hour from a Web site is an alternative distribution channel, but it is no match for getting a browser bundled with Windows on a new PC.

"Microsoft is pointing to all the other paths of distribution and undoubtedly takes comfort from the Gilbarco case," said William Kovacic, a professor at the George Washington University Law School. "But its contracts could still be found to be significantly anticompetitive. The law is by no means absolutely clear."