New York Times

October 22, 1998

Microsoft Uses E-Mail From Netscape to Contest Antitrust Case

By STEVE LOHR

WASHINGTON -- Attempting to refute a central allegation in the government's antitrust case, Microsoft Corp. on Wednesday produced a secret e-mail message from the chairman of Netscape Communications Corp. seeking Microsoft's cooperation, offering to stay out of its way and suggesting that Microsoft invest in Netscape.

James Barksdale, the president of Netscape, enters United States District Court in Washington. He was cross-examined for several hours Wednesday by Microsoft's lead lawyer.

The e-mail, written on Dec. 29, 1994, was introduced to suggest that it was Netscape, not Microsoft, that initiated some of the elements of what the government portrays as an illegal offer by Microsoft in June 1995 to divide with Netscape the market for software used to browse the Internet's World Wide Web.

The e-mail message, written by James Clark, the chairman and cofounder of Netscape, was submitted in court Wednesday by Microsoft as part of its defense in the sweeping antitrust suit filed by the Justice Department and 20 states. It was perhaps the most surprising piece of evidence produced during a second day of often combative cross-examination of the government's leading witness, James Barksdale, the president and chief executive of Netscape.

Throughout the morning and afternoon sessions, John Warden, Microsoft's lead lawyer, frequently tried to goad Barksdale to concede key points in Microsoft's defense -- namely, that Netscape's browser is widely distributed despite Microsoft's allegedly unfair business practices, and that Microsoft's Internet Explorer browser only began gaining market share against Netscape's Navigator in the fall of 1996, because Explorer had been significantly improved, not because of predatory conduct on the part of Microsoft.

Barksdale made few concessions, repeatedly replying, "No, I don't agree."

In the e-mail memo to Dan Rosen, a Microsoft executive, Clark wrote "We have never planned to compete with you."

Later, Clark wrote, "We want to make this company a success, but not at Microsoft's expense. We'd like to work with you. Working together could be in your self-interest as well as ours. Depending on the interest level, you might take an equity position in Netscape, with the ability to expand the position later."

Clark concluded his e-mail appeal by noting, "No one in my organization knows about this message."

Barksdale said he did not know about the e-mail until recently and that the first time he saw it was in court Wednesday. He said that Clark told him about his December 1994 proposal to Microsoft this summer when Netscape executives were being deposed by Microsoft's legal team in preparation for the trial.

"He said that he made an offer to them including some of this and that it was rejected," Barksdale testified.

On the witness stand Wednesday, Barksdale sought to portray the December 1994 e-mail from Clark as a freelance overture that did not represent corporate policy. "He never discussed it with the board, and he never discussed it with me," Barksdale said.

Because Clark's offer was quickly dismissed by Microsoft, the government asserts that its introduction in court by Microsoft is mainly an effort by the defense to try to "change the facts and change the subject," in the words of David Boies, special trial counsel for the Justice Department.

The December 1994 e-mail is not related, the government contends, to the June 1995 meeting in which the Justice Department says that Microsoft made its illegal offer. According to the government, Microsoft offered to make an investment in Netscape and give Netscape's software developers crucial technical information about the Windows operating system if Netscape would agree not to make a browser for Windows 95 operating system, which Microsoft released two months later.

The government says Netscape rejected Microsoft's collusion pact, while Microsoft replies that the government is misrepresenting what was a routine business meeting.

Clark sent his e-mail during Netscape's precarious startup phase, before the company had yet begun to garner a lot of sales and with Clark watching his $5 million investment in the company dwindle. In his testimony, Barksdale tried to dismiss the memo as a sales ploy, perhaps made in desperation, as opposed to a genuine business plan for Netscape.

Warden asked Barksdale of Clark, "Do you regard him as a truthful man?"

After pausing, Barksdale replied, "I regard him as a salesman."

"I'm not going to touch that," Warden responded.

Microsoft also introduced a portion of Clark's pretrial deposition to try to prove that as early as the fall of 1994 Netscape was aware of Microsoft's intention to bundle its browser with its Windows operating system.

This is potentially significant because the government says that Microsoft's principal reason for folding the browser into the operating system was as an anticompetitive tactic to undermine Netscape. In the fall of 1994, Microsoft asserts, Netscape had not yet produced its first product.

In his deposition, Clark testified that he first heard Bill Gates, the chairman of Microsoft, talk of bundling the browser and the operating system at an industry conference in October 1994.

Clark was asked if he had a personal conversation with Gates about this, and Clark said no, instead recalling it as a vaguely threatening comment made to the conference audience.

"All he said was: I hope no one plans to make money on browsers because they will be bundled into the operating system," Clark said.

In his cross-examination, Warden also tried to establish that Netscape had long viewed all-but-free distribution of its browser as part of its business plan. This assertion relates to the case because Microsoft's decision to distribute its Internet Explorer browser free is characterized in the government's suit as one of several extraordinarily aggressive steps Microsoft took to try to undercut Netscape.

To make this point, Warden introduced as evidence portions of the manuscript from a new book, "Competing on Internet Time: Lessons from Netscape and Its Battle with Microsoft," by Michael Cusumano, a professor at Massachusetts Institute of Technology's Sloan School of Management, and David Yoffie, a professor at the Harvard business school.

The book, based on extensive interviews with present and former Netscape executives, quotes Marc Andreessen, a cofounder and executive vice president, as describing browser marketing as "free but not free."

The concept refers to the notion that many individuals and corporations downloaded browser software from Netscape's Web site without paying for it. Still, free distribution is valuable because it encourages companies to adopt Netscape's technology, and Netscape bases its business on selling large software packages for hub computers, or servers, that feed data to many personal computers in a network.

Warden raised the issue to suggest that Netscape's business model did not vary much from what Microsoft did.

When asked about it, Barksdale replied, "I have never heard this term 'free but not free.' I have not heard it, I don't espouse that, and that was not our strategy."