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Daily Wrap and Flow

June 5, 1999 - Saturday (review of transcripts from Friday, June 4)

8:44 AM PDT - Microsoft does waste a lot of time asking questions about non relevant and hypothetical competition

q. Is that the line you told me you were going to use before we finish?

a. No. Do you want me to tell you the line? Because it goes with this document, Mr. Lacovara. If you really believe that these machines, these games machines, are going to be a serious threat in anything like the foreseeable future to Microsoft's operating system monopoly for pc's, then as I said before, you really like to play games.

Microsoft is proving they have a monopoly simply by the time they spend taking about unrelated products and hypothetical competition. Notice the absence of OS/2 installations and applications some of which do compete in part with Windows 98. They really have to scrape the barrel to come up with something that even remotely sounds like competition.

The important observation is that the court does not care about what could be. The consumer in the computer store can not choose future products. The consumer can not chose between alternate operating systems today. It is a true monopoly. On Intel, all consumers have but one choice. Those consumers who might ask "what about Linux or OS/2?" will find almost no applications available for use. And, they certainly will not find any applications in the computer store for Unix. They can go to Apple. But, Microsoft forced Apple customers to buy IE there too. So as far as Microsoft using its raw power to force the sale of IE, all consumers are so forced.

7:52 AM PDT - Microsoft would never accept the limited distribution methods they say they think are fine for Netscape

q. If you take just two of the facts that you have identified, one is that netscape's browser share was declining, and, two, at the same time that it was declining, it was apparently distributing approximately 160 million copies of its browser, what does that tell you about the extent of netscape's foreclosure or the extent to which its costs have been increased?

a. Well, some of these costs are being borne by what are called netscape's partners, but, of course, netscape has, in some sense, to make it worth its partners while to do this. but, in any event, what it says is netscape has been forced into channels of distribution that are very, very, very ineffective. It's not able to reach customers in an effective way any longer.

The court really should reverse the tables on Microsoft. Bundle Navigator and require Microsoft to give away via download and uninstalled CDs for a couple of years. And, of course, never mention IE on the desktop or any menu either.

The problem you have here is that Microsoft and its lawyers are not even representing their own views. Everyone at Microsoft knows that the distribution channels left over for Netscape are inadequate. But they lie about it in court anyway. They are trying to convince the judge that something they themselves would not accept is okay for Netscape. The judge is not buying it and the court and public is laughing at Microsoft for their foolishness.

7:44 AM PDT - Hard to imagine an economist on the stand can offer real humor

q. Now, if usage is, as you and Mr. Brad chase have testified, is what is important, if netscape is distributing 160 million browsers a year, and still its usage share is declining, what does that tell you about the extent of its foreclosure and the extent to which, if any, Microsoft has succeeded in raising its rivals' costs?

a. Netscape -- i'm sorry. Microsoft did not shut off the channels in the sense that it did not shut off netscape's ability, in some form, to reach customers. what Microsoft did was to make those forms of distribution that netscape had -- the less efficient ones, or the more costly ones or, to the extent that netscape remained in the oem and isp channel -- they made it much less likely that customers would, in fact, install and use the netscape product as opposed to ie. i am thinking of professor schmalensee's diagram that has browsers being delivered by parachute. Netscape can, i suppose, if it hires -- this is no more fanciful than professor schmalensee -- netscape can sign a contract with the marines to hand-deliver browsers to every home. That's not going to be an effective way to get browsers installed, although i suppose people have enough respect for the marines; you never know.

Personally, I am insulted by Microsoft's suggesting that they should have ever right to force all consumers to buy IE for up to $140 a copy and then justify such illegal acts by suggesting they have not stopped Netscape from giving away their browser and distributing it at great cost and without any direct revenue. It only points out the brutality that Microsoft has toward its own customers and the arrogance of the company in general, typical monopolistic thinking and arrogance. Off course everyone wants to be forced to buy our product, it is good for them.

7:13 AM PDT -

q. Now, in terms of why you say Dean Schmalensee's formula is not relevant, i'd like to sort of focus on each element of that. The first thing that you mentioned was you said that Dean schmalensee's formula deals with short-run prices.

a. Correct.

q. And what's the significance of that?

a. Sensible firms do not maximize short-run monopoly -- I'm sorry -- do not maximize short-run profits, period. And sensible monopolies, i suppose, do not maximize short-run monopoly profits. they are typically interested -- and appropriately so -- in long-run profits. In my terms, that would be the discounted value of the stream of profits. That's equivalent to saying that they are interested in maximizing shareholder value.

q. And does Dean schmalensee's formula even purport to measure that?

a. No. It's a purely short-run formula.

Dean Schmalensee's formula is just not relevant at all.

However, the observation here that companies are most interested in long run profits accounts for the acts by Microsoft to preclude competition rather than worry about charging the highest price for Windows. If you further assume that Microsoft is charging $60 for the OS and $140 for IE the idea that Microsoft is not charging very much for the OS makes a lot of sense. Windows 98 is simply a bundle of products. Microsoft has historically bundled in products removing potential competitors from the market and maintaining a high price for windows.

Gullible consumers accept this constant price simply because it includes more and more features over time but Microsoft suppresses technology and precludes competition with each new step in this process. The bundling of IE is not a new trick learned by an old dog at all. It is a common and consistent practice engaged in to preclude competition. If you do not want to give Microsoft credit for adopting such a plan that is okay but their focus upon Netscape is plain as day.

June 4, 1999 - Friday (review of transcripts from Thursday, June 3)

1:12 PM PDT - Lets see ... 160 million times $20 is $3.6 Billion?

q. Let's--let me, if I can interrupt you. Lots of people use more than one browser; isn't that right?

a. Yes. Lots of people do use more than one browser but it beggers belief to suppose that those 160 million browsers all went into use.

Microsoft has been real proud to suggest Netscape has been able to distribute some 160 million browsers. But, should Netscape later sue for lost revenues based upon this same number the damage amount could be enormous. How does a damage claim of $3.6 billion sound to you? And, of course, antitrust damages can be tripled. That would be 10.8 billion in damages going to AOL. Do you still think they are not going to file suit in the event Microsoft is judged a monopolist?

You watch how fast Microsoft tries to discredit the same facts they now are expecting this judge to buy.

12:59 PM PDT - Microsoft and Netscape both charged for browsers at one time - about the same price too - $34.95 or so at Frys

q. Okay. you understand that netscape was charging $39 a copy at retail and had raised the price steadily until Microsoft introduced ie-3? That's the pricing history of netscape software.

a. Well, it's a little more complicated than that because netscape offered it, it was sometimes free and sometimes not. If offered a trial version and then you were expected to pay for it.

q. All right. and when i, I asked you whether millions of copies had been distributed free in the first phase, you told me, no, because you could rely on people to pay for it, I think. so, they were charging $39. That was the price.

a. Yes.

q. And they were collecting revenue for it?

a. Yes. Not everybody was paying but a lot of people were.

q. And they had raised the price several times up until Microsoft introduced ie-3; isn't that right?

a. I don't remember that but it may very well be true.

q. In fact, netscape continued to raise the price even after ie-1 and ie-2 had been released; isn't that correct?

a. That's the same proposition. I don't remember whether they raised the price or not.

q. Have you thought about what netscape would be charging consumers for browsing software today had Microsoft not taken actions that you say, harm consumers?

a. Yes. More than zero.

q. More than zero. And you can't be any more specific about it than that?

a. No. It would depend on what Microsoft charged. It would depend on what competition on the merits between the two browsers produced.

Absent Microsoft ruining the market for all browsers, one would clearly expect a competitive price to establish itself for both browsers and others. And, this is likely to re-establish itself when and if Microsoft is required to restrain its illegal activities. But, of course, this assumes that Microsoft is prevented from using other applications like Word, QuickBooks (from Intuit), etc., from forcing customers to pre-purchase IE as they must now pre-purchase a Microsoft OS.

12:38 PM PDT - Microsoft may have been foolish

q. If Microsoft, dr. Fisher, had not engaged in the conduct that you deem predatory, would Netscape have a platform today?

a. Obviously, I can't know that.

q. What is your judgment, sir?

a. It might. Microsoft plainly thought that it might, that it would. And they may very well have been right. But I can't tell over what is now, you know, sort of several years, what the course of events would really have been.

Professor Fisher is correct in stating that it is not possible to know how successful Microsoft might have been if it refrained from illegal conduct. If Microsoft refrained from all illegal conduct it is possible that Netscape would have maintain a dominant role in browsers and successfully used the browser as a platform. But it is also possible that legal acts would have achieved a similar result.

This is an important lesson to be learned. When a company has a choice to abide by antitrust laws or ignore them, the necessary choice is not obvious. Microsoft could have chosen not to bundle IE or offer the OS with or without IE. In fact, it could have abide by the consent decree approved by this very judge. Instead, some idiots at Microsoft were suggesting that the consent decree be ignored. It could have been poor legal advice. It could have been management.

The correct observation to be made here is that almost all major corporations actively maintain a program of reviewing their risk for antitrust violations. What we are likely never to learn is just what recommendation or advice was given to Microsoft by their attorneys on this point. Attorney/client communications are privileged. Generally, they only come to light when the client sues the attorney for malpractice. Such a suit is not out of the question here either.

11:24 AM PDT - The raw arrogance of Microsoft and its attorneys is truly amazing

q. So it's your testimony that even if "x" number of people had obtained internet explorer technologies through the isp and oem channels, and x plus whatever number of people had obtained netscape's browser through the download channel -

a. No, that's not my testimony. That obviously would be foolish.

q. Okay.

a. Whatever, plus any other number.

q. Well, how close do we have to be?

a. Well, one of the issues has to do with -- not with how many people obtained these things at some time in the past downloading, but how many people are now obtaining them through downloading. I don't know the question of how -- what the answer is to the question of how close we would have to be, but I do know, from the exhibits prepared with Mr. Case - chase, sorry -- that downloading appears to be dead.

This question from Microsoft's attorney is truly a stupid one.

If Microsoft wants to restrict its business to downloaded software distribution methods, then I would say it would have the privilege of asking this question. However, if Microsoft insists upon normal channels and wants to be paid for its products then it really should refrain from suggesting that its competitors be happy distributing software without compensation using inferior methods only after IE is already purchased, installed and running. (A number of IE versions will intentionally fail to download Navigator.)

This case is not about what methods Microsoft will permit competitors to use. This case is about fair and open competition where all vendors receive compensation for their products distributed by the same channels differentiated only by price, quality of the product and brand name. It is pure arrogance to even suggest that lessor distribution methods are acceptable to competitors when Microsoft (exercising its monopoly power) forces 100% of all consumers to first purchase IE.

9:54 AM PDT - The legality of an act does depend upon who does it and why they do it

q. Okay. And so the act of distributing browsing software with operating systems for free may or may not be predatory, depending on the facts, correct?

a. Depending on who does it and what the monopoly power situation is, yes.

q. Depending on who does it. Okay. And you understand that aol is now considering or has considered whether it would be appropriate to pay people to use the netscape browser; isn't that right?

a. I'm not aware of that.

q. Are you aware -- have you examined the question whether aol has thought it might be profit-maximizing to pay on a per-copy basis to distribute the netscape browser? To pay people to take it.

a. As I said, I am not aware of that.

q. Okay. Assume that that were the case. Would you consider that act, on its face, predatory?

a. No.

q. You'd have to know -- because the act itself could be pro-competitive or anti-competitive, correct?

a. Yes. I'd want to know why aol was doing it. I'd want to know what aol was saying about why it was doing it. I'd want to know what its business plan shows. in the case of Microsoft, there is not much doubt.

This is one reason why so many people have a hard time understand antitrust law. Antitrust laws do not just list all of the acts that nobody can do as the penal code does. The criminal law lists all of the acts that subject individual to criminal prosecution. The antitrust law does not do that. Almost any act can violate the antitrust law. The test (highly simplified) is whether the act when conducted by that person or company precludes competition.

