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June 25, 1999 - Friday (Transcripts from Wednesday, June 23 AM - Direct Examination)
 

10:41 AM PDT - Barriers to entry in the consumer OS market have nothing to do with non-OS development.

q. Now, professor Fisher testified in his rebuttal testimony that, other than sun, he had no knowledge of any firm that was developing operating-system-independent applications, or web-based applications, or how many such applications there were, or any examples of such applications. do you believe that professor Fisher could have any reasonable basis to opine as to the existence of an applications barrier to entry without analyzing those facts?

a. Not in today's market.

Which "market" are you talking about? Do you mean the consumer OS market?

Being able to write web applications is totally unrelated to entry into the consumer OS marketplace. If you can buy a bus, does that mean that buses are cars? If you can buy a plane, does that mean planes are cars?

Just because developers write other software not dependant upon Windows does not mean than IBM can sell more copies of OS/2. Nor does it mean that some company is going to introduce a consumer OS.

Maybe Bill Gates thinks he owns all software development expertise?

If developers are working on something that is not dependant upon Windows, then it must be writing for a competing OS? That is not true.

In fact, if developers are working on web applications and java applications, etc., then it is less likely that they will ever write a consumer OS again.

Perhaps consumer systems are just like word processors? Nobody writes them anymore? There are all off doing other things?

Does the Dean really think that writing applications creates consumer operating systems? That is what he and Microsoft are trying to prove.

Applications that do not depend upon a particular OS might create an environment that would allow other operating systems to surface. But, Dean, you have to find the evidence of the new systems. You can not just whine that not all developers write Windows applications.

Maybe the Dean thinks that the only barrier to entry is a total lock on a key resource. Maybe that is why he claimed that all anyone needs to be rich and famous like Bill Gates is a few good programmers and the money to pay them until the first sales come in.

Well. Dean Schmalensee simple does not understand the computer software industry. Or, maybe he is just paid to testify falsely about it.

10:34 AM PDT - Web based applications do not disprove barriers to entry for the consumer OS either - But the Dean thinks everything disproves that.

q. And, second, whether you believe that that statement is relevant to an analysis of the existence of an applications program barrier to entry?

a. Absolutely. It suggests yet another way in which - it's another demonstration of, if you will, the nonexistence of any such barrier.

Sorry. Dean, that is totally illogical. You can not point to non-related development work and argue that since all developers are not working on Windows applications, barriers to a consumer OS do not exit. That is a non-sequitur.

Only Microsoft thinks it owns all developers. Therefore if they do work other than Windows applications, somehow that proves they are not a monopoly.

The dean is an idiot. Competition in the consumer OS market is determined by looking at consumer systems. Barriers to entry to that market can only be evaluated by looking at actual entries. There are none. BeOS does exist. Linux does exist. But, neither of them are consumer operating systems.

Can developers write something other than Windows applications? Yes. But, that is just not relevant to the issues in this case.

10:20 AM PDT - I am flatly amazed that Microsoft has not suggested that since Cobol programmers still exist, that proves no barriers to entry in the consumer OS market exist.

q. And do these sorts of alliances [AOL and 3com] in which applications are to be offered across multiple platforms affect, based on the analysis you've done, the willingness of application developers to write server-based applications as opposed to windows-specific or p.c.-based applications?

a. Oh, absolutely. This is -- again, if you just put yourself in the mind of a developer, what this says is that there is a whole new set -- not entirely new because there's overlap, but there's a whole new set of eyeballs and a whole new set of occasions on which individuals will go to the web to do some of the things that aol lets them do. and if you can write a web-based application that's attractive, they can come to you.

Sure, there are lots of other things for software developers to do. Only Microsoft thinks that 100% of all software developers should write exclusively for Windows.

But, Microsoft forgot to mention the cobol people. The continued existence of cobol developers proves the absense of barriers to entry in the consumer OS market just as much as palmtop and java developers do.

The barrier to entry in the OS market is not because of a lock on a key resource such as developers. The barrier is caused by the requirement that the OS reach a particular scale or size before it can sustain itself. The only exception being niche markets. Linux got its start as a "niche". Same with BeOS. Microsoft illegally forced OS/2 to remain a "niche". Apple remained limited most likely because of its direct tie to hardware.

But, it is false to suggest that barriers to entry in the consumer Os market do not exist simply because developers find other markets. Rather it proves that there is a surplus of developers and money to pay them, but they avoid the consumer OS marketplace. Guess why?

