THREAD---The first half in review---Dow Jones Newswires -- January 15, 1999
TECH WEEK IN REVIEW: Microsoft Trial
By Jason Fry and Timothy Hanrahan
The Wall Street Journal Interactive Edition
NEW YORK (Dow Jones)--The government rested its case in the landmark antitrust trial of Microsoft
Corp. (MSFT) this week, meaning the case has reached its approximate halfway point - and a logical
place for a little scorekeeping.
So far, the Redmond, Wash., software giant doesn't appear to be doing very well. It's spent an
inordinate amount of time trying - probably fruitlessly - to put its competitors on trial. Its lawyers and
even one of its own witnesses have inadvertently scored points for the other team. And the videotaped
depositions from Chairman Bill Gates have been an unqualified disaster for the company, one that will
no doubt be studied by future generations of budding public-relations professionals and corporate
lawyers.
In fact, the biggest win Microsoft has had came from circumstances outside of the company's control:
America Online Inc.'s (AOL) $4.2 billion deal to acquire Netscape Communications Corp. (NSCP), a
megamerger that even U.S. District Judge Thomas Penfield Jackson has mused might represent "a
very significant change in the playing field." But despite Microsoft's missteps, this trial is far from over.
The software giant now gets the chance to go on the offensive and project a different public face than
the one that has emerged from the videotaped snippets of Gates and the e-mails between its executives.
And even more importantly, even if Judge Jackson rules against the software giant - far and away
considered the most likely scenario - an appeals court is waiting in the wings.
And that appeals court has repeatedly reversed Judge Jackson's decisions and shown considerable
skepticism about role the courts should play in evaluating high-tech products.
Based on how the trial has gone so far, Microsoft had better get ready for its appeal.
The software giant's lawyers have demonstrated that Microsoft's competitors are just as ambitious and
pugilistic as Microsoft is. That was established early on, when Microsoft blindsided Netscape's Jim
Barksdale with an middle-of-the-night e-mail Netscape co-founder Jim Clark sent to Microsoft seeking
an alliance between the two firms.
Microsoft made much of late-1995 talks between AOL and Netscape, painting them as an illegal deal to
divide up the online-services market. The company scored points on Apple Computer Inc.'s (AAPL)
Avie Tevanian by introducing internal Apple documents suggesting that Apple had pressured Microsoft
with the threat of a huge patent lawsuit. And Microsoft provided a peek into Sun Microsystems Inc.
(SUNW) that detailed that company's ambitions for Java along with the programming language's
missteps.
Call it the "Everybody Does It" defense. But while Microsoft's mud-slinging sullied the reputations of its
competitors, did it help the software giant any in the courtroom? Probably not. Somewhere along the
way, Microsoft seems to have forgotten that AOL, Apple, Netscape and Sun aren't on trial here.
Indeed, government lead attorney David Boies was coolly dismissive of the idea that there could be any
comparison between Microsoft's alleged misdeeds and the supposed cabal between AOL and
Netscape: "Netscape's percentage of the market for online services in 1995 was trivial - and small
companies get together all the time, especially when they are facing monopolies."
While Microsoft has put some points on the board - it's a wonder Netscape didn't sell for more of a
discount after Microsoft's lawyers got done savaging Jim Clark and Marc Andreessen - it's also
fumbled some away in embarrassing fashion.
Microsoft lawyer Michael Lacovara would probably like a do-over on his cross-examination of
economist Frederick Warren-Boulton. In December, Lacovara pressed Dr. Warren-Boulton about his
testimony that Microsoft has monopoly power over software prices and his analysis that Windows'
share of a new PC's price has doubled in the past two years even as PC prices fell sharply. For some
unknown reason, Lacovara's line of attack was to note that the cost of Intel Corp.'s (INTC)
microprocessor has also risen in the same period - a hanging curve on which Dr. Warren-Boulton did
his best Mark McGwire imitation. Intel, he responded, is "the other person in this market that might
have monopoly power."
Microsoft's first witness, MIT economist Richard Schmalensee, didn't start 1999 out on a high note,
either. Dr. Schmalensee was sparring with Boies about the proper definition of markets, and about what
competitive threats Windows might face. Dr. Schmalensee then handed the government a win when he
said Web browsers and Java should be considered such threats - the very point at the heart of the
government's case against the software maker.
But neither of these missteps can compare with the damage done by Gates in his disastrous deposition.
Gates has made President Clinton look like a cooperative witness. If his deposition was truly accurate, it
raises the question of what, if anything, he does all day: He apparently doesn't read key strategy memos
or keep abreast of Microsoft's Java efforts, for instance.
Gates's insistence on parsing definition after definition was also decidedly Clintonesque, as he wrangled
with government attorneys over the definition of words like "compete" and "concerned." Judge Jackson
could just dismiss the Gates deposition as an acidly amusing sideshow, but the videotapes remain the
government's greatest weapon, allowing attorneys to destroy any momentum Microsoft might build up
by subjecting the court to one of Gates's agonizing performances.
Microsoft, understandably, has objected to the government's strategy in using the tapes, but Judge
Jackson has been unmoved, telling Microsoft's attorneys that the problem is with their witness. As for
the prospect of Gates taking the stand, forget it. The risks for Microsoft are enormous and the rewards
all but nonexistent.
But while Microsoft has ample reason to expect that it will lose this case - though the Netscape/AOL
deal remains a wild card - the software giant can still play defense. Judge Jackson himself has indicated
sardonically that the case is probably going "upstairs" in the court building, which is to say to the appeals
court. And that court has been much friendlier territory for Microsoft.
Remember Judge Jackson's injunction against forcing PC makers to include Internet Explorer on the
desktop with Windows? The appeals court struck that down, charging Judge Jackson with making
procedural and substantive errors - like issuing the injunction when government attorneys hadn't asked
for it. Remember Judge Jackson's appointment of Harvard's Lawrence Lessig as "special master'? The
panel struck that one too, calling the appointment "either a clear abuse of discretion or an exercise of
wholly nonexistent discretion.'
And then there was the guidance the court offered for the future. It said it was inclined to view the
combination of Windows 95 and Internet Explorer as a genuine integration of products, and said it
thought "integrated product" could most reasonably be understood as one that combines functionality in
a way that offers advantages unavailable if the products were bought separately and combined.
That was a big win for Microsoft - and a bigger win was the court's crystal-clear warning about the
"limited competence of courts" to evaluate high-tech products. Judge Jackson will have to keep that
warning firmly in mind as he crafts any judicial remedy.
The government has clearly been mindful of the court's position: This summer, it pushed its case beyond
a mere question of browsers to include whether Microsoft illegally used its market muscle to make
inroads into the multimedia-software market and derail new technologies. Microsoft argued that
amounted to a new case and asked that the charges be barred; Judge Jackson let the approach stand,
outlining the trial as about whether Microsoft "maint ained its operating-system monopoly through
exclusionary and predatory conduct." The court, however, may not see it - or a great many other things
- that way.
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