When Bill Gates publicly threatened to bundle a browser with the OS should anyone attempt to develop and sell that application for Windows, his antitrust advisor should have tackled him right there. If you have a monopoly OS, bundling any application smells of antitrust from day one. And, if you do not have a monopoly OS, bundling applications may only reduce sales due to the increased costs for the expanded product. Sometimes bundles sell better but that is because of a lower price for the bundle. And, that only works when just about all customers want both or all products. Clearly, if Microsoft only offered the Office Pro Suite (including Access), sales for Word would be lower. Microsoft sells Word separately so that consumers who only want a word processor do not need to buy the fat suite. Otherwise, they would just buy WordPerfect.

With Windows, there is no other OS to buy. Viola. Monopoly. And, bingo, IE bundled. Consumer pays.

.

9:25 AM PDT - Not the answer Microsoft really wanted

q. Do you believe Microsoft has won the browser wars? You've testified to this several times today.

a. Yesterday, actually. I believe that Microsoft has won the browser wars in the sense that the browser wars matter. Namely, that it has succeeded in assuring a wide-enough share for IE that browsers, or at least netscape's browser -- but I think any browser -- is not likely to produce a paradigm shift and commoditize the operating system.

This answer may in time be much more significant than first appears. If the DOJ wants to argue that IE has achieved monopoly status or the acts of Microsoft in regard to IE precluded not only effective competition for browsers but also increased or maintained barriers to entry and thus subdued future threats to the monopoly, this answer supports that argument. Sometimes it is a mistake to ask some questions unless you have a firm plan to dispute the harmful answer you are likely to get.

I do not necessarily agree with Professor Fishers answer. And I do not necessarily agree a paradigm shift has been stymied by Microsoft. It may be true that the standards to which a browser must be written has been forced upon the industry by Microsoft (pending the removal of Microsoft from the game or the requirement that any and all technology be distributed only at fair competitive prices).

It is not correct to call the era "the browser wars". Netscape was competing and expanding the technology and Microsoft was cheating and forcing consumers to buy the Microsoft product illegally. I do not call that a war. A war would require two armies that abide by roughly the same set of rules. Microsoft has forced all consumers to buy IE and prevented Netscape from having any market to sell their product.

It is pure hog wash to suggest that the result realized has been caused by technological differences between two products. Any technological difference could account for a higher sales price for the superior product or a lower price for the inferior product. Economically speaking that is totally absent in this case. It is absent because a monopolist is manipulating prices.

8:46 AM PDT - Professor Fisher is way too kind on Microsoft Corporation

q. Now, Dr. Fisher, do you believe that Navigator has been destroyed?

a. Navigator has been -- how shall I put it -- hampered. Obviously, it's not been completely destroyed.

q. Hampered?

a. Hampered.

As a technology Navigator has been hampered. It still exists. It may continue to exist. It may even find a new life. But, economically speaking, right now, it is a dead duck. Everyone needs to evaluate where the company they work for gets their money to make the payroll. Assume that as of tomorrow your employer is prohibited from selling any products or services that now provide the revenue. Would you call your employer "hampered" if that were the case? Do you think your job would be secure?

If Navigator is "hampered", I would suggest "hampering" Microsoft for a couple of years by prohibiting Microsoft from receiving any money in exchange for their products. And, of course, all Microsoft supporters and stockholders could still promote Windows if they wished.

Some commentaries suggest that splitting up Microsoft is too harsh a remedy. Well. I have suggested selling off the code base multiple times non-exclusively but I was going to give the money to the Microsoft shareholders. That is a fair exchange of value. If the court wanted to ruin Microsoft as Microsoft wanted to ruin Netscape, the money coming from the sale of Microsoft assets could go to reduce the federal deficit. Now that would be a harsh remedy.

The technology is hampered. The economic viability of any company wanting to develop and market any browser technology has been completely ruined by Microsoft. Leaving Microsoft with what? A monopoly on internet browsers. The only question is "how much is Microsoft charging all consumers for their copy of IE?". Everyone is forced to buy it. You are just not told the price.

8:17 AM PDT - Just how did Microsoft price Windows 98 anyway?

q. Do you believe that the inclusion of internet explorer technologies generated extra revenue to Microsoft in the form of marginal sales of windows?

a. It may have generated extra revenues in that form. those revenues -- some of those -- you have to be careful about this, though, because you have to ask how much of those revenues would also have been generated had IE been offered at a separate price.

q. And have you attempted to perform that analysis?

a. No, I don't think that's easy or even possible to do.

q. Okay. Have you attempted to determine whether it is possible that Microsoft has recouped whatever investment it has made in internet explorer through increased windows sales or what you call a price increase?

a. And has recouped it -- let me be clear. That recoupment would have to ask the question not merely what is the value of the extra sales to Microsoft that it made because of IE. you have to ask how that differs -- to what extent that exceeds the amount that they would have made had they not offered IE at a zero price, not bundled it, and not gone out of their way to destroy navigator, because navigator was also a complement. and I think the answer is -- the full answer is no, I don't know the answer to that question. I doubt very much that they have, in fact, recouped the development costs. And it is plain from their internal documents that's not what they were doing.

The suggestion that Microsoft has made that IE was included free to increase sales of Windows is completely bogus. As is pointed out here Navigator would have the same effect if it were bundled. And, you have to consider just where the "extra" sales are supposed to come from. Is Windows with IE supposed to reduce Apple sales? Apple comes with IE too. Would bundling Office with the OS increase sales or decrease sales and encourage more users to keep using their old machines? You are looking at consumer fraud. IE was bundled simply because Microsoft had the monopoly power to do so. The only question is "how much are consumers paying?".

Professor Fisher here refers to internal documents suggesting that at least some within Microsoft may think that IE's costs have not been recouped. That might be. However, I would want to see evidence that the competitive price for Windows is somewhat close to what Microsoft is charging PLUS additional evidence that the price could not be increased to also cover the price of IE. That evidence is clearly absent. Thus it can not be proven that IE could only be distributed with the OS if no additional price was charged. These are economic concepts that the Q&A is toying with. As you can see, even economists are unable to accurately pin down precisely what is going on.

What you have to understand is that Microsoft could be charging $60 for the OS and $140 for IE. Or, it could be charging $200 for the OS and $0 for IE. (Hint: end users do not pay the wholesale price so I use the cost figures for the end user .... the wholesale price could be $65...but I could care less...and all end users could care less) What is important about this discussion is that when you do not have active and real competition, the monopolist does not even have to decide between the above two pricing schemes. When you have a monopoly, it does not matter. The money is the same. The ability to sell the bundle is present and will stick. It is only if some other company could sell an OS only solution for $60 that Microsoft would have to decide more carefully how it priced and bundled its products. Notice also that if some other company could sell the Windows OS without IE for $60, the deceitful campaign from Microsoft that IE is free would be exposed. In that case, consumers would be aware that Windows without IE costs $60 for a new license (suggested retail...with the street price around $40) but if it included IE Windows would cost $200 (street price around $150 or so).

The above example is a very different situation than what exists when a monopolist bundles products and arbitrarily sets price. This is highly significant. It illustrates the real value to consumers when active and real competition in fact exists. And, it illustrates the opportunities that a monopoly has to engage in not only deceitful campaigns but also charging high prices (... Microsoft is highly profitable and consumers are being overcharged).

7:38 AM PDT - Interesting question coming from a Microsoft lawyer

q. Okay. Do you have any estimate as to how much less Microsoft would have charged for windows if it had not included what you call IE in that product?

a. I don't. Microsoft had a good deal of freedom as to what it charges for windows, and it would have made a different decision, and I can't say what that decision would have been.

This question coming from Mr. Lacovara, Microsoft's attorney to Professor Fisher is very interesting in light of my own opinions that IE never was a free product when bundled with Windows 98. I have estimated that up to 70% of the retail price of Windows 98 is directly related to IE. Many individuals have suggested that figure to be ridiculous. But, it is not. Windows 95 is old, about to be discarded and was minimally improved in Windows 98 with the exception of the IE work. Therefore, a 70/30 split with IE representing the larger portion is not out of the question. It might be closer to 30/70. But, one thing is very clear. You can not accept the arbitrary public allocations as announced by a monopolist. The answer from Mr. Fisher here is appropriate. "Microsoft had a good deal of freedom as to what it charges for Windows." And, by extension, once IE was bundled with the OS, Microsoft had not only the ability to force the sale of IE upon 100% of its potential customers (I.E. you buy IE even if you choose Apple) but Microsoft also had and has the power to set the price as well.

So is it absurd that consumers are paying up to $140 per copy of IE? It is an absurd price for a product no customer can refuse to purchase. But, it is not absurd that $140 could be the tariff.

Reflect upon the sensitivity to the price of a typical PC by the Microsoft attorney. Microsoft really wants the average PC price to be around $2000 versus $950 or so. The last thing Microsoft wants is for consumers to realize that the OS and IE account for almost 30% of the price of their new PC.

Pricing information is very difficult to deal with simply because it is only one factor in a complex environment. This is why it is ridiculous for the economist for Microsoft to suggest that evidence of Microsoft not charging a short-run monopoly price is proof they do not have a monopoly. A high monopoly price may prove that a monopoly exists but the converse proves nothing.

The one factor in this case that has not yet been brought out relates to the ability of Microsoft to bundled IE maintaining a high minimum price and not lose sales. Bundling unwanted products with required products thereby increasing the cost or keeping it high only works when the required product is a monopoly product. Compare this to the office suites. Even thought Microsoft almost has a monopoly position with Word, they still sell it separately as a stand-alone application simply because if it were offered only as part of the Office Pro Suite (including a DBMS), they would loose sales.

Consumers are truly gullible. Microsoft as part of their deceitful marketing program claims IE is a free application and consumers just go ahead and buy it. It is funny. But, when I see a shampoo bottle marked "20% more for free", I call that BS. But the typical consumer gets out their credit card thinking they are actually getting a free product, IE. Navigator is free. No money leaves your wallet. IE is not free. Money leaves your wallet. (Yes. You can also download IE. But, after 100% of all consumers are forced to buy a copy, that fact is just not relevant to the pocketbook. Have you ever accepted a free newspaper after you just paid for your daily copy?) A consumer fraud suit against Microsoft is another suit I fully expect to be filed before this era is over. The use of deceit to get your money is fraud.
 

June 3, 1999 - Thursday (Continuing with a detailed review of Transcripts from Tuesday Afternoon and Wednesday)

5:14 PM PDT - Humm, Microsoft has no problem defining the server market for operating systems in the Bristol case (started today).

I swear the economist from Microsoft testified that defining the consumer OS market was meaningless, but when Microsoft needs to narrow the market to a place where they do not sell 100% of the copies, they seem to have no problem accurately describing the marketplace.  In the Bristol case, Bristol benefits from a broader market definition (like the one that Microsoft thinks should apply in the DOJ case including game players and ghost operating systems and corporation product plans that do not even exist yet).

Bristol does have a more difficult challange with some of its facts.  Bristol focused on NT products.  NT does have competing products, to Microsoft's delight.

Personally, I have thought that Microsoft's decision to continue the code base for Windows 95/98 was to keep an adverse decision in the DOJ case from seriously happering their "acts" in regard to NT.  If you have only one code base, the DOJ decision applies.  If you have two, then Microsoft can continue to "double face" the issues in different court cases.  Right or wrong in this supposition, the two code sets have not merged as promised by Microsoft years ago.  And, they may never do so.

4:57 PM PDT - Microsoft's arrogance turns into stupidity.

I'll have a chance to read the transcripts tomorrow but a ZDNet report suggests that Microsoft lawyers think that enormous quantities of free downloads is just fine for Netscape.  I wonder if this same lawyer would object is the Judge ordered that Microsoft could not sell their OS for the next 5 years but they are free to download as many copies of their OS as they wish.  They just can not sell it.

Are the Microsoft lawyers really this stupid?  Or, will they just say anything?

4:37 PM PDT - More "ghost" competitors has the judge guessing?

The dialog is not very relevant but interesting:

the court: I am just curious. How in the world would IDC know that by the year 2002, there are going to be more internet gaming devices sold than net tv's?

Mr. Lacovara: Their methodology is actually spelled out in some detail what they used to forecast. I think I would note that their forecasts are generally the best regarded in the industry.

the court: Well, they may be.

Mr. Lacovara: The answer is you can estimate the size of the probable market.

the court: Nobody is even marketing Net tv's today as far as I know.

