And here's Microsoft's PR Newswire response:
PR Newswire
Copyright (c) 1998, PR Newswire
Wednesday, November 18, 1998
Partial Microsoft Response to Written Testimony by Government Witness
Frederick R. Warren-Boulton
WASHINGTON, Nov. 18 /PRNewswire/ -- The following was issued by Microsoft Corporation:
Under the procedure established by the Court, the written statement of each of the government's witnesses is released to the public and media on the afternoon preceding their testimony. Today, the written testimony of Mr. Frederick R. Warren-Boulton has been released. It is important to note that this written testimony has not yet been admitted into evidence, and that significant portions of this testimony may be ruled inadmissible.
Nevertheless, we know that reporters may feel compelled to file stories based on the release of written testimony, so Microsoft is providing these brief, top-level responses. Obviously, the real story will occur in Court during Microsoft's cross-examination of the witness, as well as during the government's re-direct examination and Microsoft's re-cross, if any. The information and responses outlined in this document are NOT, by any means, Microsoft's full response to the testimony, but they do serve to set the record straight on some of the issues prior to a more detailed response via cross examination.
Contrary to Mr. Warren-Boulton's claims, Microsoft does not have monopoly power, regardless of how the market is defined. Nor are there high barriers to market entry.
Mr. Warren-Boulton's testimony is clearly that of an ivory tower
consultant with little or no direct experience in the day-to-day business and competitiveness of the U.S. software industry. It is well established as a matter of both law and economics that high market share does not necessarily establish the existence of monopoly power. High market share is a static snapshot of sales that does not begin to reflect the intense competitive dynamic in the software industry. History has shown that high market shares in computer software are vulnerable and susceptible to rapid deterioration, should the market leader fail to innovate at a rapid and competitive pace.
Regardless of Mr. Warren-Boulton's assertions, market entry costs are very low and profit opportunities vast in software platform technology, leading to constant efforts to unseat the incumbent leader -- witness the phenomenal IPO of Netscape and the increasing popularity of Linux. The only necessary inputs for software development are innovative programmers, inexpensive development
tools, and PCs or workstations, all of which are readily available. Once a product is developed, replication costs are very low, so a new market entrant can quickly and easily produce millions of copies of its product -- which can then be advertised on and distributed via the Internet at extremely low cost.
As a matter of basic economics, if Microsoft had a monopoly in operating systems and sought to maximize profits, it should charge much more for Windows than it does, because the extra income per unit would more than offset any reduction in sales of PCs equipped with Windows. In fact, Microsoft does not charge more because this is a highly competitive market, and a higher price would attract additional market entrants. As a result, Windows on average costs less than 5% of the retail price of a new PC. Nor would a monopolist spend heavily on R&D and innovation, because it would not need to. By contrast, Microsoft has increased its R&D effort dramatically during this decade, to more than $3 billion projected during fiscal 1999.
In an effort to support his claim that Microsoft has monopoly power, Mr. Warren-Boulton resorts to redefining the relevant market in a way that simply ignores operating systems that compete with Windows. In particular, both he and the government overlook the fact that the PC competes with traditionally larger, more expensive computing technologies that run UNIX. This ignores market realities. Windows faces competition from IBM OS/2, PC-DOS, Apple Mac, Caldera OpenDOS, Linux, BeOS, Novell NetWare, Sun Solaris, Sun JavaOS, HP/UX, DEC VMS and Digital UNIX, Lucent Inferno, SCO OpenServer and UNIXWare, and
IBM AIX and OS/400 -- plus a range of nascent software-based technologies, from "network computers" to "information appliances." Those that have failed in the market have done so because consumers rejected them.
Regardless of Mr. Warren-Boulton's allegations, Microsoft's business
practices have not impeded Netscape's ability to distribute its products.
In stark contrast to Mr. Warren-Boulton's allegations, Netscape CEO James Barksdale estimated in court that 20,000-30,000 Web sites currently offer downloads of Netscape's browser. He also said that between 40 million and 70 million people now use Netscape's browser, and that about 26 million Netscape browsers were downloaded from the Internet between January and August 1998. In addition, an August 1998 Netscape document reveals that Netscape then expected to distribute 68 million browsers during the next six months, and a further 91
million in the six months after that -- a total of 159 million browsers in the next year.
Contrary to Mr. Warren-Boulton's claims that Microsoft's business
practices have made it "more difficult for competing browsers to acquire new users," the evidence conclusively demonstrates that Netscape has broad access to its four main channels of distribution -- PC manufacturers, Internet service providers, Internet content providers and online services. Netscape often boasts that almost all of the Fortune 100 companies are running Netscape software, so it
clearly hasn't suffered restricted distribution among large businesses. It also has distribution deals with many Internet service providers and PC manufacturers. As Mr. Barksdale boasted in InformationWeek on September 30th 1996, "We've probably done more partnerships with more companies more quickly than anybody ever in the software business. . .We can deploy globally, market globally, advertise and collect globally for our products, and we can distribute hundreds of thousands of copies a day for basically the same cost as
distributing 10 copies a day."
