The New York Times
January 6, 1999
Tactics at Issue as U.S. Calls Last Witness in Microsoft Case
By STEVE LOHR and JOEL BRINKLEY
WASHINGTON -- The government called its last witness in the Microsoft trial on Tuesday after presenting 110 pages of written testimony that amount to a summation of -- and economic justification for -- the Justice Department's sweeping antitrust suit against the software giant.
Much of the testimony by the witness, Franklin M. Fisher, an economist at the Massachusetts Institute of Technology, was a detailed review of major allegations in the government's case. But he also sought to advance the case and strengthen the argument for strong sanctions against Microsoft with his analysis of Microsoft's pricing tactics.
Fisher asserts that Microsoft commits predatory pricing by giving away its Internet Explorer browser. The doctrine of predatory pricing -- defined as a monopolist selling goods below cost -- has been generally rejected by courts in recent years on the theory that it is difficult to prove both the practice and any resulting harm to consumers.
But Fisher argued that Microsoft decided to give away its browser software only to thwart the threat to its dominance posed by its main rivals in Internet software, the Netscape Communications Corp., developer of the Navigator Web browser, and Sun Microsystems Inc., creator of the Java programming language.
Besides, he added, the tricky matter of trying to determine if a price is below some technical definition of its cost to produce does not apply because "Microsoft distributes its browser at a zero price," though it has spent more than $100 million a year since 1995 on browser development.
"Classifying Microsoft's pricing as predatory and anti-competitive," he stated, "does not require reaching the difficult questions that are usually faced in predatory pricing cases."
Fisher also provided a pre-emptive rebuttal to an MIT colleague and former student, Richard Schmalensee, who will testify next, as Microsoft's expert witness on economics. In his own report to the court, which has not been released, Schmalensee argues that the price of Microsoft's industry-standard Windows operating system is too low for Windows to be legally classified as a monopoly. The comparatively low price of Windows -- less than 5 percent of the total cost of an average personal computer -- has been cited by many economists as inconsistent with the government's allegation of an enduring monopoly.
But Fisher contends that such analysis means only that Microsoft's management is taking the long view of monopoly. "The proper conclusion from Schmalensee's argument cannot be that Microsoft lacks monopoly power," Fisher wrote in his testimony. "If any conclusion can be drawn, it would be that Microsoft is not maximizing its short-run profits."
Microsoft's product pricing, Fisher testified, should be viewed as part of a "broader campaign to eliminate Netscape's browser and Java as sources of potential competition to Microsoft's operating system monopoly -- a campaign characterized by actions by which Microsoft lost money in order to raise rivals' costs and exclude them from the market."
In court on Tuesday, a Microsoft lawyer, Michael Lacovara, opened his cross-examination of Fisher with more than an hour of detailed challenges to the methods Fisher used to determine the market shares of competing Web browsers. Lacovara also introduced criticisms of Fisher by judges in previous cases in which he appeared as an expert witness.
Fisher, an assertive, 64-year-old economist, has testified in dozens of antitrust cases in the computer industry -- though he was on the other side the last time, as the chief economic witness for IBM Corp. in its marathon antitrust confrontation with the Justice Department, a case the government dropped in 1982 after 13 years.
Microsoft's lawyers say the company is being attacked by Fisher for being much the kind of company IBM was when he was defending it. "Monopoly profits are earned through high prices and inferior products," Fisher wrote in a 1983 book about the IBM case. "The notion that acts showing a pattern of lower prices and better products are the behavior of a monopolist is a confusion of the workings of competition with its opposite -- monopoly."
Microsoft said in a statement that "Professor Fisher's testimony would give readers of his 1983 book whiplash."
On Tuesday morning, Microsoft ended the cross-examination of William H. Harris, the chief executive of Intuit Inc., which makes the industry-leading personal finance software, Quicken. The government also played excerpts from the taped deposition in which Microsoft Chairman Bill Gates was questioned last August about the company's dealings with Intuit.
Though Gates professed no knowledge of any of the interactions with Intuit that are at issue in the case, the government introduced e-mail messages in which employees had briefed him on the negotiations in exhaustive detail.
Shown one such message and asked if he had been informed of its subject, Gates said: "In the sense that one of the e-mails that may have come into my mailbox might have related to that, I don't doubt it."
Much of the questioning of Harris had centered on Intuit's interest in becoming an even larger player in Internet commerce. Microsoft's lead trial lawyer, John Warden, asked him about America Online's proposed purchase of Netscape, a deal that Microsoft argues is proof of healthy competition in the software industry.
"Doesn't that change the entire landscape of the Internet industry?" Warden asked.
"No, I don't believe so," Harris said. "There's a great deal of merger activity in this industry. Microsoft is rumored to be in discussions for acquisitions. I don't think the AOL-Netscape deal will be the last one we hear of."