Mr. Lacovara: No. I think that's items like WebTV and some things we'll talk about later in the day.

the court: Okay.

Just wait until the judge learns that Microsoft owns WebTV.

4:18 PM PDT - Gosh. Are the Microsoft attorneys reading this column?

q. (From Microsoft attorney, Mr. Lacovara) Do you have an understanding of the effects on private lawsuits, should Microsoft be found to be a monopolist in this case?

a. I have a laymen's understanding, yes.

q. And what is that understanding, Dr. Fisher?

a. That under, I think, the Clayton act, if Microsoft should be found liable in this case, private plaintiffs, to recover damages, would merely have to show damages and not liability.

Well. I would be pleased to find out that the Microsoft lawyers read my column everyday. But, they did not need to get this idea from me. I am sure this discussion came up in the law firm partnership meetings (and the meetings with Bill Gates, of course, when they submit their bill for legal services rendered). I did make a rather significant comment earlier today (see below) on this idea.

3:44 PM PDT - Microsoft attorneys again try to misrepresent copyright law

q. Okay. And as a copyright holder, you hold a bundle of rights, correct?

a. Yes.

q. And one of those rights, i take it, is that Cambridge University Press could not remove the epilogue, defendant's 2487, and sell the book as this book without getting your permission, correct?

a. I assume that's right.

q. Okay. And you understand that to be a general principle of copyright law, correct?

a. I am not an expert on copyright law, but it sounds reasonable.

q. To the extent you testified this morning bringing only that level of expertise, you understand that it is generally the holder of the copyright that gets to tell the distributor what is the product?

a. I am pretty sure that's right, yes.

This is really a meaningless Q&A between Professor Fisher and Mr. Lacovara now cross examining Mr. Fisher on behalf of Microsoft. However, since Microsoft will want to argue copyright law on appeal, it is worth the time to explain why this dialog take place.

Microsoft wants to argue that copyright laws gives it carte blanche to design windows anyway it wants and require that all OEMs sell the precise combination of components as decided upon by Microsoft. Of course, they are making this argument for two reasons. One: They want to bundle IE with the OS. Two: They want to require all OEMs to not modify in any way the appearance of Windows when it first boots up for the end customer. The first would permit Microsoft to bundle the Microsoft Office Pro Suite with the OS when they choose to force the sale of those products upon all consumers completely free of any antitrust violations. The second would maintain the value of the first sales pitch to the consumer for browsers, applications or any other service (including long distance phone service if you are ready to be forced to buy that too from Microsoft).

The problem with Microsoft's argument here is that copyright law does not except the holder from violations of any other law that might result from their acts save for preempting any State copyright laws. In other words, copyright law does not protect the holder from antitrust violations anymore than it does against liable or slander. The Federal Copyright law only preempts lessor State copyright laws. It simply does not except the holder from violations of non-copyright laws.

If you are listening to the inference Mr. Lacovara wants to draw from this Q&A with Professor Fisher, you will be mis-informed. This is not a copyright case nor does the argument that Microsoft can do as it wishes because it holds the copyright on windows have any merit. Hint: Copyright laws and antitrust laws do apply, but one does not invalidate the other or as Microsoft might wish, permit repeated antitrust violations to go unchecked because of the copyright law. Neither libel, slander, defamation, nor antitrust violations are excused or permitted simply because a copyright is somewhere in the picture. If an OEM were being sued by Microsoft for rearranging windows components and selling the altered version and no antitrust violations were in the picture, then copyright law might apply and the OEM could be prevented from profiting from the sale of the altered version of Windows. But, it is incorrect to argue that copyright permits other laws to be violated with impunity. That suggestion by Microsoft is false.

2:49 PM PDT - Oh. But, how can free products hurt, goes the cry...

q. Let me return just for a moment to the point that you made at the beginning of this discussion in terms of predation. And you indicated that, while predation is going on, lower prices are being offered?

a. Yes.

q. What is wrong with predation in that sense?

a. There is nothing wrong with the offering of low profitable prices. That's what competition is supposed to do. The general proposition about competition producing good results is a proposition that says, so long as you take your own profit-maximizing actions, without regard for the profits you can make if you achieve or maintain a monopoly, that, in fact, will lead to ends that are good for consumers. But when a firm offers prices that are below cost and takes actions that are unprofitable, except because it is going to gain monopoly profits, then something else is happening. Then, although in the short run, consumers who take advantage or customers who take advantage of the low prices will be benefited during that period, the end result will be either the continuation or the attainment of monopoly, a departure from competition, and a circumstance under which it is no longer true that the pursuit of private ends, in this case, by the monopolist, leads to publicly good results.

This again brings up a discussion where I do not necessarily agree with the DOJ case. The Q&A both assume IE is free. Rather it might cost consumers up to 70% of the retail price for their OS which could be as much as $140 per copy. The $65 price spoke of in this trial is the wholesale cost or price to OEMs not the retail price to consumers. Microsoft announced the suggested retail price of Windows98 and IE to be $200. And, Microsoft has claimed to charge Compaq more as "features" were added to Windows. However, the DOJ has permitted Microsoft to argue a zero price for IE and just hang them on the predatory price charge. That works too. A zero price is not a free ride for Microsoft at all. I suspect that most of the State laws violated in this case (some 19 States, remember) deal directly with zero priced products. At least the laws in California do so.

q. And when, in your analysis, if at all, is Microsoft able to recoup the losses from engaging in what you have described as predatory conduct?

a. Well, in one sense, Microsoft is already recouping. It has preserved its operating systems monopoly, and can continue to gain there. It has warded off the threat. To refine that a little bit, one can say it recoups as of the day when, if it hadn't taken these actions, its operating systems monopoly would have begun to erode.

At least Microsoft seems to have thought so. Microsoft thought it was really important to rub out Netscape and sabotage Java to prevent superior technology and ideas from reducing the dependency on Windows or eroding the camp of ISVs that blindly support the Microsoft monopoly. You can blame the ISVs for doing as Microsoft says. Just look at what happened or is happening to Navigator, DrDos, OS/2, Java, LANtastic, Stac, Real Networks, etc, etc. It is not about superior technology at all. It is a standing joke in Silicon Valley that Microsoft is all about mediocre software being marketed illegally. That joke does not even get a laugh anymore. Truly innovative companies and products are gone. And Microsoft is laying plans to prevent Linux from having a fair marketplace (i.e. they just began advertising for Linux experts ... to join a special team.... No. I do not think Bill plans to install it at home.). The one thing that is certain is that Microsoft Corporation will not abide by the spirit nor letter of the law and will do everything it can think of to prevent fair competition and force companies that do not do as they demand out of business. That is very clear.

2:26 PM PDT - True and fair competition will clearly benefit all consumers - What Microsoft is doing is directly harming all consumers in both the short and long run.

q. Is it the case that Microeconomics assumes or presupposes that competition will lead to an efficient allocation of resources, and that will ultimately benefit consumers?

a. No.

q. It is not true?

a. It is not true. Microeconomics -- you've got one word wrong in that, and it matters. That is not an assumption of microeconomics. That is a principal result of Microeconomics. It's a theorem. It's not assumed; it's proved.

q. It is proved that competition will lead to an efficient allocation of resources, and that that will benefit consumers?

a. Yes.

Observe: If you reduce the price of Windows by $35 or so, allow each consumer to buy either IE or Navigator or neither, all consumers benefit. Consumers get the best product for their use (according to them) and consumers who do not need or want any browser get a cheaper price. And, most importantly superior technology can be introduced to the industry by someone other than a law breaking monopolist.

q. Will competition for customer sets like oem's, that are not themselves ultimate consumers, advance that efficient allocation of resources?

a. Yes, it will.

q. Will interference with competition in the sense of depriving those customers of choices, or having less competition for the business of those customers, ultimately harm consumers?

a. Yes, it will, although, as -- I have already remarked about all of this -- there are a set of occasions on which, or a set of circumstances under which the theorems don't apply. But, in general, you know, that is true. I gave the air pollution example as one.

q. Does, in your judgment, Microsoft's conduct affect the pace and level of innovation?

a. Oh, sure. Microsoft has been giving out very, very strong signals that innovation is fine and they will cooperate with it. They will even assist it, if what you're doing is producing simply complements for Microsoft products. But they will take very, very aggressive action against you if what you're doing is producing innovations that might lead to something that threatens their operating system monopoly.

Ask any Microsoft ISV you want how soon they might introduce a consumer OS and go after the really big bucks. And, when they say they do not plan to do that, they are really saying they only do what Microsoft approves for them and nothing else. Do you really think anyone wants to be the next Netscape?

q. And how does that affect innovation?

a. It rather discourages, I should think, people from thinking of ways to provide -- to innovate in ways that would threaten the operating system monopoly. The lessons are out there. It also means, by the way, that Microsoft's operating system monopoly is unlikely to be threatened. As I said in January, we're going to live in a Microsoft world. Innovation is going to go in the direction that Microsoft thinks is good for it. And that is - you know, that may be a good world. The general presumption is that it ought to be competition on the merits that decides what kind of innovation is good.

Microsoft has tried very hard to sabotage Java and drive Netscape into bankruptcy. They failed. But, antitrust absolutely applies to the attempt. Success is not required. Who is next? Who in his right mind is willing to try to compete with Microsoft when Microsoft Corporation ignores any and all laws that get in the way of precluding competition. The internet browser and Java are probably the most innovative products to surface in quite a while in the computer software industry. And, just look how hard Microsoft tried to prevent their benefits from reaching consumers.

1:37 PM PDT - Professor Fisher explains antitrust law and how it relates to competition and consumers...

q. You may or may not have had an opportunity to read the newspaper today, but there was an advertisement by something called "the independent institute" suggesting that various antitrust cases do not really relate to consumer welfare. does microsoft's conduct here, in your opinion, adversely affect consumers?

a. Yes, it does.

q. Why is that?

a. Well, because it limits choice.

Bingo. When Microsoft uses the "choice" word they only mean the Microsoft choice. They never mean the choice not to buy a Microsoft product nor do they ever mean the choice of a competitors product. For Microsoft, choice is synonymous with "forced sale". Even Bill Gates dearly wants to only sell Windows if it includes IE (the bundle, right?) but he absolutely refuses to permit a single consumer not to buy IE. If you do not have a choice not to buy a product, by definition, that is not a choice at all, it is simply a forced sale. And Bill Gates is forcing all consumers to purchase IE. The only unknown is how much consumers are forced to pay for IE. It cost half a billion to develop.