Any decline in Netscape's share of browser usage is partly a result of its own missteps -- and of competition from Microsoft's browser that has benefited consumers.
In his eagerness to blame Microsoft's business practices for Netscape's loss of its browser monopoly, Mr. Warren-Boulton ignores the fact that Netscape's own strategic missteps are in large part responsible. Critically, Netscape underestimated the competition, falling far behind Microsoft in Web-browser development after the "version 2" round. Netscape lost many of the "version 3" reviews in the media, and was trounced in the "version 4" reviews. As Fortune
put it on October 27th 1997, "(Microsoft Internet Explorer) is fast,
efficient and so chock full of improvements that it beats Navigator hands down." Netscape also raised its prices at critical junctures, and attempted to charge many of its customers supra-competitive prices after having set the market price for its Web browsing technology at zero dollars.
Long after Microsoft delivered a state-of-the-art componentized Web
browsing solution (a design approach that appeals to independent software vendors, such as Intuit and America Online, that wish to build seamless Web access into their products), Netscape still has not done so. Netscape had promised a componentized browser built on Java and JavaBeans as the object model, but it has now ceased development of its Java client. Netscape also tried to enter too many markets too early in the evolution of its business, leaving it stretched too thinly. For example, Netscape made much of its strategy of competing
with firms such as IBM/Lotus, Novell and Microsoft in the groupware market, but failed to deliver competitive products. It is now largely abandoning those efforts. Netscape also hyped numerous new products and technologies -- such as browser-based GUIs, the Netscape One development environment, NIFC, LiveConnect, LiveScript, Javagator and OpenDoc Navigator -- which were subsequently dropped or delayed.
Contrary to Mr. Warren-Boulton's claims, Intuit chose Microsoft's
Internet Explorer Web browsing technology because it was technically superior to Netscape's Navigator.
Mr. Warren-Boulton alleges that the effect of an Internet content
agreement between Intuit and Microsoft "was to force Intuit to abandon distributing Netscape's browser with its popular Quicken software." As the text of a July 24th 1996 email from Bill Gates makes clear, this is a misrepresentation of the facts. Almost the entire email is taken up by Gates explaining how, in a conversation, he told Intuit's Scott Cook that the primary thing Microsoft could offer Intuit is the best browser technology, componentized in a way that specifically addressed Intuit's needs.
Intuit has explicitly acknowledged that the technical advantages outlined by Gates were behind its choice of Microsoft's browser technology. In Retail Delivery Systems News dated July 18th 1997, Intuit's position is explained by spokeswoman Debra Kelley: "Explorer will be embedded in the 1998 version of Quicken, QuickBooks and Turbotax so that it will appear to users that they are not leaving Quicken when they invoke the browser, Kelley says. When Quicken users click on the Explorer icon, the Web comes in through the Intuit applications, she says. Intuit is switching because Netscape's Navigator and Communicator browsers do not offer that capability, she says. When Navigator was bundled into Quicken, users had to leave Quicken to go out and explore the Internet and Web. It was time consuming and inconvenient, Kelley says."
Microsoft's contracts with Internet Service Providers and Internet
Content Providers are not in any way anti-competitive.
Mr. Warren-Boulton makes a great deal of the allegedly anti-competitive nature of Microsoft's agreements with various Internet service providers (ISPs), Internet content providers (ICPs) and online services. None of his allegations stands up to scrutiny, however.
What this PR release shows is just how scared Microsoft is of the guts of the government's case, as well they should be. Seeing Bill Gates look bad in a deposition is no fun, but, in the scheme of this trial, it will not be a major factor. The economic analysis of the anticompetitive effect of Microsoft's behavior *will* be.
I'm sure everyone who posts regularly on this thread can come up with a point-by-point refutation of this, so I won't bore you with mine. Suffice it to say, all of these allegations will be met with counter-allegations, and they will all make for some very interesting factual disputes, which I am sure the judge will have a lot of *fun* (in the sense Steve Ballmer uses the term;)) resolving.
(Note, however, the complete lack of factual support for the last statement, that "none" of Warren-Boulton's assertions regarding the ISP/ICP contracts "stands (sic) up to scrutiny, however." I'm sure this was just an oversight necessitated by the limited space in this Microsoft PR release; it will be interesting to see how Microsoft fills in that gap at trial.) |
