The government's lead attorney, David Boies, grilled Microsoft's witness, economist Richard Schmalensee, about allegations the company illegally linked its Internet Explorer browser to Windows. The Justice Department (DOJ) and 19 states claim Microsoft melded the products to crush competitive threats posed by emerging Internet technologies.
Boies asked Schmalensee, dean of the Sloan School of Management at Massachusetts Institute of Technology, a series of questions suggesting that when Microsoft combined the two products, it harmed consumers by denying them their choice of browsers.
Explaining that the line between browsers and operating systems is blurry, Schmalensee said, "It doesn't make sense to define a browser market. . . [because] most operating systems include a browser."
Microsoft contends its browser is seamlessly integrated into its latest OS, Windows 98, and that the combination represents a single product.
The part of the government's case that alleges joining Internet Explorer and Windows violated antitrust law centers on tying, a legal concept that bars conditioning the sale of one product on acceptance of another, usually less popular, product.
It may be the weakest part of the case against Microsoft: A June ruling of the U.S. Court of Appeals for the District of Columbia involving Microsoft and the Justice Department said it is difficult to establish an illegal tying of products where some consumer benefit results. Although the appeals court's language doesn't control the current Microsoft case, Boies spent much of the day shoring up the tying charge with evidence that Microsoft enjoys a monopoly in an industry where new competitors face high hurdles to entering the market.
He questioned Schmalensee about whether Microsoft's combination of the products let it extend its alleged monopoly in personal computer operating systems to the browser market. Windows runs over 90 percent of the personal computers in the world.
Boies asked the economist: "Microsoft considered the ability to include its browser as part of the operating system as the No. 1 reason why Microsoft expected people to switch to Internet Explorer?"
"I am unaware of any company expectation," Schmalensee replied. "I expect you have a document." Boies showed him a Microsoft chart that said computer makers "are the best vehicle to gain browser share."
Schmalensee said he didn't understand various items on the chart and concluded: "I still don't know what it means."
The economist also denied Boies's suggestion that "Microsoft has taken the position that Internet Explorer was not really part of the operating system."
"Don't you recall that as a part of the Bristol case?" Boies asked, referring to Bristol Technologies' private antitrust lawsuit against Microsoft in which Schmalensee was also an expert witness.
"I'd love to go back to the Bristol case but I don't remember," said Schmalensee.
Boies showed Schmalensee a 1995 Microsoft email about contract talks to give Bristol access to Windows source code to let the smaller company devise software development technology. In the email, Microsoft executive Jeff Alger wrote of creating a distinction between applications the company sells as separately boxed products and the Windows operating system.
"I'd rather use [Internet Explorer] as a bargaining chip to clarify the extent of their rights: IE [Internet Explorer] as a separate deal, and thereby set the precedent that [applications] in the box aren't really part of the [operating system]," Alger wrote.
"I see one person in Microsoft describing the proposal," Schamalensee said. "I don't know who this person was or by whom this was received."
To try to undermine Schmalensee's testimony, Boies introduced the economist's statements from a previous case that seemingly contradict the views he is now expressing.
In 1981 testimony about tying claims in a case against Data General, Schmalensee said that company's linking of its hardware and software was made more legally suspect by the "lock- in phenomenon." That effect resulted when software programs were written specifically for that company's hardware system.
"Lock-in gave Data General an advantage over others," Schmalensee testified at the time, though he has since denounced the government's notion that the lock-in effect gives Microsoft's Windows an advantage over rival operating systems.
"I think the PC world is very different," Schmalensee said.
Microsoft shares rose 5.825 to 155.625 on enthusiasm the company's second-quarter earnings would exceed analysts' estimates, which they did.
After trading closed, the Redmond, Washington-based software giant said quarterly earnings rose 75 percent to 73 cents a share, from 42 cents in the year-earlier period. The average analyst estimate was 59 cents, according to First Call Corporation.
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