Is Microsoft a monopoly? To the lay person, the fact that the software giant's Windows operating systems is installed in more than 90% of personal computers makes the question pretty much moot. But to lawyers, economists, and others testifying in the Microsoft antitrust suit, it's a subject of unending debate. And so, Richard L. Schmalensee, professor of economics at the Massachusetts Institute of Technology and dean of its Sloan School of Management, spent his second day on the stand doing more of what he did on the first -- telling Justice Dept. cross-examiners why he feels Microsoft isn't a monopoloy. His central argument: There are no significant barriers to entering the operating-systems market, and that potential threats already exist.

Schmalensee said "the possibility of long-run competition" in so-called computer platforms was the major constraint on Microsoft's prices. "Just as no one could have predicted the emergence of Netscape or the resurgence of Linux, the characteristics of this business are that software competition can come out of nowhere," said the professor. On his list of potential competitors: Apple Computer's Macintosh, the Linux system that's offered free on the Internet, and Sun Microsystems' Java software programming language. He noted that America Online's merger with Netscape Communications Corp. offered a combination of "attractive technology" with "a large user base."

But under tough questioning by Boies, Schmalensee conceded that none of these posed any immediate threat to Microsoft. Boies also argued that Microsoft's dominance was protected by a stubborn "applications barrier": Because most software applications are written to Windows, it's tough for other operating systems to eat into Microsoft's market share. Schmalensee agreed that Apple, Linux, and the others had not attracted the number of applications that would enable them to become immediate substitutes for Windows. But he said most computer users need only a handful of applications anyway. He also noted that the WordPerfect office-productivity suite was now being written for Linux, and that Dell Computer was shipping Linux. He called the free OS a "serious potential threat" that could attract application writers "within a short period."

EASY ENTRY? The issue of barriers to entry into the operating-systems market is key to determining whether Microsoft has monopoly power. Under antitrust law, a company does not have monopoly power -- even if it has 100% market share -- if other companies can enter the market without substantial difficulty. Such easy entry would encourage the dominant company to keep its prices at a competitive level.

Boies spent part of the day trying to attack Schmalensee's credibility by indicating that his current views on barriers to entry regarding Microsoft may conflict with his earlier writings -- earlier than his joining the Microsoft payroll, that is. Boies also used internal Microsoft E-mail from Microsoft CEO Bill Gates and other executives to raise questions about the quality of Schmalensee's research and conclusions.

In Schmalensee's written testimony, for instance, the economist referred to a March, 1998, survey that 85% of software developers predicted that Microsoft's integration of Internet functions into Windows would help their companies and that 83% predicted it would help consumers. But Boies pulled out a Feb. 14, 1998, E-mail in which Gates said he wanted a survey that would show "that 90% of developers believed that putting the browser into the OS makes sense. I am sure we will get like 60% before we explain our plans. Once we explain our plans properly, I think we will get more like 90%." Gates said that "ideally we would have a survey like this done before I appear at the Senate on March 3." Gates appeared before the Senate Judiciary Committee, chaired by Senator Orrin Hatch (R-Utah) on Mar. 10, along with Netscape CEO James Barksdale.

Responding to Gates's E-mail a day later, Microsoft executive Nathan Myhrvold suggested that the survey not be worded so that developers are asked whether they like the idea of putting the browser in the OS. "The name 'browser' suggests a separate thing," he said. "Instead you should ask a more neutral question about how Internet technology needs to merge with local computing. I have been pretty successful in trying this on various journalists and industry people."

"VERY QUIET." Myhrvold also suggested that the survey be part of a public-relations blitz about integration, including full-page ads following Gates's testimony and statements from industry figures on the benefits of integration. "We should keep this VERY quiet before the testimony because we do not want Barksdale and others preparing a counterattack," he wrote.

Schmalensee said that he didn't know that the survey had been prepared for the hearing but added he would have used the survey anyway because it was conducted by a third-party polling firm.

In 1987 writings on barriers to entry, he noted that the test of whether the barriers were low was whether there was downward pressure on the established company's profits. Schmalensee testified that the presence of Netscape, Sun's Java, and IBM's OS/2 operating system put pressure on Microsoft's profits because the software giant had to spend some of its would-be profits to fight off any threat. But when Boies asked him to state the years in which OS/2 was driving down Microsoft's profits, he said he had not investigated that. He also said Windows' price would have been higher if Netscape was not in the picture, but he was unable to quantify how "important" an effect it was.

Boies also asked Schmalensee about a 1982 Harvard Law Review article in which he wrote that persistently high profits indicated long-run power and impediments to entry by other companies. When presented with this writing, he exclaimed, "My immediate reaction is, 'What could I have been thinking?'" He noted that in industries with "successful investments" in intellectual property, there are high rates of return.

The court will be closed Jan. 15 and Jan. 18 for the Martin Luther King Jr. holiday. Schmalensee will take the stand again on Tues., Jan. 19.

By Susan Garland in Washington