To hear Microsoft tell it, Monday, Nov. 23, was the best day so far in its antitrust battle with the Justice Dept. But the "victory" had little to do with anything going on inside the courthouse. The Big News, as far as the software giant is concerned, is the possible alliance among America Online, Netscape, and Sun Microsystems. The potentially powerful combination, Microsoft General Counsel William H. Neukom declared on the courthouse steps, "pulls the rug out from under the government."

The possible AOL deal dominated the day, inside the courtroom as well. Microsoft's lawyers insisted that if AOL buys Netscape, it would prove that the marketplace can fix itself and that Justice's interference is unnecessary. Microsoft lawyer Michael Lacovara, wasted no time introducing the proposed deal into testimony as he cross-examined the government's expert witness, economist Frederick R. Warren-Boulton, about projected trends in Internet browser share. After Lacovara attacked a study indicating that Microsoft's share could reach 66%, he asked Warren-Boulton if he was aware of the deal and whether it proved that "overnight the structure of the marketplace can change."

Warren-Boulton disagreed. Rather than proving that healthy competition exists, he testified, the deal showed that Netscape had been driven into AOL's arms because Netscape had been so weakened by Microsoft's tactics in the browser business. "It is unfortunate to see the disappearance of a firm like Netscape that was the brightest new entrant in this particular area," Warren-Boulton said. He labeled the potential merger "an unfortunate outcome of what Microsoft has been doing."

BIGGEST GATEWAY. Outside the courthouse, Lacovara argued that the combined AOL-Netscape would have a dominant portal share, meaning that the combination of AOL's online service, which has 14 million subscribers, and Netscape's Netcenter Web site would produce the biggest gateway to the Web, a key position for generating ad revenue and transaction fees. Also, he said, it would dramatically improve distribution of Netscape's browser. Currently Microsoft's Internet Explorer is the "default" browser on AOL, but AOL might drop Explorer when the contract with Microsoft comes up for renewal in January. AOL denies this is a possibility.

Warren-Boulton also said it's hardly inevitable that AOL would automatically shift from favoring Microsoft's Internet Explorer browser to Netscape's Navigator. "I'm not clear why this merger, if it goes through, is really going to change AOL's fundamental calculus," he said, adding that AOL would still want to be the featured online service on Windows, which is what it got in return for switching from Netscape Navigator to Explorer in the first place. That deal, in fact, has figured in Netscape's testimony against Microsoft in the antitrust suit.

Warren-Boulton and Lacovara bumped heads on several issues. Disputing Warren-Boulton's analysis, Lacovara argued that neither Microsoft's lush profit margins nor its price-earnings ratio are legitimate measures of monopoly power. Warren-Boulton called Microsoft's 38.5% net margin "astonishing," and he said profit margin and p-e data are "informative and useful" in determining whether a company has monopoly power. The economist contended later that Microsoft isn't raising its prices because they're already at the profit-maximizing level -- one characteristic of a monopolist.

"DOUBLE STANDARD"? Microsoft lawyers also questioned the economist about why he failed to include Apple in the market for operating systems. Warren-Boulton said he excluded the Apple Mac because the cost for a personal computer maker of converting from an Intel processor to the PowerPC chip is so great it wouldn't happen.

Microsoft probed the government witness about his view of Netscape's inclusion of E-mail with its browser. Warren-Boulton said there was nothing illegal about it, even though Netscape was dominant in browsers. But Microsoft asserted that it's being prosecuted for bundling a browser with its operating system. "The government should not have a double standard," griped Microsoft spokesman Mark Murray. Warren-Boulton said Netscape ended up selling the E-mail separately after customers balked at the bundling.

Warren-Boulton also conceded that developers of Java programs may have gotten some benefits from Microsoft's altered version of the Sun Microsystems program -- which has now been ruled in violation of a contract between the companies by a California court. The government has contended that special versions of Java tailored for Microsoft's Windows undermined the usefulness of Java as a universal cross-platform tool that would let software developers create applications for any operating system. That would undermine Microsoft's lock on operating systems for personal computers.

Warren-Boulton's testimony also gave some comfort to the government, however. He said the Java-related Microsoft technologies slowed down the applications on non-Windows platforms, and he called Microsoft's strategy a "Trojan horse."

By Stan Crock and Mike France in Washington