(Professor Fisher continues his answer)

Now, let me speak more generally. The last time i was here, i was asked a question by Mr. Lacovara, which i later talked about on redirect, as to whether consumers had already been injured. And in the context of that question, I said, I thought not yet. That has been much misquoted. As i explained the last time, that was in the context of a question about the pricing of the browser at zero. And as in any predatory campaign, it is the case that, while the predatory campaign is going on, consumers are not injured by the low prices involved. But any injury to competition is an injury to consumers, and i will say more about that in a minute. And in the meantime, consumers have been injured by having their choices restricted. Certainly, there is -- there are documents and testimony -- well, there are documents from the oem's that say, "we wanted to do certain things, and we didn't want to be restrained -- constrained by Microsoft, and we wanted to do this because we thought it would be good for our consumers and, therefore, good for us." And they were prevented from doing those things. They had to ship ie, and so forth. They were restricted in the initial -- there were various screen restrictions placed upon them. Mr. Vesey of Boeing testified that the fact that IE was bundled with windows placed costs on his company that they did not wish to incur, but they thought were unavoidable. customers who might have wished to get ie -- to make a free choice between netscape and ie, found that it was more difficult for them to do so because of microsoft's actions. Those are are all examples of consumer harm. now, more generally, antitrust policy and antitrust cases are about harm to competition. It is true that we care about harm to competition, largely because of the results as to harm to consumers, but it's an error to suppose that antitrust policy is directly about harm to consumers, although, as i say, that is a primary part. the economics of antitrust policy is based upon the proposition that competition ends up, in one way or another, always being good for consumers. That proposition is the central proposition of microeconomics, and, therefore, in my view, the central proposition of all economics. It is also -- and there is a formal statement of that -- it is also the central proposition of, to be fairly grand about it, western capitalization. And it is the proposition that says, in effect, that there is a close relation between competition and desirable consumer outcomes. now, it's perfectly true that there are some occasions on which that proposition does not hold. And when that proposition does not hold, it is then appropriate for the government to take some other actions. for instance, to take an easy example, pure competition isn't going to solve air pollution. It will lead to problems in the case of air pollution. That requires regulation. But it's society as a whole. It's government that gets to make the choice as to -- and should make the choice as to when those situations need correcting. and the antitrust policy is drawn up on the proposition that individual firms don't get to decide that for themselves, and that departures -- there is a general presumption, which ought to be preserved, that departures from competition, in any form, end up hurting consumers, and are against appropriate public policy.

the court: you use the term "consumer" as synonymous with "end user." Do you ever think of oem's as, quote, consumers, close quote?

the witness: well, i certainly think of oem's as customers, your honor, and they are certainly hurt. There is no question about that. But i used "consumer" here advisedly as people -- in this case, end users.

the court: all right.

q. From an economic standpoint --

a. Let me just go on for a second. Oem's are, in some sense, the representatives of the consumer for certain purposes. They are in competition with each other. They gain if they deliver what end users actually want. They wouldn't care about the restrictions on them if they didn't think that it mattered in their dealings with consumers. and, indeed -- if i try hard, i can recover the name -- the man from hewlett packard -- i can't recover the name -- wrote a terribly angry letter to Microsoft about how the restrictions on him were making it difficult for his consumers and, therefore, difficult for him.

q. From an economic standpoint, is it important that there be competition and choice for customers in the economy who are not end users -- who are not the final consumer?

a. Well, as i just said, yes.

q. Why is that?

a. There are two reasons. One is the reason that i just gave in response to his honor's question. The customers here -- in this case, the p.c. Manufacturers -- the customers here, pursuing their own ends, it's true, represent the consumers. The really remarkable fact about the underlying propositions about competition is that when there is competition, the pursuit of private ends leads to public good. In that case -- this case, i mean, consumer goods. and one of the reasons is that in competitive industries, firms will be driven to try to satisfy consumer demands in order to succeed. So that the first answer is that competition to satisfy customers means, at least indirectly, competition to satisfy the ultimate consumer. now, there is a deeper -- well, not deeper - there is a more complicated proposition. And it goes something like this. It has to do with the central propositions of microeconomics to which i referred. imagine an economy like ours in which there are various markets. Some of the markets are markets for consumer goods. Some of the markets are markets for inputs that are used to make consumer goods. Some of the markets are markets for inputs that are used to make inputs that are used to make consumer goods and so forth. now, the general proposition is that a failure of competition anywhere in the system leads to a situation which is sooner, in one way or another, not as good for consumers as could otherwise be the case -- as would be the case in a system of fully competitive markets. That's true whether the failure occurs in the consumer markets or occurs somewhere else in the chain. And it's a true and quite general proposition, even if you can't necessarily chase -- trace the connection right away. Now, in this particular case, i think you can trace the connection.

Microsoft has spent a lot of time and money attempting to deceive the public about this litigation and antitrust law. Microsoft corporation has put their PR boys on overtime attempting to rally the troops on issues that are not even relevant in this case (I.E. harm to consumers by free products ... IE is not even free...but Microsoft lies about that anyway... the AOL-Netscape merger...just not relevant to the consumer OS monopoly and the abuse of its power ... etc.)

This case is all about the flagrant abuse of monopoly power and forcing all consumers to buy Microsoft products without choice. As explained above by Professor Fisher the antitrust law is not a consumer protection law. However, it does protect competition on the assumption that true competition will offer real choices to consumers at the lowest price. The very proof of this assumption shows up in this case. As long as Netscape "threatened" to offer a competitive choice, Microsoft will willing to invest half a billion in R&D for IE and even falsely claim that the product was given away without additional cost to consumers. Microsoft even blew a fuse in the PR department by claiming that free products could not possibly harm consumers. Economically speaking, too low a price (predatory) can drive competition from the market thus reducing consumer choice and in fact causing real harm.

I have personally tried for about a year now to get a Microsoft supporter to allow me to pick an application for them to use. No surprises. Not one Microsoft supporter permitted me to pick a single application for them, but each one of them without exception continued to insist that I should be required to purchase, install, use and maintain the application they picked (i.e. IE). Sorry. But, the day that Bill Gates allows me to pick an application or OS for his personal use is the same day I will allow Bill Gates to pick my browser. And, I can think of some really nice programs for Bill.

So how does this relate to consumer harm? Real simple. Bill Gates does not let me pick his applications because he might consider that as "harming him", right? Not embarrassing. Although that might be the case too. But, real harm. If he has to use the application I pick, he can not benefit from the choice "he" (Bill) might make. (Actually, I plan to meet Bill Gates in the near future. I rather doubt he will change his mind. After all, not one of his supporters have changed their minds. But, if you like to make any suggestions regarding an application that Bill Gates should be forced to use instead of his preference, feel free to email.)

1:18 PM PDT - True, this case is not about Netscape. But...

q. The figure that i showed you earlier was a figure relating to the decline in netscape's revenues, and there are also have been some figures used showing the decline in Netscape's market share. From an economic standpoint, is what happens to Netscape the critical issue in the analysis?

a. No. This isn't a case about netscape. It isn't a case about damages to netscape, or it's not a case being brought by Netscape. This is a case about microsoft's protection of its monopoly in operating systems. And what matters there is the degree to which Microsoft succeeded in preventing the platform threat from materializing. for that purpose, what matters is how successful IE was. It doesn't matter, for that purpose, whether the remaining part of the browser share was netscape, someone else, or divided among them. Microsoft, in fact, succeeded in having ie out to a sufficient extent that there wasn't -- it was no longer seen likely that there was going to be a paradigm-shifting event causing people no longer to care very much about the underlying operating system. there is -- i quoted it yesterday -- a Microsoft document that says essentially, "i think we've won the browser wars." This occurs when microsoft's ie share is up around 50 percent.

Gosh. Even Fisher, the economists knows that this case is about the conduct of Microsoft and not Netscape (nor the AOL-Netscape merger for that matter). But, do not close out your calendar. Depending upon the results of this case, Netscape may decide to sue on its own behalf for monetary damages. Just because the DOJ files an action does not foreclose any legal rights that Netscape may have for illegal acts by Microsoft. Billions in damages could make the purchase price of Netscape look real cheap. Sometimes people (including journalists) have a tendency to focus only on the present rather than the big picture. Just keep in mind that at one point in time the tobacco industry was getting a free ride to the court house and back. The lawyers had to drive the cab but the cab went anyplace and everywhere without buying gas. Do not count out the Bristols, Corels, Stacs, Novells, IBMs, Apples, Symantecs (what did they do anyway ...Quarterdeck?) and others. Once Microsoft is in the books for flagrant violations of antitrust laws, lots of lawyers may warm up their word processors (running Word, of course).

12:46 PM PDT - Yet another garbage line from Dean Schmalensee?

q. Let me turn to another subject, and in that connection, I'd like you to look at page e-29 of the dean Schmalensee written direct testimony that's part of the executive summary at the beginning. And I am going to ask you, in particular, to look at figure 6 -- figure e-6, which is a graph of netscape's browser revenues. And Dean Schmalensee says that this demonstrates that Netscape's revenues declined only after IE became the superior browser. Do you see that, sir?

a. I do.

q. Do you agree with that conclusion?

a. I do not.

Why is the testimony from Dean Schmalensee garbage? It is rather simple. The testimony from the Dean concludes that revenues dropped for Netscape due to the superior product from Microsoft. The problem is that Dean Schmalensee has no expertise in evaluating the quality of either browser. Neither is there any study by any qualified expert to base that conclusion on. Dean Schmalensee's testimony was written by a PR person, not an economist. (Who says IE ever did become the superior browser, anyway?) An economist may be able to observe the drop in distribution or sales of a product but falsifying the reason for the drop without any study or evaluation as to whether the reason stated is true or not is simply argumentative without any supporting evidence. Did IE improve? Yes. Was AOL forced to switch to IE? Yes. It is false testimony for any economist to conclude that product sales changed for a single reason without some creditable evidence to support it. It is just PR or BS, your choice. What are some other factors to evaluate? How about Microsoft going around and bullying OEMs, ISVs, etc. It is much more likely that the entire drop in Netscape position is the result solely of illegal acts by Microsoft and had little or nothing to do with the quality of the respective browsers. Netscape had a dominant position in the market. It often takes much more than a superior product to overcome that situation.

Dean Schmalensee has exceeded his position as an expert. He has also proven he will compromise his own expertise if paid.

12:25 PM PDT - Very little what Dean Schmalensee has said reflects reality

q. With respect to the issue of windows prices, is it plausible that those prices are being kept low or are being kept lower than they otherwise would have been because Microsoft is concerned about long-run competition?

a. No, it's not plausible.

q. Why not?

a. Well, the description of long-run competition, as given by Dean Schmalensee, involves innovation. It involves the appearance -- in large part, the appearance of substitutes that don't yet exist, but might some day exist. now, the prospect of such innovation, if it is there, is there pretty much regardless of the short-term price of windows. And, indeed, if Microsoft thought that, in a relatively few years, its power would be dissipated by such innovation, then it would be in Microsoft's interest to charge a high price now and earn the -- earn profits while the earning is good, so to speak. now, why might not that happen? Well, the only reason that might not happen would be if Microsoft thought that by earning very high profits now or charging a high price now, it would hasten the day when such innovation appeared. But that's not a sensible thing for it to believe. What will matter to the inducement to innovation to compete with windows are the profits that will be made once the innovation has been made, not the profits that are being made before, and the prices that will then prevail. But Microsoft can -- and it's perfectly well shown that it's willing to -- at any time drop its price when faced with competition. And, therefore, Microsoft could, with impunity, charge high prices now, even if it thought that there was a long-term threat to its power.

q. Let me ask --

a. Let me just see if I can sum that up. Professor Schmalensee's view that Microsoft's prices are low, and are low because of the long-term threat, is not consistent with the nature of the long-term threat he talks about.

Professor Fisher is really too kind on the Dean's testimony. If you reverse all of the Dean's conclusions, his direct testimony actually makes sense. It is almost like the entire testimony was written and Microsoft required that the conclusions had to all favor Microsoft so the conclusions were just reversed. Take the time someday to read the Dean's discussion of barriers to entry, the network effect, etc. It is all there. But, his conclusions are not supported by the detail of the discussion. His detailed discussion supports the DOJ position, the reality of the industry.

Expert witnesses are hired guns but rarely will an expert prepare illogical testimony just to support one side to the litigation.

Directly on point with Fishers answer, I observe again and again that Microsoft claims to put a very low price on IE. They even claim it is free, although not consistently. Bundling IE and not allowing consumer the basic right to not purchase the product has the same impact upon competitors as a truly free product would have. But, bundling does not make a product free. (By the way, in the Office suite, which of those products is the free one? Perhaps Microsoft would be kind enough to tell us?)

12:07 PM PDT - It is ridiculous for an economist to suggest that the absence of short term monopoly prices proves the absence of a monopoly - even Freshmen at lessor universities than MIT know that is a bogus suggestion ... clearly any Dean should know likewise

q. Good morning, Professor Fisher. Let me begin by following up on our pricing discussion of yesterday. We had a discussion yesterday about the extent to which Microsoft was or was not charging a short-run profit-maximizing monopoly price for windows. leaving that issue aside for the moment, are there ways in which Microsoft can earn monopoly profits other than directly through the price of windows?

a. Yes.

q. Could you identify those?

a. Well, I think one of the things to think about has to do not with short-term profits, but with long-term profits. Microsoft imposed certain restrictions on the oem's. These were restrictions which the oem's were not happy about, or at least some of them were not. And, in one case, extremely unhappy. in order to get the oem's to do that, it had to be worth the oem's while, and that means that Microsoft could not charge so high a price for windows to the oem's as it might otherwise have wanted to do, having imposed on them what the oem's considered costs. By doing that, Microsoft could -- and I think did -- protect its long-run monopoly profits by, in this case, assisting -- getting the oem's to, in effect, assist in destroying the Netscape threat.

q. From an economic standpoint, would you expect that a rational monopolist would be more interested in maximizing its long-run profits than its short-run profits?

a. From an economic standpoint, any rational firm -- I would expect that any rational firm would be more interested in maximizing its long-run profits than its short-run profits, long-run profits appropriately defined.

