Microsoft's expert witness in economics has spent hours on the witness stand denying that the software giant has monopoly power. But on Wednesday, Jan. 20, he was forced to make a major concession: Computer makers, at least for now, have no other operating-systems supplier to turn to if they don't like the demands Microsoft places on them.

During his cross-examination of economist Richard L. Schmalensee, Justice Dept. litigator David Boies sought to portray Microsoft as a ruthless enforcer of contract restrictions that were so tough that PC makers complained bitterly about them. According to Boies, Microsoft wanted to ensure that PC makers would not give Netscape Communications Corp.'s Navigator browser more prominence on their screens than Microsoft's own Internet Explorer.

Computer makers, for example, are not allowed to change the basic appearance of the Windows operating system. They're not allowed to hide Microsoft's Internet access icon or to place larger "icons" for rival products on the desktop. Nor are computer manufacturers allowed to show a customized screen before the Windows desktop pops up.

Schmalensee, an economics professor at the Massachusetts Institute of Technology and dean of MIT's Sloan School of Management, testified that Microsoft imposed such screen restrictions because it was "asserting [its] intellectual property rights" and because it has an "obvious interest" in how the consumer views its products. He called these reasons a "plausible rationale."

"VERY IMPORTANT GOAL." Boies showed Schmalensee an internal Microsoft E-mail from Bill Gates in Jan. 5, 1996, complaining that a lot of PC makers were distributing non-Microsoft browsers and getting the offerings "displayed on their machines in a FAR more prominent way" than Microsoft's browser and other products. He noted that "winning Internet browser share is a very very important goal for us." Though Gates was asking Joachim Kempin, his chief in charge of PC-maker relations, to find ways to get them to display Microsoft's products, Schmalensee resisted Boies' suggestion by noting that the memo made no mention of possible screen restrictions.

But a few days later, Kempin issued a mid-year review in which he noted that what was missing was "control over startup screens" and Explorer placement.

Boies also showed Schmalensee a furious E-mail from an executive from Hewlett Packard Co., complaining about the restrictions, which he said had caused "significant and costly problems." The HP exec added: "If we had a choice of another supplier, based on your actions in this area, I assure you would not be our supplier of choice."

Schmalensee noted that "this is clearly an angry person," and he conceded Boies' point that if PC makers get unhappy with Microsoft, they have nowhere else to go. "In the short run, no," the professor said.

EXCEPTIONS. Boies offered another E-mail from a top Microsoft executive griping in mid-1998 that Microsoft was making exceptions to the screen restrictions for some large PC makers, such as Gateway and Packard Bell. Concerned that other PC makers would want exceptions too, the exec noted that "the antitrust team was negative. Changes like this undermine our whole case in defense of Windows Experience."

Boies and Schmalensee also sparred over why Microsoft's browser share had risen over time while Netscape's had declined. Justice is arguing that Microsoft used its monopoly power in operating systems to force PC makers and other customers to favor its browser over Netscape's. Microsoft counters that Explorer use increased because it was a better product.

Schmalensee testified that Internet Explorer use started rising when the company offered a better version of it. He said product reviews in computer magazines showed that a larger percentage of them gave Microsoft higher marks when it issued its latest version.

But Boies showed him a May 8, 1998, Microsoft marketing document that noted that "IE4 is fundamentally not compelling" and that it is "not differentiated" from Netscape's browser. The browser, the memo noted, was "seen as a commodity."

Schmalensee noted that the memo was directed at how Internet service providers viewed browsers and then said the document was consistent with his testimony. The magazine reviews, he said, indicated that Microsoft's product "was better, not significantly better" than Netscape's. He noted that the differences "are not dramatic." Left unsaid by Boies: So if Microsoft's browser is not that much better, why the dramatic rise in its market share? Outside the courtroom, though, Boies did say Schmalensee's testimony "undercut" Microsoft's defense that it made gains in the browser war because its product was better.

$2,000 FOR WINDOWS? Boies showed his greatest skepticism of Schmalensee's testimony when the economist said his analysis showed that if Microsoft were a true monopolist, it could be charging 40 times the price that it's charging now for Windows -- $2,000. When Boies intimated that Schmalensee may have decided Microsoft didn't have monopoly power because he's working for Microsoft, the economist became visibly angry. "I value my professional reputation very highly," he snapped. He said while that price seemed high, Microsoft would be able to charge that much if it "had enormous power" and no threat of competition.

When Boies noted that Microsoft had reported high fourth-quarter profits in 1998, Schmalensee said that one can't assume that Microsoft is a monopoly because it has high profits. When Boies asked whether he tried to find out how much of the profits came from operating systems, the economist said Microsoft told him that such separate data didn't exist. "I was surprised. Microsoft's internal accounting systems don't rise to the level of sophistication you might expect," Schmalensee said. He added he didn't consider that data to be valuable, anyway.

Boies, who has many times questioned Schmalensee's failure to seek various data, pressed: "There were no records to show how profitable the operating system is? You accepted that on face value?" Schmalensee answered: "They record operating-system sales by hand on a piece of paper."

Boies ended his cross-examination with a smile.

By Susan Garland in Washington