Nobody wants to play marbles with the bully. He cheats. He throws dirt. And, he hires others to trip up competitive players. He actually pays people to be mean.

Why? To discourage anyone else from playing marbles. All Microsoft ISVs are chicken. They got the message.
 

9:52 AM PDT - Barriers to entry in the OS market are not dis-proven by the advancement of Java - rather they support it

q as you return to the witness box, i'd like to conclude your examination by returning to the subject that we were discussing at the end of the day yesterday, which is the single barrier to entry asserted by professor Fisher and dr. Warren-boulton, namely the application programmers barrier to entry. and one of the things we talked about yesterday was sun's java technology and how that related to the assertion of barrier to entry.

Mr. Lacovara: at this time, i would ask that defendant's exhibit 2792 be placed in front of the witness. this i will identify, your honor, as a press release from the java division of sun, dated june 15^th, 1999, which was retrieved from the java web site last night. and i would offer defendant's 2792 at this time. and, for the record, it is entitled "sun developer connection program now the fastest-growing developer community in the industry."

Mr. Boies: no objection, your honor.

the court: defendant's 2792 is admitted.

(whereupon, defendant's exhibit number 2792 was received in evidence.)

Mr. Lacovara: if you could highlight the first paragraph, please, bill. It reports that sun microsystems announced at last week's java one conference that "the sun developer connection has passed 1 million members, making it the fastest-growing and second-largest developer community in the industry." do you believe that the notion that sun has a million members of its developer community is consistent with the notion that there is an applications program barrier to entry that keeps people writing only or writing first to windows?

a. That's inconsistent, and what's sharply inconsistent is the next statement that it's the the fastest growing and second largest. under professor Fisher's analysis, the seconds largest either shouldn't exist or certainly shouldn't grow. so a million is a lot of developers to be wasting their time. I think it's inconsistent with the assertion.

q. And then if i could ask you to look at the last two sentences of the paragraph where it says "sun is introducing aggressive new enhancements to the program. These new services include developer essentials hardware, the launch of its next generation java developer connection portal, and sun education essentials." do you recall your testimony yesterday on your study of the extent to which developers of platforms other than windows rely on developer tools or evangelization efforts?

a. Yes.

q. And could you comment on the relevance of that testimony to sun's announcement on june 15^th?

a. Sun is doing here what i described. It's making it easier for developers to write good applications on java. it's doing education. It's providing a portal for information. i'm not sure i understand exactly what the hardware is, but it's clear from the context here that sun is trying to make life easier for its developers and to make them more productive, and it's investing to do that.

q. And is the investment and the promotion of these sorts of tools and the developer connection portal consistent with the notion that there is an applications program barrier to entry that prevents people from writing applications to platforms other than windows?

a. Only if sun is being irrational on a large scale. Sun plainly doesn't think there's such a barrier or it wouldn't be investing.

Mr. Lacovara: at this time, your honor, i'd ask that the witness be shown defendant's exhibit 2794, a document also taken from the sun web site, dated june 18, 1999, entitled "afterglow: four days of bof's, business and buzz." and for the record, "bof" stands for birds of a feather. and the court will note, on the second page, a photograph of one of the plaintiffs' trial witnesses who appeared at this event. I offer 2794 at this time.

Mr. Boies: is there a date of the document itself?

Mr. Lacovara: on the second page, it's dated 18 june, 1999.

Mr. Boies: no objection, your honor.
 

the court: defendant's 2794 is admitted.

Mr. Lacovara: q. and can we highlight the first paragraph again, which reads "for four days, more than 20,000 attendees have soaked up sun's 1999 java one conference in san francisco, demonstrating for the fourth year in a row this is the largest developer event on the planet."

by Mr. Lacovara: q. And, first, Dean schmalensee, is the notion that 20,000 people would attend a conference about developing to the java platform consistent or inconsistent with the notion that there exists an applications program barrier to entry?

a. Well, it's on its face inconsistent. this is four days of time, it says, and this is 20,000 people. This is, by any measure of the cost of time, a massive investment, but plainly just the tip of the iceburg since these folks are wasting their time unless they intend to use java to create applications. So that's an inconsistency.

q. And under the plaintiffs' theory, as you understand it, what is the relevance of the development of java applications to the applications program barrier to entry and Microsoft's ability to exercise monopoly power?

a. Well, as i understand plaintiffs' theory, java -- and in this regard, i must confess, i agree with it -- java is a threat to windows because java applications that are operating-system-independent reduce the value of the windows platform. And, so far, i think we're in sync. And here are 20,000 people who are busy creating java applications to do just that.