The biggest mistake that Microsoft is making in this trial is coming up with rather ridiculous suggestions that anyone would deem unplausible. It is one thing to suggest that Microsoft is not charging monopoly prices in an effort to maximize short term profits but it is rather short sighted on the Dean part to then say that means Microsoft does not have a monopoly. (Clearly Microsoft's earnings have really been suffering, right Dean?)

Clearly a monopolist might forgo monopoly prices in exchange for help from the OEMs, etc, to rub out a potential competitor thereby maximizing long term profits. Just look at the extra money Microsoft is willing to pay OEMs, ISVs, lawyers and other companies just to rub out a competitor and avoid legal liability for doing so. Even half a billion in R&D on a product they "claim" is free in one breath but "claim" to raise the price of windows over time for added features.

10:47 AM PDT - Microsoft's assertion that the AOL-Netscape deal moots this case is pure bull.

q. With respect to aol with the addition of netscape, is aol in a position to threaten Microsoft's operating system monopoly?

a. No. Aol is not a producer--is not itself going to produce an operating system. The only way in which aol could threaten Microsoft's operating system monopoly would be to go heavily or try to promote the browser very heavily and create a platform which would have the property that other people would write to it. And that, in turn, would allow other vendors to threaten Microsoft's monopoly directly. Aol, itself, would not take over the monopoly profits. that's one of the reasons, by the way, for believing that--one of the reasons economic analysis says you're not going to make the switch. Microsoft has too big an incentive to prevent it.

q. Is there anything about the aol netscape merger that, in your judgment, affects Microsoft's pc operating system monopoly?

a. No, there isn't.

The only reason that Microsoft even mentioned the AOL-Netscape deal was because they wanted to rally their supporters. Microsoft attorneys know full well that the merger is not even relevant. This case is about monopoly power in the consumer OS marketplace. Neither AOL nor Netscape are in that market. The merger could prevent Microsoft from achieving a monopoly in browsers. And, it could make Microsoft task in doing so more difficult. But, so what? Achieving monopolies are supposed to be difficult. And increasing that difficulty NEVER excuses the antitrust violator when they try anyway. It is the attempt to monopolize a second market using the power in an existent market that is illegal. The difficulty is not relevant.

Too many people have taken sides in this case like it was some kind of sporting event. Too many people argue Microsoft's position simply because they want "their" favorite company to win. This whole issue of the merger is just Microsoft's way of rallying the troops. (I guess South Carolina's AG bought the line ... or where paid. They absolutely did not drop out of the DOJ case on the basis of antitrust law. However, keep in mind here that each State participating in this action is basing their participation upon their State's laws not the Federal Antitrust Laws. But, I rather doubt non-relevant competition excused Microsoft's illegal acts. It their acts ever violated the laws of South Carolina, they most likely still do.)

Take the AOL-Netscape merger even further. Assume that AOL-Netscape announced plans to write a consumer OS, bundle it with Navigation, bundle it with the AOL service AND Sun would help sell the whole package. So what? Microsoft still has a monopoly position. Potential future competition does not count. OS/2, Mac, BeOS and Linux hardly count today as far a Microsoft is concerned. This is true by Microsoft's own statements referred to earlier (below). The AOL-Netscape merger is no more relevant to this case than my unannounced plans to write a consumer OS and market it, right? Neither one is a threat to Microsoft. The circumstances can change. But, the possibility of change is never an excuse for pouring concrete around an existing monopoly.

10:36 AM PDT - Microsoft employees are not as dumb as they testify

q. Now, you mentioned increasing costs there, and earlier you talked about raising rivals' costs. is raising rivals' costs something that is well-recognized and conventionally recognized within economics as a way of excluding competition or as an anti-competitive practice?

a. Yes. The theory of raising rivals' costs, I think, is now well-studied and documented in the literature. It goes back to--i know it goes back to an article by steven sallup. I think the original article is by sallup and--it will come to me--david--i will find out. I had it a minute ago, and yes, he, too, is a former mit student; not mine, however. other people have written a great deal about it, and it's generally understood that raising rivals' costs, as defined in those papers, is a way in which it is possible to gain anticompetitive advantage over rivals and hamper competition.

q. And have you reached a conclusion as to whether Microsoft's conduct, in the context of this case, is anticompetitive as a technique of raising rivals' costs?

a. Yes, it certainly is.

q. And have you reviewed Microsoft documents to determine whether Microsoft was aware at the time of what it was doing and, in fact, intended the results that it achieved?

a. Microsoft certainly intended to close off netscape as much as possible from the main channels of distribution, and yes, I have seen documents that suggest that.

Of course Microsoft knows they raising the costs of distribution for Netscape. They are not as dumb as they testify. Gosh. Even the Dean suggested that any competitor needed money to pay their programmers. I doubt that a single Microsoft supporter in this case is willing to forgo the receipt of money for the products they sell, continue with software development and pay money to distribute their product via direct mail or even downloads. Downloading is not free for either side of the transaction. It may be low cost but it is not free.

10:03 AM PDT - Using the browser usage numbers favors Microsoft and lags the distribution numbers

q. Let me ask you to look at Mr. Poole's testimony here at the trial. In particular, his testimony on February 8th, 1999, at page--let's start at page 17. Let me go to page 45, line 13, (reading): "question: now, when you referred to market share objectives here, what is the market that you're referencing? answer: we are referring to usage share there as we discussed before. question: usage share of what, sir? answer: of Microsoft's internet technology, including specifically internet explorer 4--3 and in this case. question: is this what was regularly and routinely referred to within Microsoft as `browser share'? answer: yes." and again, what is the significance of that in terms of your analysis?

a. Is that, quite sensibly, Mr. Poole and, indeed, Microsoft thinks of browser share in terms of usage share because that's what matters. if they didn't, by the way, then they would be happy just to have--then the simple fact that IE is out there on almost every machine these days would count as browser share, and measurements of IE share would be a lot bigger.

The focus upon the browser usage share also favors Microsoft in one critical determination. The DOJ is charging Microsoft with attempting to gain a monopoly in the browser market. Well. There is nothing more obvious than that attempt by Microsoft (for a number of reasons). But, case law suggests that a company may have to actually achieve a 50% share before this kind of charge can stick. This is not a hard and fast rule but it is a benchmark to observe. If the distribution percentage is used, clearly in time Microsoft will exceed 50%. It probably has already. (Netscape has exceeded 50% too for that matter, but Netscape is not being charged with antitrust violations and they are not using monopoly power in one market to achieve it in another. That difference is very important.) It is to Microsoft's advantage to use a browser usage percentage throughout this trial for this reason as well as others. However, the reality is that the court has the ability to decide that Microsoft is using its monopoly power to achieve yet another monopoly by looking at the whole of Microsofts action and is not limited to a simple 50% achievement level. By this point in the trial, everyone has figured out what Microsoft is up to.

Actually, I would guess that even Microsoft is amazed at how well their plan is coming together (sans the law suit filed by the DOJ).
 

9:38 AM PDT - Microsoft's plan to force consumers to actually use IE is significant

q. Let me show you what some of what Microsoft witnesses have said about browser market share and how to measure it, and let me begin with the testimony of brad chase at his march 25, 1998, deposition at pages 96 and 97, beginning at line 11 on page 96, (reading): "question: when you say, quote, distribution's not the issue, closed quote, what do you mean? answer: netscape and Microsoft both have many, many ways to get users to their browser or their internet explorer technologies. The issue in terms of browser share is committing people to use yours as opposed to someone else's. question: why is it that usage is the important thing and not distribution? answer: well, for example, I distributed versions IE 1 and IE 2 with windows as part of the windows from the very beginning, and I had no market share. I had lots of distribution and no usage. Usage is what matters. Distribution is very unimportant relative to usage." then continuing on to page 97, (reading): "question: and why is share of usage an important thing--browser usage an important thing to Microsoft? answer: because usage is what impacts what developers do." what significance, if any, does that testimony have to what you were just saying?

a. Well, I believe that's what I just said; in effect,

Fisher is responding here to the acknowledgment by Brad Chase that use of a browser is more important than simply vast distribution. Certainly if users purchased browsers they would only buy one of them and most likely use it bringing these two factors into agreement. But, with mass distribution this is not likely to be the case. With mass distribution (forced by Microsoft and without charge by Netscape) then use is most important. Microsoft benefits by its ability to force consumers to use IE even if they prefer Navigator. They can and have forced Intuit and others to require IE. And, they have encouraged ISVs and ISPs to promote it as well. Some of this kind of activity Netscape could and did participate in. But, in the final analysis, the monopolist will win out regardless of the merit of the two products.

The ability to force the use of IE is highly significant when you factor in the reality that few if any corporations want to be required to support two browser applications and they MUST support IE. This is a product dependancy that only the monopolist can create. It does not work well with a non-monopolist. For a lessor vendor to force the use of an uncommon browser (or support them all), the value of using the primary product (the product forcing the use of a particular browser) is reduced and sales are also likely to be restrained.

Therefore, in a free browser environment, the monopolist always wins. The monopolist can force the use of the lessor product, the non-monopolist (I.E. BeOS or OS/2) can not force the use of any browser and any vendor without an OS is at the mercy of the wind.

Why is this so important? Simple. Antitrust law prohibits a monopolist from using their monopoly power to preclude competition. This is precisely what Microsoft is doing. Go to a non-priced product (do not forget that IE may not be free, just not priced separately) and force the use of your version. Viola. Microsoft has just used its monopoly power to achieve a dominant or future monopoly position in yet another market.

Fisher and Boies were actually taking about tagging along developers when you force consumers to use one product versus another. That is yet another factor that amplifies the force exerted directly by Microsoft and further increases the barriers to entry for any non-Microsoft product (OS or browser). If Microsoft writes Word to force all customers to use IE it would be foolish for Corel to try to force all their customers to use Navigator. That would be suicide. Only a monopolist can do these kinds of dirty tricks on consumers.
 
 
 
 
 

9:10 AM PDT - No person does not believe that there are enormous barriers to entry in the consumer OS marketplace. -

q. Professor Fisher, in the morning you mentioned some testimony by various Microsoft witnesses that related to the issue of applications programming barrier to entry, and I would like to show you some testimony by Mr. Kempin. you described some testimony by Mr. Devlin, and I would like to show you some testimony by Mr. Kempin and see if this is part of what you were referring to. (document handed to the witness.)

q. And in that connection, I would like to refer you to page 98 of the february 25, 1999, trial transcript, the afternoon session. And particularly, beginning on line 15 of page 98, and this follows a general discussion about looking at windows 95 prices and pricing windows '98, and this is a question that's being read to Mr. Kempin from his deposition, (reading): "question: did you consider competition more generally in considering what level of royalties for windows 98 should be? answer: again, I said I looked at the competitors, but windows 95 or 98, when it comes to value propositions. It just doesn't come close to anything else; meaning, I believe, the competitors are basically selling inferior-type products. question: what is the basis for your belief to that effect?" and then continuing on to page 98, (reading): "answer: it's the simple fact that the number of applications, peripheral devices, support on that platform, basically, is so huge that the benefits for being into that platform is huge." does that have any significance for your analysis of applications programming barriers to entry?

a. Sure. One doesn't expect Mr. Kempin to say there I am protected by the applications barrier to entry, and so I have freedom as to pricing. what he is saying there is, however, the perception that you would expect him to have, given that Microsoft is so protected. What he's saying is we do not--in considering our pricing, we do not have to worry about operating system competitors. why not? because the application--the number of applications written for us is so huge that the benefits of buying into our platform are so huge. And as a result, the competitors are producing, essentially--basically selling inferior-type products. That is the result of the applications barrier to entry, and it's a fairly clear statement.

