|BUSINESSWEEK ONLINE : FEBRUARY 15, 1999 ISSUE|
|NEWS: ANALYSIS & COMMENTARY
Commentary: Microsoft Outsmarts Itself
When Microsoft Corp. (MSFT) entered U.S. District Court to defend itself against a Justice Dept. antitrust suit in October, it had what many people assumed would be a surefire defense in one area--a June U.S. Court of Appeals ruling that upheld the software maker's right to combine products as it saw fit. The higher court said that as long as the integration provides ''some technological value'' that can't be achieved if users combine the features themselves, there was no problem. That ruling, legal experts said, would make it all but impossible for the government to prove that Microsoft violated tying laws when it combined its Internet Explorer browser with Windows.
So much for the experts. Throughout, the government has been able to produce evidence disputing Microsoft's claim that integrating the browser was simply the next step in the Windows' evolution--and not a way to force computer makers to offer its browser rather than one from Netscape Communications Corp. (NSCP).
SERVICE BREAK. What's worse, for Microsoft, the recent setback on integration is just one in a series for the company's defense. Even though it is now Microsoft's turn to call witnesses and put forth its version of events, it is the government that seems to be scoring most of the points in recent weeks. ''It's certainly not the start that Microsoft envisioned,'' says Washington antitrust attorney Timothy J. O'Rourke.
Perhaps most discouraging, Microsoft's own witness, Senior Vice-President James E. Allchin, has provided some of the most damning testimony. Under cross-examination by Justice attorney David Boies, Allchin conceded on Feb. 1 that a consumer with Windows 95 could install Internet Explorer later and achieve many of the features offered in Windows 98, with its integrated browser. Washington antitrust attorney James R. Loftis III says Allchin's testimony was ''another nail in the coffin of Microsoft's argument that [Windows 98] is integrated and not separate products.''
Allchin's testimony also raised serious questions about Microsoft's credibility, from which it may not easily recover. On Feb. 2, Boies began a cross-examination aimed at discrediting a videotaped demonstration that Microsoft had entered into evidence. The purpose of the tape was to prove that government witness Edward W. Felten of Princeton University was wrong when he asserted that he could remove browsing capability from Windows 98 without harming the system. After Boies pointed out to Allchin problems that suggested doctoring of the tape, U.S. District Judge Thomas Penfield Jackson noted that ''doubt'' had been cast ''on the reliability'' of the Microsoft tapes. At press time, Microsoft was planning to restage the demonstration.
By itself, the video snafu could be viewed as just an embarrassing gaffe. But it's part of a pattern that leaves the impression that Microsoft is losing points. The Microsoft witnesses who preceded Allchin to the stand also fared badly under government cross-examination. Boies attacked Richard L. Schmalensee, Microsoft's economist, over his earlier writings, which seemed to contradict his current testimony. When the economist insisted that high profits don't imply monopoly power, Boies showed him a 1982 article in which Schmalensee wrote that persistently high profits do indicate barriers to entry by rivals. To that, he said: ''My immediate reaction: 'What could I have been thinking?'''
Another Microsoft witness, Paul Maritz, wound up giving Justice some ammunition for its allegation that Microsoft attempted to divide the browser market with Netscape at a June 21, 1995, meeting. Boies managed to get Maritz to concede that Microsoft had tried to persuade Netscape to become less of a direct rival by using more Windows technology in its browser.
Most worrisome for Microsoft should be Jackson's demeanor during these cross-examinations. Several times, he ordered Maritz to answer Boies with a simple ''yes'' or ''no''--something he never did with government witnesses, even when Microsoft lawyers sought his help. He also challenged Schmalensee's reasoning several times. ''In many ways, he has been revealing his skepticism with their arguments,'' says William E. Kovacic of George Washington University Law School.
But it's the widening crack in the integration defense that could prove most damaging to Microsoft. To show a violation of antitrust law, the government must prove that Microsoft's browser and operating system are separate products and that there would be consumer demand for each alone. To that end, Justice has introduced many Microsoft E-mails showing that even Microsoft execs monitored the market shares of the two products individually. In a January, 1996, E-mail, for instance, Microsoft Chairman William H. Gates III noted: ''Winning browser share is a very, very important goal for us.''
LESS CHOICE. As for consumer demand, executives from Packard Bell NEC, Gateway (GTW), and Hewlett-Packard (HWP) all testified that they would like to make the browser choice themselves. ''I would prefer that we had that choice to make,'' said Scott Vesey, a Boeing Corp. executive who testified that his company chose Netscape as the standard because it could work on top of all operating systems.
Although Allchin insisted he wanted to integrate Internet Explorer because it was ''cool technology,'' Justice has introduced E-mails indicating that the company may have intended to foreclose competition. Said one executive in February, 1997: ''It...will be very hard to increase browser market share on the merits of IE alone. It will be more important to leverage the [operating system] assets to make people use IE instead of [Netscape].''
There is still considerable evidence on Microsoft's side on the issue. And even if Justice wins this point, finding the right remedy could be a headache. Does Judge Jackson order a company to pull apart its product--one used by millions of consumers? And is he really ready to dictate what should be in an operating system? For these reasons, Microsoft may still come out with Windows fully intact. Then again, Judge Jackson doesn't seem one to take the easy way out.
By Susan B. Garland
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