The Java movement is rather significant proof that barriers to entry for consumer operating systems is enormous. It has taken not another operating system but rather a whole new concept which does not replace entrenched operating systems to attract significant developers.

Java is not an OS. It is a run-time environment designed to run on all platforms.

Is it attracting developers? You bet. But, why? Because applications are not limited to a particular OS. Applications do not need to further support the monopoly product but can be used on other systems as well. Superior operating systems that otherwise can not enter the market either for illegal or natural reasons.

In fact, the barrier to entry is so significant in the consumer OS market that Microsoft Corporation has acted to fracture or harm Java by trying to prevent it from being a universal solution. The very fact that Microsoft saw development resources leaving windows and going to a universal and superior solution caused it to try very hard to make certain that a universal solution would fail. Of course, it did this buy trying to write an incompatible version of Java that would run only on Windows.

Microsoft would much rather have consumers tied to windows than allow them the choice to purchase other operating systems. Java works away at that barrier to entry. It in fact proves how significant it is. It does not prove it does not exist. Pushing a bolder over the cliff does not prove the boulder does not exist. It proves just how heavy that bolder is. And, in this case, Microsoft was busy as it could be in adding weight to the boulder.

Does Java eat away at the monopoly power of Windows? Absolutely. But, Java also proves that designing a competitive OS is almost impossible due to the barriers to entry in that marketplace. It took another concept or paradigm to skirt the barriers. Java is simply disconnecting the development process from the particular OS. And, this disconnect greatly benefits developers and consumers alike.

9:30 AM PDT - Well. I do not think Microsoft is charging the maximum price either. But, not for the single reason the Dean wants to accept.

q. So use 160. And could you solve for the short-term monopoly price of windows?

a. I believe so. With those numbers, this equation becomes the price of windows equals the price of windows over 2, plus 1800 over 2, which is 900, minus 1600 -- i'm sorry. minus 160. That would be interesting, too. Or the price of windows equals 2 times 740, equals $1480.

q. And so just because you did the arithmetic fast, for some of us who are challenged in that regard, could you explain what it is you have done and what the $1480 figure means?

a. What i have done, in moving from this first line to the second line, is to make the substitutions indicated by the arrows on the first line and unpack this first term to write it as the price of windows over 2, plus the cost of hardware over 2 -- 1800 over 2 being 900 -- and then substitute in 160 and subtract. moving from the second line to the third line, i did two things. I subtracted the price of windows over 2 from both sides and then multiplied by 2. And that leads to the solution. I should perhaps have done it in two steps.

q. And, arithmetically, is the exercise in which you have just engaged the same as the one professor Fisher engaged - in which he engaged?

a. Algebraically, i would say. We're using different numbers, but it's the same manipulations.

q. Now, professor Fisher testified that he could use numbers that he felt were reasonable and get to within a couple of hundred dollars of the actual price of windows. do you believe that that testimony, that professor Fisher could get to a couple hundred dollars of the actual price of windows, disproves the point you have attempted to make with this analysis?

a. No. That says Microsoft, in his view, might only be leaving $200 a copy on the table when it decides to charge only $65 as an approximation. that means, depending on what you think about demand elasticity, it's leaving around three-quarters of the profit it could have earned. It's deciding not to take it -- not to take three-quarters of the profit it could have earned. I don't think that's close.

(The Dean falsely concludes that Microsoft would charge the monopoly price but for the only constraint he wants to talk about, competition.)

q. And what do you conclude from your analysis of windows pricing and your assessment of professor Fisher's take on that analysis?

a. I conclude that if this analysis is done with reasonable numbers, it makes clear that Microsoft is not maximizing profits in a world that is consistent with plaintiffs' description of its competitive environment. that tells me, again, as professor Fisher said, one of two things must be happening. Either plaintiffs have it wrong, or Microsoft, for reasons that haven't been explained and certainly aren't explained by that discussion of oem restriction, has, for a long time, left a lot of money on the table.

The DOJ is not suggesting that the only discount from the maximum price of windows is due to OEM concessions. As Dean as ignored, even Microsoft is sensitive to the cost of windows in relation to the cost of PCs.

