Richard Schmalensee, dean of Massachusetts Institute of Technology's Sloan School of Management, will be the first of 12 Microsoft witnesses to answer charges that the company defends its Windows monopoly by illegally restraining competition for computer operating software.
Schmalensee took the opposite approach of his fellow MIT professor and the government's final witness, Franklin Fisher. With the government about to rest its case after nearly three months of trial in federal court, Fisher cited Microsoft's software pricing data to support the government's claim that the company has a monopoly on computer operating systems. The power to raise prices due to lack of competition is a factor in the legal test for determining whether the company is a monopoly.
Schmalensee argued that the Windows market dominance is threatened by competition ranging from network computers from IBM and Sun Microsystems to handheld computers such as 3Com's Palm Pilot.
After a false start six years ago, "operating systems for handheld computers became, in short order, an important new software category and on that could impose increasing competitive pressure on the Windows operating system for Intel-compatible desktop and laptop computers," Schmalensee said.
Even though the Windows operating system powers 90 percent of the world's computers, Microsoft does not have a monopoly in this market, Schmalensee said, because any number of companies--known and unknown--are developing new software products that could quickly displace the operating system. "Far from living the quiet life of a monopolist immune from entry (competition), Microsoft perceives itself as being in a constant competitive struggle to maintain its leadership in operating systems," Schmalensee said.
"It is the constant threat that its competitors will provide a more appealing software platform...that makes Microsoft constantly strive to improve Windows and keep Windows prices low," Schmalensee said. "Despite what would appear to be an ironclad monopoly, the evidence based on real-world observations is that Microsoft does not behave like a firm with monopoly power," he said.
A key element of proof that Microsoft is violating the Sherman Antitrust Act is that it holds a monopoly for personal computer operating software. Without that finding, the government could not show that Microsoft illegally stifles competition. Legal experts who have watched the case say the government has provided abundant evidence that the software giant has a monopoly.
The landmark antitrust trial now shifts to Microsoft's defense. Under procedures imposed by U.S. District Judge Thomas Penfield Jackson, witnesses first submitted their direct testimony through written depositions before appearing in court. Schmalensee will be cross-examined by a government attorney when he takes the witness stand.
Schmalensee took issue with two economists hired by the Justice Department (DOJ) and 19 states who testified that Microsoft has used its power in the marketplace to thwart competition from Netscape Communications and other software rivals to preserve its Windows monopoly.
Fisher, an MIT economist hired by the Justice Department, and Frederick Warren-Boulton, a private economist, both testified that Microsoft's decision to give away it's Internet Explorer Web browser was an act of predatory pricing designed to thwart competition by Netscape's rival Navigator browser. Microsoft's inclusion of Internet Explorer in Windows helped consumers and was pro-competitive, Schmalensee said. Moreover, America Online's proposal to buy Netscape for $6.67 billion is evidence that Netscape has not been hurt by Microsoft, he said.
"Netscape would have little value if it had a limited future in providing Web browsing software," Schmalensee said. AOL's offer "reflects its confidence in Netscape's vitality," he said.
Schmalensee said it is too soon to predict what effect AOL's proposed technology alliance with Sun would have on the future of the Java programming language. Still, Sun's Java programming language "poses potentially serious competitive implications for Windows," he said. Java would be a particularly serious threat to Windows if Sun succeeds in developing microprocessors that run more quickly with Java.
He also disputed Warren-Boulton's assertion that Microsoft's market dominance has enabled it to raise prices it charges consumers for operating software. If it had a monopoly, Microsoft could charge 16 times what it charges computer makers to install Windows on personal computers, Schmalensee said.
"The fact that Microsoft charges less than one-sixteenth of the monopolistic price reflects the fact that it faces significant competition from numerous sources," he said.
Schmalensee scoffed at the government's contention that the lack of software applications for new operating systems bars rival systems like Linux or IBM's OS/2 from developing a following.
"Every leading personal computer operating system was once an entrant and had to overcome a lack of an installed base of applications software," Schmalensee said. He recalled that before IBM introduced its IBM PC in 1981 there were two operating systems for microcomputers--Apple II and CP/M--that had many applications. There were "only a handful" of applications for the PC, "however, the amount of software available for the PC exploded" in a year or two.
Microsoft has won several highly competitive "races" to sell the leading operating system and has kept its dominant position "as a result of its superior industry, foresight and efficiency, as well as the missteps of its competitors," Schmalensee said.
Copyright 1999, Bloomberg L.P. All Rights Reserved.