Why Microsoft chooses to attempt to present false evidence in court on this point is beyond me. Why an economist wants his reputation ruined on this point is even more difficult to understand. Legally it does permit the attorneys to argue that evidence is present in the record to support a finding that no barriers to entry exist in the consumer OS marketplace. I guess barriers to entry do not exist in the railroad business or long distance telephone markets either. All it takes is small investment and the will. "Pure garbage".

June 2, 1999 - Wednesday

6:06 PM PDT - And do not forget the Bristol case.

The Bristol case does present slightly different issues than the DOJ case against Microsoft.  Windows NT is not a monopoly.  Windows NT does have competitors.  Some of them (Linux) are doing quite nicely thank you.  But, it will be interesting to see how the Bristol case takes advantage of any factual determinations that might come out of the DOJ case.  Keep in mind, almost any act that precludes competition can run afoul of the antitrust law.  Even though the Bristol case deals directly with NT, it does not take much of a stretch to find that Microsoft's act in regard to NT with Bristol is just one more illegal act engaged in by Microsoft to protect its monopoly position and prevent competition.  NO.  Companies do not have any right at all to prevent competition.  They can compete with products and they can compete with prices (not predatory).  But, Microsoft does not offer products competitive with the Bristol products.  They are not competitors at all.  Microsoft just wanted Bristol to go away and stop doing business.  Wanting another company to go away and wanting another company to not sell their products always smells bad in an antitrust office.

3:14 PM PDT - The next "killer app" and another reason why IE is not free?

q. If what Microsoft was interested in was increasing the sales of windows, what would that lead Microsoft to do with respect to either promoting or restricting the netscape browser?

a. Microsoft -- i don't know that Microsoft would have an interest in promoting the netscape browser, but Microsoft would surely have no interest in restricting its distribution, since people who wanted to use the netscape browser with windows would be happier people with windows. to some extent, it would increase the sale of windows.

q. And from your examination of the evidence, did Microsoft, in fact, restrict or attempt to restrict the distribution of the netscape browser?

a. Oh, you bet you. To take a particular example, in its contracts with isp's, Microsoft doesn't merely require that the isp ship some minimum number -- i think it's usually around 85 percent -- of internet explorers to the isp subscribers. That requirement alone would have permitted the isp to ship both ie and netscape navigator. the contracts, in fact, require that the isp not ship more than, in this example, 15 percent of other browsers to the isp's. That's a restriction on netscape. if Microsoft were really interested in selling windows, it wouldn't have any interest in doing that. And it can't have any interest in doing that to protect its, quote, sales of ie, end quote, because it doesn't have any, quote, sales of ie, end quote. It's a no-revenue product.

Every OS waits for a killer app to help out its sales, that is a given.

The other part of this answer suggests that IE is not a revenue product and therefore would not be protected against lost sales. Well certainly if Microsoft wants to argue IE free there certainly would be no reason to protect its sales volumes. But, if it were bringing in more money, it would need protecting.

Does it begin it sound like Microsoft is guilty no matter what it did? Well, that is not true. If it continued to develop IE and sold it competitively against Navigator, Microsoft would not be in court today. But, as the snippets pointed out from Microsoft, they considered that scenario and concluded they would loose (if they competed fairly).

2:52 PM PDT - Rubbing out Netscape as an effort to maintain high barriers to entry

q. Now, in your analysis, has Microsoft taken anti-competitive actions to maintain or preserve that fact of the applications programming barrier to entry?

a. Indeed, it has.

q. And could you explain, just in general terms, how they've done that?

a. Well, Microsoft saw some possible threats to the programming -- to the applications barrier to entry. One of them, the one that's taken up most of the time in this proceeding, is the browser threat. That was the possibility that browsers would eventually grow to offer an alternate platform to which software developers would write, and that if that happened enough, nobody would care what operating system was running underneath. now, that was a particular threat in a way that the entry of a new operating system by itself would not be, because people wanted browsers for different reasons. people wanted browsers in order to browse, if i may put it in a fairly trivial way, and, therefore, browsers were going to be very popular, and this might actually occur. Whereas a new entrant in an operating system business competing directly, it's not clear that people -- it's pretty clear that people wouldn't, in fact, want to buy that new operating system in great numbers, in part because of the applications barrier to entry. to thwart this, Microsoft set out to insure that nobody else's browser would ever reach that stage, and in particular, that netscape wouldn't. And they did this by giving away their browser -- in fact, giving it away at a negative price. They did this by signing various restrictive contracts or using their monopoly power to obtain restrictive conditions from isp's and from -- from or on oem's. now, these were practices which make no economic sense on their own. They only make sense if one considers the protection of the monopoly. As i said before, they are doing these things for, quote, a no-revenue product, end quote.

q. I want to follow up on the reference to no-revenue product, but before i do that, you said that what Microsoft was trying to do was to prevent an alternative browser from reaching a particular stage. Can you explain what you mean by that?

a. What was feared was that if the netscape browser became sufficiently widespread, that it might develop -- the world might develop in such a way that software developers would write to the api's exposed by the browser, and do so in such large numbers that that would be what became important in the writing of software. if that were true -- if that were to become true, then people would care what browser they had -- there would be an applications barrier there -- people would care what browser they had, but they might not care any longer very much what operating system they had because the applications that they really wanted to do would be carried by the browser. in that event, the operating system would, to use Microsoft's words, become, quote, commoditized, end quote. and the monopoly power over operating systems would be gone.

q. Now, in order to prevent the netscape browser or another browser from becoming, in your terminology, sufficiently widespread so that it could erode the applications programming barrier to entry, was it necessary for Microsoft to completely dominate the browser market?

a. No.

q. What was necessary?

a. It was necessary that Microsoft achieve a sufficiently high share on its own. And here I mean a sufficiently high share for internet explorer and other browsers that use the same technologies, to which the -- which would expose the same api's -- to prevent software developers from, as it were, sitting up and saying, "hey, wait a minute. We want to write, first and foremost, for this extremely popular other browser." For that purpose, it's not necessary to drive netscape to zero.

Recognizing the potential threat that browsers might pose to an operating system might justify meeting the competition, but it never excuses illegal acts. In fact, the antitrust law is supposed to help future competitors gain a foothold and offer competition. Microsoft has often claimed to be acting the way they do as a "competitive act". But, they are confused. Acts are characterized as competitive or anti-competitive based upon the benefit to the party so acting. Rather, that determination is based upon whether the act offers fair competition or precludes competition. Both can remove a competitor. Both can benefit the acting party. The claim from Microsoft that they are just "competing" is meaningless.

Browsers may yet provide an alternative platform to operating systems for applications. So the threat is real. And, that paradigm should be given every opportunity to provide significant benefits to consumers and not be snuffed out by a company that simply does not want any competitors. The OS should rightly be a commodity. Why? Because all consumers will benefit when it is. It is an interesting observation, but almost everything that Microsoft has done to preclude competition has also harmed a very high percentage of their own customers. (...need I repeat...."Just how much is Microsoft charging for IE?")
 

2:24 PM PDT - The barrier to entry for a new OS is enormous .... Microsoft knows it and so does everyone else in the industry... NO EXCEPTIONS

q. Does it matter to your analysis, or maybe more accurately, is it sufficient to overcome the applications programming barrier to entry that there may be some isv's or even many isv's that will write to operating systems other than windows?

a. No.

q. Why?

a. Well, in the first place, you have to ask under what circumstances will they do it. You might pay ISV's to write to your operating system. That in itself is part of the barrier to entry, that you have to pay them to turn away from windows. Secondly, what makes the applications barriers to entry so severe is not the action of one ISV. It's not even the action of a large-ish number of isv's. It's the breadth and depth of the numerous, numerous applications that are written for windows that provide the assurance to people buying operating systems -- to corporations buying operating systems -- that the things they want to do are going to work with windows.

The silliest suggest Microsoft has made in court is that there are no barriers to entry in the OS marketplace. The next silliest is that the large body of applications written for Windows is just not significant. The next silliest is that developers write for the Windows platform based upon the merits of Windows (I.E. it has been standing joke in Silicon Valley for many years that Microsoft software is only mediocre but everyone writes to it simply because of the large number potential customers that use that platform).

Many would argue that Microsoft's success to date has little or nothing to do with their technology but rather simply the result of hard marketing and illegal acts. A lot of Microsoft supporters argue that it is only playing "hard ball". But, they would not play for the other team if asked. Even Microsoft supporters know "unfair" when they see it.

Not a single knowledgeable person in the industry believes the false claims coming from Microsoft about how easy it is to offer a successful OS to compete with Microsoft when they are so willing to violate antitrust law and preclude competition. IBM gave up. Others have not even tried. Venture capital stays away like that market is some kind of disease (despite enormous potential for profit).

This answer from Mr. Fisher illustrates that he understands the consumer OS marketplace. The answers coming from Microsoft only illustrate that they can present false testimony when paid. Even the most ardent Microsoft ISVs scoff at the suggestion that they should write an OS and compete head up with the monopolist who freely violates any law if it means preventing a competitor from earning revenue. (Go ahead ... find an ISV that is willing to invest some time and energy, drop their Windows applications and enter the consumer OS market for the big bucks. If no ISV is willing to do that, why should anyone believe a single witness from Microsoft?)

Actually, the testimony has failed to bring up a primary reason why many companies write for platforms other than Microsoft: "Anyone but Microsoft". It is not a common one. And, it is not a very good one. But, it does exist. And, it is probably as significant as writing for a new unproven platform just so you can be on the ground floor when it takes off.

1:54 PM PDT - Bundling is not just a technical issue

q. Let me ask you to turn next to page 35 of the transcript of the same session, and lines 10 through 13. "question: and it was entirely practical for you to deliver these two pieces of functionality, if that's what you want to call them, separately; correct, sir? "answer: yes. That's the way we do development. we develop lots of different pieces concurrently, separately." What significance, if any, does that have to your conclusion?

a. That suggests extremely strongly that not only are there no particular consumer benefits from getting the things together as opposed to getting them separately, but there are no particular advantages -- i mean, economic cost advantages to Microsoft from delivering them together, as opposed to delivering them separately.

q. And one more selection from this session with mr. Allchin on page 39, lines 18 through 25. "question: it's just a distribution vehicle, correct, sir? "answer: it's the same code out of windows. "question: it's the same code and all we're talking about are different distribution vehicles, in your words; correct, sir? answer: yes. That's what i said, yes." what significance, if any, does that testimony have to your analysis?

a. Well, by the way, he says similar things further up - just before this, further up the page. what it says is, so to speak, the thing that arrives on the consumer's computer is the same thing. The question of whether it gets bundled together, priced together, and welded together is basically only the way in which it gets delivered to the consumer.

You have to keep in mind that "bundling" is really an economic issue not a technical one at least as far as computer software is concerned. Most hard goods (i.e. clock radios) may require some bundling by the seller in order for certain benefits to be realized by the consumer. This is just not so with computer software. Even Microsoft acknowledges the real disadvantage where this not so when they continue to update and release new versions of IE to be installed separately from the OS.

Not even Microsoft wants to wait with their new version of the browser until the consumer buys their next OS version. That would be unacceptable and a real disadvantage for them. Microsoft wants the browser to be an application just as much as anyone else. They only want to force the sale of their products whenever they can. Nothing is more obvious than that. The testimony from Microsoft employees proves it. And, the acts by Microsoft during the course of this trial also prove it (I.E. the release of the latest version of IE despite Microsoft testimony that the OS and IE are really only one product ... true purjury.)
 

1:39 PM PDT - Absolutely no benefits to consumers simply because they are forced to buy both products

q. Let me direct your attention to the february 1, 1999 afternoon session, in particular beginning on page 45. And this is part of a series of questions and answers in which i was asking a question with some repetitiveness. And the question was, "and you agree that you can get those benefits either by buying windows 98 or by having purchased an original retail version of windows 95 to which you added ie 4, either downloaded or bought from retail or gotten in some other way; correct? "answer: i do." now, what significance, if any, does that testimony have, professor fisher?

a. Well, what it says is that you do not, in fact -- the consumer benefits, such as they are, that come with the integration, the welding, the selling together, the bundling of ie -- in this case ie 4 and windows operating system - don't require any of those actions. The consumer gets the same benefits if it acquires the -- if the consumer acquires those two things separately. in that event, there is no reason why Microsoft shouldn't offer them typically separately throughout and let consumers decide, if those are really good benefits, that they want to acquire them.