The concessions to OEMs can be evaluated by looking at the difference between those OEMs who went along with the illegal terms and those who did not. The concession portion is just a part of it.

But, before you scoff at the suggested price of Windows being $1480 or so I suggest you read the articles regarding "bubblegum" and "jawbreakers". You can evaluate the price you might have to pay for windows yourself. Just think about it a little bit. Read the bubblegum and jawbreaker articles and decide just how expensive the cost of windows would have to be before you switch to an alternate OS. If you switch, how much other software will you be required to purchase? Can you get the applications you want on those other platforms? If you as a consumer can not use some other OS because applications are not available or you have to have buy all new versions, then you may have to pay the full monopoly price.

So. Could Microsoft charge considerable more? You bet. Or, they can simply bundle more applications which they will certainly do.

9:14 AM PDT - Do you suppose the Dean paid $1800 for his PC recently? And, Microsoft has suggested a retail price of $200 for windows, not $80.

q. Now, for purposes of the analysis today, what do you believe is the appropriate price for a p.c. System to use, as of june 1999?

a. The price i used in january, as i recall, was around $2,000. Hardware costs are falling, as has been discussed, and the latest data i've seen for an overall average price for the system is around $1880, so down a bit from 2,000. and if you subtract the price of windows in round, this ought to be around -- again, as an average number, around $1800.

Does this economist have any data to suggest the average price of PCs is $1880?

Obviously the higher the cost of PCs the less bad Microsoft looks.

And, despite the Deans ignorance of the facts in this case, Microsoft is more sensitive to the impact on consumers at the low end. They are the ones being harmed by the bundling by Microsoft.
 
 
 

9:07 AM PDT - The Dean ignores direct evidence from Microsoft itself in his effort to falsify his testimony

q. Now, professor Fisher testified that you had used too high a hardware price. And instead of the figure you used, which i believe was $2,000, he used the figure of $950. Do you agree that it was appropriate to use $950?

a. No. It's my understanding that that price, a, didn't include a monitor, and, b, was for the retail channel only. that's a low-end price, clearly not an average price.

q. Now, in his redirect rebuttal examination, professor Fisher suggested that, in fact, it was appropriate to look at the retail price, because focusing on the low end in terms of the demand for cheaper machines, made sense to explain Microsoft's pricing behavior. Do you agree with that?

a. I certainly haven't seen any analysis from professor Fisher, or any other source, that would support that. As a general matter, if you're going to charge a price across all p.c.'s, the analysis that determines the optimal price needs to take into account information from across the range of demand. the notion that you would price only to the low end, disregarding enormous profits to be made on more expensive computers, strikes me as implausible. He presented no analysis to support that assertion, so i can't comment on the analysis.

Again, the Dean ignores direct testimony contrary to his pre-conclusions. This case has documents suggesting that Microsoft is very sensitive to the impact of the price of windows at that low end. In fact, the extensive effort by the Dean to make sure a very high price for PCs is used in this analysis also points out this sensitivity.

Dean Schmalensee simply ignores any and all evidence that does not favor his pre-conclusions.

8:49 AM PDT - "Addicted" is the wrong word. But, the lack of a price rise does not disprove it at all. "Branding" would apply.

q. Now, your reference to satisfied users suggests a question that the court asked of you in january. And to paraphrase, i believe the court's question was whether the low prices, over such a long period of time, might be associated with some sort of addiction phenomenon where Microsoft was holding down the price to get people addicted. have you reflected on that question over the last several months?

a. I have. I remember that conversation well. There is certainly a sense in which Microsoft wants to bring people to its platform, but i think i raised in january the issue of whether addiction to windows was an appropriate way to think about it. and, on reflection, i think the pricing analysis sheds light on it, because if there's one characteristic of addicts -- and you see it in studies of cigarette demand, among other things -- it is that they are not sensitive to prices. So that if Microsoft had, in fact, done this for some period of time, it would have a set of people who would be even less price sensitive than i assume in my analysis. so if, in fact, addiction to windows is a real phenomenon, at some point, after all of these years, or addiction to Microsoft products, Microsoft would have rationally raised the price to take advantage of the addicts it had acquired. And it hasn't.

