BUSINESS WEEK ONLINE / COURTTV ONLINE:  MICROSOFT ON TRIAL
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Profiles
 
 
DEC. 1, 1998 7pm ET
 
Numbers That Make Microsoft Look Bad
Among other stats, Justice's economics expert points to Windows' increasing percentage of a PC's cost

At the close of Microsoft's antitrust trial each day, its spokespeople step into the harsh light of TV cameras on the steps of the federal courthouse in Washington, D.C., and try to put a positive spin on the day's events. On Tuesday, Dec. 1, the spin seemed to grind to a halt. Asked if it had been -- as he used to say almost daily, "another great day" for Microsoft -- spokesman Mark Murray demurred. "It's been weeks since I've said that," he commented.

On Tuesday, he had good reason to be subdued. During redirect questioning from a government attorney, economist and government witness Frederick R. Warren-Boulton came off powerfully. He laid out the facts behind his conclusion that Microsoft's pricing practices show that it exercises monopoly power and that its exclusionary dealings with Internet service providers had a profound effect on the company's ability to overtake Web pioneer Netscape Communications Inc. in the browser wars.

Warren-Boulton used a Microsoft pricing study to argue that the software giant has been able to keep its prices high because it faces little competition -- to the detriment of consumers. Prepared in advance of Windows 98's release last summer, the Microsoft study concludes that there would be no need to lower the price of Windows upgrades to increase the volume of sales. More significantly, it also noted that Windows accounted for 2.5% of the average personal computer price in 1996, up dramatically from the 0.5% it represented in 1990. Recently, on its Web site, Microsoft put that number at 5%.

MUSCLE FLEXING. This suggests that while other technology prices were dropping dramatically because of competition, the cost of the operating system was not, Warren-Boulton testified. "We see a really dramatic increase in the cost of the operating system relative to the other components in a PC -- which suggests the extent to which Microsoft is exerting its monopoly power is increasing," he said.

The economist also broke down browser usage data provided by AdKnowledge Inc. to back up his contention that Microsoft's agreements with ISPs helped turn the tide in the browser war. The government maintains that Microsoft was able to get ISPs to favor its Internet Explorer browser over Netscape's because the ISPs wanted to be included in an Internet access feature on the Windows desktop. And that, Justice says, is an unfair use of the Windows monopoly to extend its influence into new markets.

Warren-Boulton's analysis showed that Microsoft's market share among browsers distributed by ISPs rose from 20% in January, 1997, to 49% last August. In a small group of ISPs that did not favor one browser over another, IE's share rose to only 30%. "The effect of this is that Netscape's browser share fell more rapidly than it would have otherwise," said Warren-Boulton.

Much of the day's testimony came in response to redirect questioning from attorney Richard Schwartz, who represents 20 state attorneys general who joined the Justice Dept. case -- so it's no wonder that the government won most of the rounds. When asked if there are competitors in the desktop operating system business that could constrain Microsoft's monopoly power, Warren-Boulton answered no, "only potential threats." He pointed out that two new entrants -- Linux and BeOS -- are really positioned only as compliments to Windows.

"ROLLING BOULDERS." But Warren-Boulton scored points even when Microsoft's attorney was asking the questions. After Microsoft attorney Michael Lacovara asserted that what's going on in the Internet marketplace is just good tough competition, Warren-Boulton cut him short. "We all want everybody to be racing to the top of the hill," he said, "but we don't want somebody to be rolling boulders down on the next guy."

During breaks from testimony, Microsoft's spokespeople argued that the government was using misleading statistics to make its case. But no doubt, the company was glad to see an end to Warren-Boulton's four days of testimony as he is. Judge Thomas Penfield Jackson seemed to speak for everyone in the courtroom when he ended the session by proclaiming dramatically: "Dr. Warren-Boulton, you are liberated."

On Wednesday, a new round of inquiry is expected to begin with video from Microsoft CEO Bill Gates's deposition. He'll be commenting on Sun Microsystems Inc.'s Java programing language -- which, the government claims Microsoft has tried to undermine.

By Steve Hamm in Washington

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1998


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