New York Times

October 29, 1998

U.S. Describes Microsoft Fight to Secure Ally

By JOEL BRINKLEY and STEVE LOHR

WASHINGTON -- Firsthand testimony from a senior executive at America Online and new documents introduced in court today provided an extraordinarily detailed portrait of the Microsoft Corporation's campaign to thwart a planned partnership between the nation's largest online service and the Netscape Communications Corporation, Microsoft's rival in the Internet software market.

Microsoft's main weapon in the campaign, the Government contends in its antitrust suit, was offering America Online a prime place on the desktop of its industry-standard Windows operating system. That deal, the Justice Department contends, is an example of how Microsoft illegally used the market power derived from its monopoly in operating-system software to stifle competition in the market for the browser software used to navigate the World Wide Web.

In the fall of 1995, America Online and Netscape, the browser pioneer, were eager to forge a strategic alliance to fight Microsoft, which they saw as "the common enemy," according to an internal document written by Stephen M. Case, the chairman of America Online.

In the internal e-mail, a draft document circulated among senior America Online executives before being sent back to Netscape, Case said he agreed wholeheartedly with a recent message from Marc Andreessen, one of Netscape's founders, urging the two companies to "use our unique respective strengths to" resist "the Beast from Redmond that wants to see us both dead."

Microsoft's Internet Explorer browser competed against Netscape's Navigator, which was then the industry-leading Web software, and its MSN online service was seen as an important challenger to America Online.

Yet by March 1996, the planned America Online-Netscape alliance had been abandoned and America Online chose Internet Explorer as its main browser -- a big lift for Microsoft in the browser market, as its software was soon used by millions of America Online subscribers.

During dogged cross-examination by John Warden, Microsoft's lead lawyer, David M. Colburn, a senior vice president at America Online, held firmly to his assertion that the pivotal consideration for choosing Internet Explorer was that Microsoft eventually agreed to put a start-up button for America Online in a folder on the Windows desktop -- "a critically important competitive factor that was impossible for Netscape to match."

In court today, Warden repeatedly sought to argue that America Online chose Microsoft's browser largely because Microsoft's software was technically superior -- and he introduced internal documents from America Online engineers who preferred Microsoft's technology.

But when he asked if that was so, Colburn said simply, "No."

The Government entered into evidence e-mail messages intended to support Colburn's answer -- including one written by William H. Gates, Microsoft's chairman.

In an e-mail message written on Jan. 8, 1996, Gates was describing to four of his executives a recent telephone conversation he had had with Case of America Online. Gates wrote that Case had told him that he "views us technically as behind Netscape but credible enough to do a very good job."

Gates added, "I said integration with Windows will be great for his users."

An internal e-mail message from Case to several members of his executive team a few weeks later suggests that he was bargaining hard with Gates -- and that Microsoft's technology was neither inferior nor the only consideration. "From a pure technology standpoint, it does look like Microsoft may win this one," Case wrote on Jan. 24, 1996. "Couple that with their distribution (OS) muscle, then Netscape clearly faces an uphill battle."

"OS" referred to Microsoft's operating system, Windows, which is loaded on more than 90 percent of personal computers shipped today.

After introducing the Case e-mail in court, Warden asked Colburn if it did not suggest that Microsoft had won the America Online deal mainly because of its superior technology.

Colburn gave little ground, saying that he would focus more on the second sentence of the Case e-mail, which referred to "distribution muscle." And, Colburn added, "In the first sentence he says Microsoft may win, which is hardly a ringing endorsement."

Microsoft's position on the deal is that America Online "played Microsoft and Netscape off against each other, and in the end Microsoft won fair and square," Mark Murray, a Microsoft spokesman, said today.

Warden used his cross-examination to question America Online's motives for testifying on the Government's behalf. He noted that proposals for an alliance with Netscape in 1995 called for America Online to pull back from some software development efforts and for America Online to handle the programming for Netscape's popular Web site, now called Netcenter.

"In your dealings with the Justice Department to defeat the 'Beast from Redmond,' " Warden asked, "did you disclose that you had proposed a market division agreement with Netscape?"

A central allegation in the Government's case against Microsoft is that it illegally proposed dividing up the browser market with Netscape in June 1995.

To the question, Colburn replied, "Those are your words, not mine."

After the day's court session, David Boies, the lead trial lawyer for the Justice Department, said that the Microsoft defense team's focus on a proposed arrangement between Netscape and America Online was another attempt by Microsoft to "change the subject."

"The antitrust rules are different for a company with monopoly dominance like Microsoft," Boies said. "In the case of Netscape and America Online, neither one of them had monopoly power."

At the time the deal was being negotiated, however, America Online was four times as large as its nearest competitor, and Netscape had an estimated 84 percent of the browser market.

Go to Part 2 of the AOL testimony