The proposed alliance of America Online, Netscape, and Sun Microsystems could alter sanctions on Microsoft if the judge finds that the colossus of Redmond violated antitrust law, the government's top lawyer in the case suggested on Nov. 24. In remarks on the steps of the federal courthouse in Washington, D.C., Justice lawyer David Boies told reporters that the judge would have to look at all factors when fashioning a remedy. "I don't know what the industry will look like at the end of the trial," Boies declared. But clearly, if the transaction bolsters Netscape's ability to compete with Microsoft, a tough court order designed to boost Netscape might not be necessary.

Microsoft's lawyers certainly saw an opening. They seized on the AOL-Netscape-Sun troika announcement to call on trustbusters to throw in the towel. "The government ought to drop this case," declared Microsoft General Counsel William H. Neukom, who also spoke on the courthouse steps. As in Justice's case against IBM in the 1970s, the government is "five steps behind the industry," he argued.

The company says the deal shows how the industry's competitive landscape can change overnight. But the government maintains that there remains one constant: Microsoft's dominant share of the market for operating systems. Boies insisted that the proposed merger might affect the remedy, but it won't alter the course of the trial.

OUTSIZE MARGINS. The testimony inside the courtroom was no match for the after-hours pyrotechnics outside. With economic consultant Frederick Warren-Boulton on the stand, Microsoft attorney Michael Lacovara pressed him on whether sky-high profit margins were evidence of a monopoly and whether Warren-Boulton should have deleted fragments of Microsoft Chairman Bill Gates's sentences when Warren-Boulton quoted him in his written testimony.

Warren-Boulton maintained that Microsoft's 38% net margins were higher than those of any other of the 500 largest companies in the U.S., including software companies. That, he says, suggests monopoly pricing power. But Lacovara suggested that Microsoft's outsize results may be the result of accounting practices that could soon be changed, producing margins more in line with other big companies. Warren-Boulton countered by saying even with the changes, margins probably would hover around 30%, far higher than Microsoft's peers. Boies added outside the courtroom that profit margins aren't the only evidence of monopoly. Another example: Microsoft's ability to raise prices without losing customers.

Selective use of quotes was a theme for much of the day's testimony. Warren-Boulton said Gates attributed Netscape's early lead in the browser market to the quality of the product, while Lacovara noted that Gates cited another factor: Netscape was free. He was trying to make the point that Netscape's tactic of giving its product away originally was no different from Microsoft's, which also distributes its browser for free.

DID MARKETS SPEAK? But Warren-Boulton argued that there was a big difference. Netscape planned to charge when there was a large enough network of Netscape users to make it something people would pay for. Then Netscape could recoup its investment. Microsoft, in contrast, never intended to charge. Thus its move could be seen as a predatory tactic.

Warren-Boulton turned the tables on Lacovara at one point. The Microsoft lawyer cited an IBM executive's statement that Big Blue's Aptiva line of PCs dropped IBM's own OS/2 operating system because customers and retailers wanted Windows. His point: The markets had spoken, and Windows won.

However, Warren-Boulton noted that the exec's explanation was that OS/2 was dropped because so many more applications are written for Windows than for OS/2. That, he suggested, buttressed the government's argument that Microsoft was leveraging its dominance in operating systems to get more applications and run other operating systems out of business.

After taking a five-day break for the Thanksgiving holiday, the antitrust trial will resume on Monday, Nov. 30.

By Stan Crock in Washington