Clearly no technical reasons exist for forcing all consumers to buy IE. But, the economic reasons are even more important. Not a single consumer should have to pay for a product they do not wish to purchase or use. Unlike "clock radios", all computer software does not need to be all installed by the manufacturer as Microsoft wants to suggest. Microsoft can offer the OS with or without IE. Microsoft can offer IE separately. The OEM can do likewise. The OEM can offer the OS bundled with the Netscape browser. And the customer can install or remove any piece of software they might wish. All of this assumes a monopolist does not prevent the consumer from exercising their own choices.

Microsoft clearly acted against the very needs of the consumer to force the use of IE and preclude competition. It is a completely and knowingly false statement for Microsoft to suggest otherwise in court. Neither parties to a court action (nor any other witness) have the right to lie in court just because it supports their case.
 

1:24 PM PDT - Of course selling IE and the OS as separate products makes a lot of sense

q. Let me turn to the question of the browser, professor fisher, and the ways that Microsoft offered the browser. you have testified in your direct testimony that Microsoft engaged in anti-competitive conduct as a result of the way that Microsoft made its browser available, or maybe more accurately, the ways it did not make its browser available, separate from the operating system; is that correct?

a. Yes.

q. Would you explain briefly why you find that to be anti-competitive?

a. Okay. We're talking here just about making it available so that -- in the sense that you can't get an operating system without the browser.

q. Yes. I want to limit it to just that aspect of it to start with.

a. Okay. Well, the right question to ask here or one of the right questions to ask here is, would it have been - put aside the effects on competition. Let's put aside the question of protecting the operating system monopoly and ask, is that a profitable way to offer the browser? And the answer, i think, turns out to be "no." there are customers who don't want a browser. there are customers who might have been willing to pay - who would have been willing to pay for the browser separately. there appears to be no particular reason why Microsoft could not have offered its browser, both together with the operating system and separately, and offered the operating system separately, all of these things at different charges. And because consumers wanted it, that would have been a profitable thing to do.

The same is true with disc compression and networking. Many consumers do not use disc compression nor networking on their PCs. Most of them would rather buy a cheaper version without the unused features. But, remember that Microsoft wants to make sure that Stac does not resurface with its disc compression utilities and Microsoft can not stand to allow "its" customers to use LANtastic or Novell for networking. It is strange enough that even Microsoft put some disc compression software in the optional pack for Windows 95. And, of course, all of the applications in the office suite are sold separately as testified to by Microsoft witnesses. But, when speaking of "browsers" falsified testimony was offered trying to prove a technical impossibility regarding the browser being sold under any system by which a single consumer could avoid buying it. (See article on consumer fraud.)
 

12:44 PM PDT - "Is it live or is it Memorex?"

q. And he distinguishes that with what he says you do -- he says, "professor fisher replaces this with the much vaguer and more problematic requirement that an act `not be profitable.' it is unclear whether this means `not profit-maximizing', as some of fisher's testimony suggests, or `not yielding positive economic profit' or something else entirely. Professor fisher never explains how whatever standard he has in mind is to be made operational." do you agree with that, sir?

a. Well, no. I think it's reasonably confused. let me -- and there are a couple of pieces in this which i would like to take one at a time. Let's start this with the "professor fisher replaces this with a much vaguer and more problematic requirement that an act `not be profitable.'" and i will get to the profit-maximizing - profitable part a bit later. the fundamental definition of predatory is an act which is not profitable and is undertaken only because of the returns that a -- that you can get -- the monopoly returns that you can get by suppressing competition. Now, in order -- courts have wanted to, and quite appropriately so, create a test for when something can be shown to be not profitable because that isn't always easy, although i think it is easy in this case. And, therefore, there has been a focus on below-cost pricing. That would be here "the prices complained of are below an appropriate measure of its rival's cost." if you go back to the famous article by areeda and turner in the 1970's, what they do is to say, in the context of a standard textbook example of a single product manufacturing firm, "we'd like to know when pricing is unprofitable -- actually, we'd like to know whether prices are below marginal cost. That's hard to measure, so we'll settle for prices below variable costs and so forth." And in that context, that's a perfectly appropriate test. But the test of below-cost pricing is a way of discovering - not necessarily the only way, but often a good way -- a way of discovering whether something is not profitable. it's not that one is interested directly in whether prices are below cost. One is interested directly in whether pricing is such that it cannot be thought to be profitable, and, more generally, whether acts are such that they cannot be thought to be profitable. And in some contexts -- many contexts -- looking at below-cost pricing is it. so i don't -- replacing it with more problematic requirement; i am not replacing it in some sense at all. I am just observing that below-cost pricing is a special case of not profitable. now, the next part has to do with the not profit-maximizing, or not yielding a positive economic profit or something else entirely. I am, of course, quoting here dean schmalensee. And let me say it once - although i am prepared to discuss this -- in the present case -- this doesn't matter at all because in the present case not only did Microsoft take actions that were not profit-maximizing. they took actions that were simply not profitable at all on any standard. but let me -- since it's come up, let me go into this. A predatory act, or an anti-competitive act, i should say, is an act that doesn't make sense except because of the monopoly rents to be earned when competition is driven out or hampered. And now the question is, what does it mean, an act that doesn't make sense? well, one version is it's just a deliberate money-loser. A second version says, well, you don't charge the price you could have charged. You don't earn all the profits you could have charged. If it wasn't for the possibility of destroying competition and earning monopoly rents, you would have charged a higher price and earned higher profits. you now choose a lower price, a non-profit-maximizing action, and you give up some of the money you could otherwise have earned. That would be a "not profit-maximizing" version. actually, a seriously deep understanding of - well, i can't help it -- of economics leads to the view that these are, in fact, the same thing properly considered. someone who fails to charge a profit-maximizing price and earns fewer profits than it could have done, that someone is incurring what's called an opportunity cost, namely, giving up the opportunity to earn the profits that it could have earned. opportunity costs are very real costs -- if you want, i can give you an example in another context -- and if you attribute the unearned profits -- if you attribute that as an opportunity cost and compare it with the returns that come in, then not profit-maximizing becomes the same as not profitable. Counting that as a cost, revenues will, in fact, be below cost. That is not to say that this is necessarily easy to do. In this case, i think it's extremely easy to do, but it isn't always.

q. In the present case, dealing with Microsoft's conduct, does it make a difference which of these tests of predation you use?

a. No.

q. Why is that?

a. Microsoft gave away internet explorer. It was to be forever free. Microsoft's documents describe it correctly as "this is a no-revenue product." now, this was a product which Microsoft not only gave away for free, but basically bribed people to take. they gave them preferred places on the desktop for which they could have charged. But beyond that, they also spent hundreds of millions of dollars on the development of this no-revenue product, and then they gave away the technology. that is not a profitable act, except for the protection of the operating system's monopoly. It's also not a profit-maximizing act, but in this case it doesn't matter which.

q. In terms of your analysis, have you attempted to confirm your analysis by looking at Microsoft's contemporaneous documents and records that explain why it took the particular actions that it took?

a. Yes.

q. And how is that relevant, if at all?

a. Microsoft's documents do not say, "we're doing this with internet explorer because internet explorer is going to bring in a lot of money." In fact, contemporaneous documents do not suggest that Microsoft cared at all about -- and some of its actions also confirm this -- that Microsoft cared at all about the ancillary revenues that might derive from giving away internet explorer. Instead of which, Microsoft's documents are full of statements -- the one i quoted a moment ago -- "this is a no-revenue product, but you should care about it just as much as does bill gates. Without winning the browser war, we lose" -- i forget what it is -- "we lose windows and office." Some such language.

This entire dialog brings up some interesting observations and questions.

First, the DOJ has decided to allow Microsoft to claim that IE is a free product. This interesting because if you have read my article "How much is Microsoft charging for IE, anyway?", you will note that IE is not necessarily free at all. It could just as easily be a bundled product with an undisclosed allocation of price. How much do you pay for Word, Excel and Access when you buy the suite? Is one of them free, too? IE has fresh R&D dollars to recover (half a billion or so) and Windows 95/98 is promised as a product to be discarded soon. So. When you put $200 or so on your credit card, which product are you buying, anyway? Or, how much for the OS and how much for the browser? You just can not tell by indirect comments from Bill Gates or anyone else (Steve Ballmer said "Microsoft does not give away free software"...of course he thought he was referring to Linux...but Linux is not a Microsoft product nor do any of his decisions price Linux ... he does help price IE. And, you have other testimony claiming that the price of windows has increased to cover "additional features" over time.)

One reason that the DOJ goes along with the claim by Microsoft that IE is free is to help pin a "predatory pricing scheme" on Microsoft. If you assume that 50% or so of the price for Windows 98 is for IE, it is no longer predatory, only bundled. I continue to ask "how much does IE cost?", not because there is any direct evidence of its real cost to consumers, but rather because monopolist have the raw power to either bundle a unwanted product and force all consumers to pay for it regardless of their needs and wants...OR.... they can simply not charge for the added product and simply ruin the demand for a stand alone product. Either situation is harmful to consumers because it precludes competition..

Almost as Mr. Fisher suggests it does not matter which way you argue that Microsoft's practices are harmful, it does not really matter whether Microsoft is charging real money for IE or forcing the distribution and calling it a free gift. Either way, only Microsoft is collecting cash from consumers and competitors can not charge for their product. The whole point is that a monopolist can use either scheme to arrive at its prices. When you do not have true price competition, the price arrived at is not determined by only one rationalization or explanation. The monopolist actually has a choice. Bundle and allocate half the revenue to each product. Or, just overcharge for the monopoly product and give away the unwanted product (the market for which you want to ruin).

Not solving the monopoly problem now in this case will in fact foretell similar acts to come. Monopolists never change their illegal practices unless forced to do so by the courts.

12:04 PM PDT - More to the choice between controlling conduct and restructuring Microsoft than just picking alternative remedies

q. Now, second, you were saying -- and this is what I want to pursue -- that once a firm has become a winner, there are also reasons why you want to limit what a firm can do to preserve that position. And could you explain why that is so?

a. Yes. Suppose that a firm has become the winner by producing a superior product. And because there are economies of scale, let us say, there can only be one firm and this firm is it because this firm produced the product most cheaply. Okay. So long as it did that -- I am going to assume that it got there by producing the product cheaply and passing the efficiencies on to consumers, and there is no question that it priced below cost during this period or whatever. So it's there -- it got there in an appropriate manner, competing on the merits. There now appears some threat. There is no point in considering a threat which will go away if the firm just continues to compete on the merits. There wouldn't be anything wrong with that. So one needs to suppose that there is a threat which challenges the winner in a way that -- the previous winner in a way that the previous winner finds it necessary to respond to, other than by competing on the merits. One can imagine the invention of a new way of doing things that's cheaper than the previous winner's old way. In this case, one can imagine paradigm shifts that might lead to the breakdown of a barrier to entry. In that circumstance, there is nothing wrong with the preexisting winner continuing to compete on the merits, but it's certainly not an appropriate policy to permit the previous winner, just because he is the previous winner or just because there is only going to be one, to compete by taking actions which are not profitable in themselves, but are only profitable because of the monopoly rents which can continue to be garnered when the threat is made to disappear.

This is an interesting Q&A for several reasons.

One: A lot of Microsoft supporters just think that their favorite company ought to be able to do as they damn well please so that they can continue to be on top of the heap. (Netscape be squeezed.)

Two: Alternative remedies may only address Microsoft's past and future conduct and ignore the monopoly power itself. Personally, I feel that placing severe restrictions on Microsoft conduct would do little to lessen their monopoly power (network effect, barriers to entry, etc., might maintain a monopoly position for years to come even without illegal acts to support it).

Three: If you decide that the consumer OS marketplace is a "winner take all" kind of market, that might affect the need to "nationalize" or standardize the product or even heavily regulate it. Microsoft might be on shaky ground to argue that the OS market is a "winner takes all" market so therefore they should be allowed to persist. That kind of conclusion is only likely to increase the probability of government regulation. In the telephone and railroad industries there were reasons for having a monopoly. There may not be based upon a required infrastructure, but there are reasons for suggesting only one dominant consumer OS could exist. Personally, I think this is false. The persistence of Apple and the rise by Linux suggests that there are real opportunities for multiple products in this market space and it is not inevitable that one will always hold monopoly power. Perhaps a dominant position might be expected.