Here the Dean suggests that the lack of an increase in the price of windows is supposed to prove something. But, he is an economists. Clearly an economist must understand that prices go up and go down over time. He looks rather silly to suggest that since the price has not gone up that something has been proven. That is false. Prove of the "addicted" value or brand if you will can easily be proven by observing that the price has not dropped over time. Hardware prices are dropping. Actually software prices are dropping as well. Just not the price of Windows. Microsoft has continued to bundle more and more applications into the OS to make certain that the minimum amount of money going to Microsoft remains high. Just as high as it was 10 years ago. Instead of a $30 OS. Microsoft bundles games, utilities, networking (which few home users ever need), browsers, media players, etc. Whatever competitor out that Microsoft wants to suppress, they just bundled their version of the application so that market never develops for that competitor. And, consumers pay the price for this. It is happening now with the browser. It already occurred with disc compression and networking. Personal money management is next (sorry Intuit, you are history as soon as you no longer suppress other companies that Microsoft might want to get rid of more than you).

8:21 AM PDT - The Dean's simplistic view of the industry is false. And, his explanation of Microsoft's pricing is proven false by evidence in this case.

q. Now, what, in your view, Dean schmalensee, explains the fact that Microsoft has chosen, over such a long period of time, to charge the prices that you observe?

a. I believe it has to be concern with its long-term competitive position. Such a concern is consistent with all the documents. It's consistent with the economics in the industry that, by having a large base of satisfied users, Microsoft positions itself well against any future competition. It's the long-run constraints that plaintiffs assume away.

Long run constraints may play a part but it is a very small part. Here the Dean wants to prove the ready existence of competition by suggesting that the only reason the price of windows is not as high as the monopoly price might permit is because of the threat of competition. Well. Evidence suggests otherwise. In fact, evidence suggests that the threat of future competition plays no part. Yet, the Dean insists upon these ghost stories about competition and how the threat of competition keeps the price down. Interesting theory. But, facts prove otherwise.

Evidence in this case suggest that Microsoft is very sensitive to the impression that consumers might have if they were paying $200 for an OS on a $500 machine. In fact, even the Dean is highly sensitive to this. This is why they want to insist that PCs all cost some $2000 still. It makes the suggested retail price of $200 for Windows 98 more acceptable. But, consumers know better. They know they get the hardware very cheap. They know they get a system bundled with the OS very cheap. But, a major portion of that goes to Windows.

The Dean's insistence that the price is where it is due to future competition is simply false. He only argues that because the implication then is that Microsoft has ready competition just waiting in the wings.

Well. The entire industry knows for a fact that they are not waiting in the wings. The industry knows all about those barriers to entry that the Dean swears up and down do not exist. The industry knows all about the illegal terms that Microsoft extracts from OEMs to block out competitors. The industry knows all about the financial incentives that Microsoft offers to get other companies to participate in antitrust activities. In this case, only IBM had the guts to tell the truth about this industry and Microsoft's practices. Intuit is still on the bubble, so they have to be careful. AOL tried to lay it out, but they really do need the windows promotion. As long a Microsoft precludes competition, AOL is restrained. And, Apple can ill afford to have Microsoft slow up support for the Mac.

Microsoft has ruined this industry. And, consumers are paying the price because of it.

Keep in mind that one of the chits that monopolists use up is directly related to the ability to bundled unwanted products with monopoly products. That is one of the things they do. And, when they do that they may have to concede a little on price. (Most suites do cost less than the separate products.) So, another explanation for the lower than monopoly price charged by Microsoft is the trade of forcing IE for keeping the price lower. Do consumers think that way? Sure they do. How many consumers have you heard say "being forced to take IE is not so bad, the price remained the same"?

The Dean testifies only to those issues and concepts that suggest Microsoft has some competition. Well. Microsoft does not think so. Consumers know that is false. Yet, the Dean is paid to try to prove competition exists. So, he just argues that less than a maximum price must prove competition exists.

Well. Bull crap. Bill Gates did not say "we will have to drop the price of windows to keep competitors away". Oh. Hell no. He said they will just bundled IE and force consumers to buy the Microsoft version. In that famous quote to Mr. Clark, Bill Gates did not even say it would be "no charge". He only said "bundle". And, the difference is highly significant for an economists. Bundle implies Microsoft will force consumers to pay. "No charge" implies a predatory price. Of course, the Dean only sees the integration of technology ( a non-economic factor) when "he" hears that threat that Bill Gates made to the industry. Blind man for sure.

