Weeks of testimony by competitors and business partners have provided lots of proof that Microsoft Corp. has sharp elbows. But is Microsoft a monopoly? That's a key question for the Justice Dept. to answer. As it attempts to do so, the trial moves into a new, more arid phase: No juicy accusations about Microsoft plots to divide markets. No lurid stories of threats and retaliation. No testy taped testimony by Chairman William H. Gates III. No, now we've entered the critically important, but less stimulating realm of economics.

On Thursday, Nov. 19, Frederick R. Warren-Boulton, a private economist who worked for Justice during the Reagan Administration, took the stand to explain how Microsoft maintains a monopoly in personal-computer operating systems -- and what that means for consumers. His conclusion: Microsoft prices operating-system software higher than it would if there were significant rival products on the market. No such rivals exist, he says, and there's no reason to believe that will change for many years. Because Microsoft execs have no fear of serious competition, said Warren-Boulton, "They have a great deal of discretion in choosing prices, and the prices they have chosen are [much] higher than they would have chosen to be at a competitive level."

Microsoft lawyer Michael Lacovara pressed Warren-Boulton to spell out by how much Microsoft overcharges. "Do you know what the competitive price of Windows 98 is?" Lacovara said. Warren-Boulton deadpanned, "Significantly below what it is."

HARSHLY JUDGED. As it has done inside and outside the courthouse, Microsoft continues to dismiss the notion that it actually exercises anything approaching monopoly power, despite its 90% share of the personal-computer operating-system market. Preventing the government from making the monopolist tag stick is key to the software giant's defense: If the company is acknowledged to be a monopoly, then its business practices will be judged more harshly. In other words, the aggressive tactics that Microsoft says are typical in the industry could be considered criminal if used by a monopoly.

Microsoft's key argument is that the high-tech business is so fast-moving that, despite its market share, it's vulnerable because potential competitors pop up quickly without warning, ready to topple market leaders from their pedestals.

Warren-Boulton conceded that technology markets do move quickly and players can rise and fall overnight. But when Lacovara tried to suggest that a new operating system called Linux might topple Microsoft, the government's witness was unmoved. Although Linux is spreading rapidly with computer users and software developers -- it's available free via downloads over the Internet, and its developers are being supported by major companies such as Intel, Netscape, and Oracle -- Warren-Boulton concluded that Linux really doesn't pose much of a threat (see BW Online, Nov. 12, "Don't Expect Linux to Hurt Microsoft Much"). He said the true test of whether a product is a viable competitor is whether it limits the pricing of the company with monopoly power. "There is no evidence that the availability of Linux is limiting the price charged by Microsoft," he said. He added: "I don't believe any role Linux will play in the future will significantly constrain the monopoly power and the monopoly prices of Microsoft."

"RUN, DON'T WALK." Warren-Boulton cited the price of Microsoft stock as a sign of how remote the Linux threat is. That Microsoft still commands a price-earnings ratio of 50, twice the average for the overall market, he asserts, proves that Linux is no threat to the above-average growth of Microsoft earnings. "The financial markets are looking at Microsoft and asking, 'do we expect those profits will be sustained over time or increase over time?' [They] expect profits will grow more rapidly than [at] other companies." He added, to laughter, that if anyone believes Linux will constrain Microsoft's prices, "Run, don't walk, to your nearest broker, and short Microsoft." Then, he advised, "that is not a good ploy."

Also discussed was an internal document written in December, 1997, by Microsoft executive Joachim Kempin, who outlined some potential threats to his company's operating-system dominance. One was the Java programming language. A second was the possibility that PC makers could get together and create a new operating system. The third: Intel could move into operating systems. "If they decide to own the OS [operating system] as well as the CPU [microprocessor] business, it will get ugly," Kempin wrote. But the executive dismissed each scenario as unrealistic.

Finally, Lacovara led Warren-Boulton to agree that even a company that has monopoly power needs to innovate to stay competitive. Lacovara was referring to another internal Microsoft document written to Bill Gates by a top exec: "Despite all the advantages that accrue to the incumbent leader, no product could expect to survive two consecutive bad versions [of a product]." Warren-Boulton dismissed this document as not being Microsoft's true belief, but a document meant to become the company's public posture.

Warren-Boulton will continue on the witness stand when the antitrust trial resumes on Monday, Nov. 23.

By Susan Garland in Washington