The New York Times
January 22, 1999


Microsoft and the Question of Monopoly


WASHINGTON -- The judge in the Microsoft antitrust trial asked the company's expert witness on economics a series of skeptical questions Thursday, suggesting that Microsoft Corp. may have difficulty with one of its defenses -- that it does not have a monopoly in the market for personal computer operating systems.

Judge Thomas Penfield Jackson interrupted when a Microsoft lawyer was questioning Richard Schmalensee, an economist and dean of the Massachusetts Institute of Technology's Sloan School of Management, about the price Microsoft charges for its industry-standard Windows operating system. Schmalensee was explaining his view that the modest price Microsoft charges for Windows, typically less than 5 percent of the cost of a personal computer, indicated a company concerned about current and potential competition instead of the predatory monopolist the government has tried to paint for the court.

But Jackson cut in to ask if there could be sound business reasons that even a monopolist might charge less today "in search of larger glory at some later date."

To illustrate his point, the judge spoke of the hypothetical case of a cigarette company that might keep its prices low to hook generations of future smokers.

"There isn't any indication," Schmalensee replied, "that Windows is that kind of addiction."

Jackson seemed unconvinced. "Do you have kids?" he asked Schmalensee.

Yes, the MIT dean replied, "but not all kids use Windows, your honor. Some use Macs," a reference to Apple Computer Inc.'s Macintosh machines, which run the Mac operating system.

The judge's occasional questions are scrutinized by both sides as a possible clue to his thinking. This is not a jury trial, so at least at the U.S. District Court level, Jackson will determine the outcome of the case. Legal experts say that queries from the bench do not foreshadow a verdict but do suggest the issues a judge is focusing on when weighing testimony.

Whether Microsoft has a monopoly in the market for personal computer operating systems is not directly at issue in this case. The Justice Department and 19 states are not suing Microsoft for having a monopoly but for illegally using its market muscle to defend and extend the reach of its monopoly.

Still, if Microsoft can convince the court that it is not a monopoly, the government's case collapses.

Under questioning from Richard Urowsky, a Microsoft lawyer, Schmalensee explained that his key assumption in explaining the company's business practices -- its pricing, investment spending and deals -- is that it lives in an industry characterized by "dynamic competition."

Unlike old smokestack industries, Schmalensee said, the software business requires even the incumbent leaders to move quickly, to keep prices low and to innovate continually. "Microsoft is constantly concerned with being displaced as a leader," he said.

The government argues that Microsoft's behavior is that of a modern monopolist. It is in a fast-moving high-technology business, the government concedes, but its monopoly position is nonetheless resilient partly because of the reluctance of consumers to switch operating systems once they have taken the time and trouble to figure out Windows, which runs on more than 90 percent of personal computers sold. This kind of self-reinforcing dependency -- "high switching costs," in economic terms -- was what Jackson was alluding to with his cigarette-monopoly example.

The government contends that Microsoft used exclusionary contracts with personal computer makers and others to unfairly shield its monopoly from the threat posed by the Internet generally, but especially by Netscape Communications Corp., the pioneer in software for browsing the World Wide Web, and Sun Microsystems Inc., the creator of Java, an Internet programming language.

But Schmalensee testified that even if one assumes that Microsoft is indeed a monopoly, there is no convincing evidence that Microsoft did anything to restrict the distribution of Netscape's browsing software.

The Justice Department has introduced documents showing that some PC makers complained when Microsoft imposed new contract restrictions in 1996 that limited their freedom to do as they please with the first desktop screen that appears when users turn on their machines. The PC makers would prefer a free hand in selling that valuable commercial real estate to software makers, including Microsoft's rivals, to load their icons.

But Schmalensee testified that those restrictions were mostly modest, like limiting the size of icons that can be displayed. Microsoft, he added, typically uses for its own software seven of the available 49 spaces for desktop icons.

"There is lots of room for PC makers to put on other icons, so Microsoft does not limit software distribution through the desktop," Schmalensee said.

The government replies that by bundling its browser with Windows and giving it away free, Microsoft used its monopoly to give its browser an unfair edge and drive up the distribution costs of Netscape.