Note also how some of the proposed remedies address the issue of conduct and the "winner take all" possibility. If you do take the code base for Windows and sell it non-exclusively to 6 or 8 major players in the industry, wrongful conduct is no longer effective so it goes away. A dominant standard OS could remain in place, just not controlled by a single company as a monopoly product.

I think what is really important about this Q&A however, is that a monopolist should not be capable of precluding new ideas, products or "paradigm shifts" from having their require affect. Microsoft has attempted to block Netscape and Java from offering their advantages to consumers. They have done that by bundling IE (thereby limiting the money available to pay Netscape programmers ...the Dean was not completely off the mark) and attempting to fracture Java so that applications based upon middleware are less attractive and applications remain dependent upon a monopoly OS.

The other observation to be made here is that superior technologies can enter the market and actually do quite well. Linux is an example, although a rather unique case. New products just can not be sold for money. They have to be given away (Linux and browsers). Only the monopolist can develop products and sell them. (Remember the phrase I have often repeated? "Just how much is Microsoft charging consumers for IE, anyway?")
 

11:07 AM PDT - Dean Schmalensee avoids the reality by omission

q. And I want to begin by looking at paragraph 39, where dean schmalensee writes, "several factors facilitate entry into the microcomputer software industry compared with other industries. Firms need two primary resources to compete in the microcomputer software industry: programmers and the money to pay those programmers while they develop and market attractive new products." the first question, as a threshold matter, professer fisher, do you believe that the issue of entry into the microcomputer software industry is the right question to be asking?

a. No. And this is where you start to get mixed up by not focusing on a market definition to begin with. This is a case about -- that centers on; it is not only about -- it centers on monopoly power in the market for p.c. Operating systems. The question of entry into the microcomputer software industry in general is not relevant.

q. From your analysis, is there any significant difference between entry into what you have described as the personal computer operating system market and entry into the software industry generally?

a. Oh, indeed there is. Let me explain. One way to talk about this is to say, look, in defining a market and then in examining monopoly power, you typically look at two sets of things that could constrain the power of the alleged monopolist. One is called demand substitutability. That's the set of products to which customers can turn in the event of an attempt to earn pernormal profits, charge high prices and so on. now, -- and i will come to the second in a minute. The microcomputer software industry does not produce products, for the most part, to which customers can turn as a substitute for operating systems. To take a simple but illuminating example, Nintendo produces games. Games are in the microcomputer software industry. That's not a constraint on Microsoft's power in the -- in pricing its windows operating system. the second thing to which one looks is called supply substitutability. This is related to entry barriers. and there the question is, could firms not now producing demand substitutable products -- could those firms easily turn their resources to producing demand substitutable products. and if you want, i can give an example from another industry, but to stay on this particular point, it is, of course, true that in order to write operating systems, you need programmers and you need the money to pay those programmers. That's perfectly true, but that's not enough. That is because the ability to produce an attractive operating system is circumscribed by what was called -- what's been called in this trial the applications barrier to entry. it's just -- Nintendo has programmers and it presumably has money. It's not going into the operating system business because it's not going to be able to produce an operating system with those programmers, or with other programmers, which can overcome the economies of scale and the network externalities that are required. It's not going to be able to produce an operating system which attracts a very large number of application writers, enough to overcome Microsoft's very commanding lead. It's a great mistake to think that we are talking here about competition in software in general. We're not.

Anyone who suggests that having some programmers and the ability to pay them is all that is necessary to compete with Microsoft in the consumer OS marketplace is either an idiot (see the dictionary) or deceitful. I rather doubt that MIT would hire an idiot as Dean (although a case could be made here).

I did read part of the MIT Dean's direct testimony. It was the most illogically prepared economic paper that I can recall ever seeing. Actually, his direct testimony (paper, if you will) made a lot of sense if you reversed all of his conclusions. (Some of the readers of this column may even remember my comment at the time that I concluded that the Dean did not even write his own direct testimony. A "paid by Microsoft staff" wrote it and told him to sign it or he was off the witness list. (This is pure speculation on my part, but only this explanation makes sense.)

I am personally aware of a company that wrote a OS that ran on both Intel and Motorola chips, was truly multitasking and superior to the Microsoft offering at the time (late 1980's). They had the programmers. They had the money to pay them. They actually finished the product. But, they did not even attempt to compete with Microsoft despite a superior product. And, of course you have the IBM story which is likely to come up again in this trial.

In this trial it is real easy to pick out the people who testify like idiots. They are not idiots. Bill Gates is not an idiot. Even the Dean is not an idiot. To truly be an idiot your IQ needs to test rather low (about 90 as I recall). It is their testimony that is rather lacking.

As poor as this testimony from Microsoft is, I heard a national news broadcast repeat the claim that anyone could compete if they had programmers and money to pay them. I do not think it was NBC(MSNBC). But it could have been.
 

10:41 AM PDT - Dean Schmalensee clearly avoids discussing the key to Microsoft's power over all consumers

q. Let me ask you to look at a couple of selections from Dean Schmalensee's testimony. And I'd like to begin by asking you to look at a selection from January 13, the afternoon session, at page 27, which I believe I can put up on the board, and we have -- and at lines 13 through 18, there is a question - the court: I'm sorry. What page are you on?

Mr. Boies: page 27 of the afternoon session on the 13th. And at line 13, dean Schmalensee is asked, "so you did not investigate and did not feel a need to investigate whether there was or was not a p.c. Operating system market; is that your testimony? "answer: that's my testimony, that that market is not relevant or necessary to answer the questions posed." he then says, "most of the questions posed -- no, the questions posed, period."

q Now, do you agree with that testimony, Professor Fisher?

a. No. I certainly don't. It's true that the question of what is a relevant market in this case, and in most cases, is not a question with very definitive answers. It's possible to disagree on what the market is, but defining a market is a way of starting to summarize what are the things you have to understand and the way they operate - understand, in a monopoly case, the constraints on the alleged monopolist. And in this case, the question of whether Microsoft has power -- monopoly power in p.c. Operating systems is a crucial question in this case. And I think that the refusal to define that market is a way of getting muddled when one starts to think about that question.

The testimony from Dean Schmalensee referred to here is truly insulting to all consumers.

What the Dean said here is that the consumer is not important. What he said here is the fact that all consumers are forced to buy Windows as a direct result of the monopoly power of Microsoft (i.e. only product to pick from). I find it amazing that an economist would even suggest such a stupid conclusion. The fact that consumers do not have a practical choice in the computer store when they shop for systems is the most important fact in this case. But, the Dean claiming to be an economist states, in essence, that the lack of choice for consumers is not relevant.

What Dean Schmalensee has done here is to intentionally present false and misleading expert testimony. Any lay consumer knows that they must first pick and choose a consumer OS from available choices on the market. Dean is trying to suggest that the consumer OS market definition in not relevant. Actually, in part, he is correct. The monopoly power of Microsoft is so strong and available alternative so absent from the market that there is no choice for the consumer to make. When Dean Schmalensee to refuses to acknowledge the obvious market definition he discredits his entire testimony and most likely puts his own career in jeopardy. His testimony certainly puts a bad light on MIT.

10:25 AM PDT

q. And what, from your perspective, did Dean Schmalensee do right and what did he do wrong, in general?

a. Well, Dean Schmalensee basically refused to define any market at all because he found that either difficult or impossible. And stemming from that, I think there are a whole series of problems leading to -- how shall I put it - leading to a lack of systematic thinking and to some muddled results.

Fisher is being a little too kind here in discussing the testimony from Dean Schmalensee. The Dean failed to define a market simply because the logical definition works against Microsoft and any other definition is a bit ridiculous. Mr. Schmalensee did try to define a "platform market" such that Java and browsers and other stuff would all be considered to be in the "same" market. But, they are not. You can write applications for Java or Windows but they do not substitute for each other in the marketplace. All systems require an OS.

This question also points out a very serious risk for expert witnesses. Expert witnesses are expected to accurately apply their expertise to the issue. Very often an expert will refuse to testify from one side or the other simply because they can not apply the expected knowledge and understanding of their expertise and still offer supporting testimony. The Dean has made a fool out of himself by getting on the stand in this case, supporting Microsoft as much as he has and refusing to apply his own expertise (or at least that expertise of an economist).

To be honest I was surprised that any economist would testify on the behalf of Microsoft in this case.

Dean Schmalensee does deserve some credit for his views as presented but he did a very poor and misleading job of doing so. "In the long run" there is no need for the antitrust laws to be applied. Given enough time (10-15-20 years) another OS will come along and replace or compete with Windows. If you look at the testimony from Dean Schmalensee you can see how, given enough time, his statements do make sense. However, he did not disclose the fact that he was taking about the long run (as any good economists should have). In fact, most economists who argue that antitrust laws are not necessary are simply looking at the long run. The only problem is that consumers are harmed in the present time frame. Competitors are blocked out in the present time frame. Thus, the antitrust laws apply to proven facts today and present harm. This case has clearly illustrated how Microsoft's monopoly power in the consumer OS market has removed a potential competitor (Netscape) and restrained yet a second competitor (Java).
 

9:50 AM PDT - Franklin Fisher is on the stand. Mr. Boies is conducting direct examination during the rebuttal phase of the trial.

q. I am going to begin by asking you some questions about certain of the assertions that Dean Schmalensee makes. But, first, as contextual background, you have examined, generally speaking, both issues of monopoly power and anti-competitive conduct; is that correct?

a. Yes, it is.

q. And I want to begin by focusing on the issue of monopoly power. In that connection, would you describe just very briefly and generally how you went about that analysis?

a. Well, I began in what is, in effect, the standard way. I began by considering the market -- the definition of the market in which Microsoft might have monopoly power. That meant considering the various things that could or do constrain Microsoft. I then looked at such indicators as Microsoft's share, stability of the share. I looked at the fundamental question, which was is Microsoft, in fact, constrained in its pricing by -- well, to what extent, if any, is it constrained by various things. That is actually the touchstone question of monopoly power.

q And, as you've testified on direct, you reached a conclusion that Microsoft did, in fact, have monopoly power as a result of that analysis?

a. Oh, yes.

Mr. Boies is asking the question here of Mr. Fisher. However this question and answer is very important. The Q&A relates to the appropriate definition of the market for this trial. Even Microsoft knows they have a monopoly in the consumer OS marketplace, but to attempt to avoid such determination they have attempted to define the relevant market as being much broader. Any consumer knows that the OS from Microsoft does not compete with Unix (or even Linux for that matter) or the various applications found in the computer store. The OS from Microsoft does compete with the Mac OS although not on Intel systems.

The real question here is "what competition to Windows does the average consumer see in the marketplace?". The simple and obvious conclusion in this case is that the consumer does not have any practical alternative to Windows and therefore Microsoft does in fact enjoy a monopoly position. To suggest any other observation is to live on another planet.
 
 
 

Daily Wrap and Flow - Week 23 - Break
Daily Wrap and Flow - Week 22 (court not in session)
Daily Wrap and Flow - Week 21 (court not in session)
Daily Wrap and Flow - Week20 (Count not in session)
Daily Wrap and Flow - Week19 (Court not in session)
Daily Wrap and Flow - Week18 (Engstrom, Kempin)
Daily Wrap and Flow - Week17 (Rose, Rosen)
Daily Wrap and Flow - Week16 (Myhrvold, Chase)
Daily Wrap and Flow - Week15 (Allchin 98Lite)
Daily Wrap and Flow - Week 14 (Maritz, 98Lite)
Daily Wrap and Flow - Week 13
Daily Wrap and Flow - Week 12
Daily Wrap and Flow - Week 11
Daily Wrap and Flow - Week 10
Daily Wrap and Flow - Week Nine
Daily Wrap and Flow - Week Eight
Daily Wrap and Flow - Week Seven
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Daily Wrap and Flow - Week Five
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Daily Wrap and Flow - Week Three
Daily Wrap and Flow - Week Two
Daily Wrap and Flow - Week One