The New York Times
January 21, 1999


U.S. Presents Documents in Case Against Microsoft


WASHINGTON -- The Government presented documents and e-mail in the Microsoft trial Wednesday as evidence for its allegation that the big software maker had imposed contract restrictions on personal computer makers to thwart competition.

The contracts imposed strict limits on Windows' opening "desktop," the screen that computer users see when they turn on their computers. These limits clearly upset some manufacturers who wanted to use the desktop to display their own brands or to feature factory-installed software -- often made by Microsoft's competitors.

In a memo to the Microsoft Corporation, an executive at the Hewlett-Packard Company complained about the restraints and concluded that if his company had any alternative to loading Microsoft's Windows operating system, "you would not be our supplier of choice."

Microsoft began imposing the restrictions in 1996, saying it had the legal right to do so and adding that the curbs helped consumers by insuring a "uniform Windows experience." But 1996 was also when Microsoft was struggling to catch up to the early leader in the Internet software market, the Netscape Communications Corporation, which pioneered the browser software used to navigate the World Wide Web.

At one point in court today, the Government also addressed the fact that on Tuesday, Microsoft reported a 75 percent jump in quarterly earnings, well ahead of expectations on Wall Street. David Boies, the lead trial lawyer for the Justice Department, mentioned the earnings report in his cross-examination of the company's leadoff witness and asked if consistently high profits were an indicator of monopoly power.

The witness, Richard L. Schmalensee, an economist and dean of the Massachusetts Institute of Technology's Sloan School of Management, conceded that persistently high profits suggest "some impediment to competitive alternatives." But such a barrier, he added quickly, could well be a very valuable asset, protected by intellectual property rights, like Microsoft's industry-standard Windows operating system.

"You simply cannot infer monopoly power from profits," Schmalensee said.

The Government contends that Microsoft's contracts were mainly intended to unfairly damage Netscape, not to benefit consumers. Microsoft used its monopoly power in the operating system market, the Government charges, to force computer makers to restrict how they could promote Netscape's browser.

To make that point, the Government cited a number of documents, including a Jan. 5, 1996, e-mail memo in which William H. Gates, the Microsoft chairman, stressed that increasing the company's browser share was a "very, very important goal." He also complained that some PC makers were displaying competing browsers on their machines "in a FAR more prominent way" than Microsoft's Internet Explorer.

Later that month, an executive review of Microsoft's sales to PC makers during the previous six months noted that one of its missed opportunities was failing to impose "control over start-up screens."

Yet by May 1998, Microsoft was weighing dropping the contract curbs on some major PC makers in response to their complaints, and it later did. An internal e-mail written by Brad Chase, a Microsoft executive, however, noted that the reaction from the company's "antitrust team was negative." He continued, "Changes like this undermine our whole defense of Windows Experience."

What computer users saw on the `desktop' when they turned on their machines.

Microsoft says that the Justice Department is selectively plucking comments from the more than three million pages of e-mail and documents the company has produced during the Government's investigation. The documents, taken out of context, may seem damaging but are not, according to Microsoft.

Throughout his cross-examination, which began last week, Schmalensee has held to his main themes -- that Microsoft's contracts are mostly garden-variety business deals, that friction and fights among business partners are to be expected, that Netscape has been able to distribute many millions of copies of its browser, and that consumers have benefited from Microsoft's practices.

Late this afternoon, Boies concluded his cross-examination with the kind of diverting exchange that occasionally brings some levity to the trial. Asked about Microsoft's profit margins on its operating system sales, Schmalensee replied that was difficult to determine precisely and that the company's internal accounting systems were not all that sophisticated.

Microsoft, he said, records "operating system sales by hand on sheets of paper." Since that struck many in the courtroom as odd for a leading producer of data-base and financial-spreadsheet software, people laughed aloud in the courtroom. Later, Microsoft executives said Schmalensee probably misspoke.

"What you saw in there," said William Neukom, Microsoft's senior vice president for law and corporate affairs, "was a trial lawyer looking for an exit line."