JFD, Here is good report on today's testimony from the trial from CBS Marketwatch. Note Boies reaction to MSFT's line of questioning---i take it as a good sign for MSFT.
cbs.marketwatch.com
By William L. Watts, CBS MarketWatch
Last Update: 8:20 PM ET Jun 22, 1999 Internet Stocks
Software Report
WASHINGTON (CBS.MW) -- Microsoft's final witness in the long-running antitrust trial said Tuesday that the software giant faces fierce competitive pressures, which prove that it doesn't enjoy monopoly power.
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6/22/99 4:56:14 PM ET
In questioning by Microsoft attorney Michael Lacovara, Massachusetts Institute of Technology economist Richard Schmalensee said the company faces myriad threats from the growing popularity of Linux and other open-source operating systems, Sun Microsystems' continuing investments in Java technology and growing interest in Web-based software applications.
In particular, Microsoft has emphasized America Online's (AOL: news, msgs) acquisition of Netscape and strategic alliance with Sun (SUNW: news, msgs) as a major competitive threat it says undercuts the antitrust charges.
Microsoft contends that Sun's Java language and Netscape browsers provide ample opportunity for AOL to build a viable software platform and that the companies had that in mind when they sealed their three-way deal earlier this year.
AOL as OS
"AOL does not plan to produce an operating system, but it plans to effectively be the operating system," Schmalensee said.
Schmalensee disputed assertions by the government's chief economic witness, fellow MIT economist Franklin Fisher, that Microsoft (MSFT: news, msgs) had engaged in anti-competitive tactics that resulted in "applications barriers to entry," preventing rivals from even entering the operating systems market. Schmalensee was once a student of Fisher's.
This week's testimony marks Schmalensee's second stint on the stand as a Microsoft witness. Much of Lacovara's questioning has focused on rebutting assertions made by Fisher earlier this month and in January.
As would be expected, Microsoft appears to be using its final rebuttal witness to reassert and underline the central tenet of its defense strategy, which is that it faces fierce competition, rendering government intervention unnecessary.
The government and 19 states contend Microsoft, through Windows, has a monopoly hold on the operating system for personal computers. They contend Microsoft moved to sideline software competitors, particularly Netscape Communications; bully its partners; and otherwise engage in anticompetitive practices in order to preserve that monopoly.
Lacovara's questioning homed in on Fisher's assertions that Microsoft's tactics had resulted in "applications barriers to entry" to the market for operating systems.
Schmalensee, dean of MIT's Sloan School of Management, characterized the government's argument as the classic chicken-or-egg conundrum: Software developers won't write for a platform unless that platform enjoys a large number of users; the platform, meanwhile, can't attract a large number of users unless developers are writing software for it.
Cost is not a barrier
But Schmalensee said his former mentor's analysis mistook "costs of entry" for "barriers to entry" to the market.
If there were a true barrier to entry for potential rivals of Microsoft, software developers wouldn't be vying to write applications for increasingly popular non-Windows platforms, he argued. But in the meantime, proponents of those platforms have had to actively seek to attract programmers. "That's a cost of entry," Schmalensee said.
Using the grocery business as an analogy, Schmalensee said that if he owned a store and another person did not, the second person's cost of building a store would represent a cost, not a barrier.
That drew a reaction from District Court Judge Thomas Penfield Jackson, who will decide the antitrust case. Telling Schmalensee he had a problem with the grocery-store analogy, Jackson said the situation with Microsoft was more akin to attempting to build a grocery store while at the same time the established merchant was expanding a massive "megamarket," leaving the potential competitor "always trying to play catch-up."
In an extended discussion with the judge, Schmalensee said such a situation doesn't meet the criteria of a barrier to entry as long as the original competitor doesn't attempt to directly interfere with the building or operation of the new competitor's store.
Service industry
In earlier testimony, Jackson was clearly intrigued by Schmalensee's assertion that a growing number of software developers have begun writing "server-based" software, which allows users to access software programs via high-speed links to the Internet, allowing users to access the programs through devices that don't use Windows.
"I can't imagine why (software vendors) aren't developing applications in droves," Jackson said.
Schmalensee noted that a previous Microsoft witness, Oblix Inc. President Gordon Eubanks, testified last week that the Internet had become the most popular platform for software developers.
Rebuttal testimony by Fisher and Schmalensee has seen both economists hold fast to their definitions of the operating system market. In January and earlier this month, Fisher insisted that the market is defined by Intel-compatible personal computers, the vast majority of which use Windows as their default operating system.
Schmalensee and Microsoft maintain that that definition of the company's competitive arena is far too narrow. Microsoft must take into account not only rival operating systems but the potential rival software platforms as well, Schmalensee said.
Outside of court, the government's special counsel, David Boies, derided Microsoft's line of questioning.
"The market is operating systems," he said, dismissing Microsoft's wider definition of the competitive arena.
The government is expected to begin cross-examination of Schmalensee Wednesday.
William L. Watts is a reporter for CBS MarketWatch |