8:13 AM PDT - A monopolist can charge almost any price. There is no requirement that the maximum short-term price be charged.

q. You've been studying the pricing for approximately seven years; is that your testimony?

a. Yes.

q. And over that seven-year period, in your judgment or your analysis, has Microsoft ever come close to charging the short-run profit-maximizing monopoly price, using plaintiffs' assumptions about the market?

a. Never.

So what? Not having charge the short-run profit-maximizing monopoly price proves little. Not charging the price does not invalidate the analysis.

7:54 AM PDT - Certainly the entire difference between a full monopoly price and the different prices Microsoft charges is not due to a single factor

q. Now, do you believe that the suggestion that Microsoft didn't charge as much as it could have charged because it wanted to get the oem's to agree to the license provisions about which you testified on monday -- do you believe that's a plausible explanation of the pricing behavior that you have observed?

a. No. We're talking here about a difference of several hundred dollars a copy of windows, at least. And we're talking about licensing restrictions that weren't imposed until, i think it was august 1996. first of all, those restrictions, on their face, seem inadequate to explain a price difference of several hundred dollars a copy. But putting that to one side, let's suppose he's right and it really is worth several hundred dollars a copy for oem's. Well, Microsoft, when it imposed the restrictions, didn't make a price cut in windows. It didn't reduce the price of windows by several hundred dollars to make oem's swallow the restrictions. It didn't change the price of windows. so, again, if it really was worth several hundred dollars a copy, then we're faced with the conclusion that Microsoft must have been, for some other reason, leaving several hundred dollars a copy on the table prior to August 1996. it just pushes the implausibility back.

The different prices extracted from one OEM versus the other can be in large part attributed to terms. Certainly, they think so.

Mr. Schmalensee continues to ignore the testimony in this case. Microsoft witnesses say they ignore outside constraints. But, the Dean insists to the contrary. Evidence proves that Microsoft charges a different price based upon terms it can extract from OEMs yet the Dean trys to suggest that those terms do not explain the difference between a monopoly price and the actual price. Those are different concepts. The higher monopoly price is really just a measure of the monopoly power that Microsoft has. It is not an effort to prove what Microsoft would charge if it did not demand harsh terms from the OEMs.

There is no reason why a monopolist must charge the maximum price they could get away with. If they did, they could not bundle as well. A monopolist can set the price they want for whatever reason. In the computer software industry there are such things as magical prices. Prices over which consumers just begin to back off and complain. Historically, Microsoft has set a suggested retail price of around $200 for a copy of Windows. Comments coming from Microsoft suggest that they just stuck with that figure to not upset the consumer.

The price actually charged to OEMs is another matter. There Microsoft has absolutely used the price of windows to extract harmful terms for competitors. Some times it worked. Some times it did not. (IBM did not completely drop Os/2. Nor did it stop promoting Lotus and Netscape. But, IBM paid a higher price for not going along with the illegal terms demanded by Microsoft.)

And, of course, non of this is relevant to Dean Schmalensee because he is paid to conclude in all situations that no antitrust violations have occurred and Microsoft does not have a monopoly. And, he clearly ignores evidence in this case. It just does not matter much what he says because his conclusions are determined by Microsoft and have nothing to do with his expertise in economics.
 

7:40 AM PDT - Dean Schmalensee is either blind to the real world or is simply taking money not to see

q. And do you recall professor Fisher identifying any reason why Microsoft was leaving as much as hundreds of dollars a copy on the table?

a. Well, he suggested, at least at one point and perhaps at two points, that Microsoft might be charging less than it could so that oem's would tolerate first screen restrictions. That was the only hypothesis that i recall in his testimony as to what might be going on.

Testimony in this case is just filled with examples where Microsoft would take less money for Windows in exchange for the OEMs help to rub out a competitor. You just do not go to a distributor and ask favors beyond the normal transaction without offering a better price if they go along. In this case, Microsoft offered to give IBM favorable terms under the MDA if IBM would just stop competing with OS/2, Lotus and disfavor Netscape. In this case, Microsoft offered favorable terms to Compaq since they agree to do so. (Although it is going to be interesting to see how this play out over time since Compaq bought DEC.) Microsoft offered AOL the desktop in exchange for rubbing out Netscape. And, we do not have complete stories on all OEMs that Microsoft dealt with.

This economist completely ignores the real world in pricing analysis. He flatly ignores terms (some legal and some illegal) that are demanded of Microsoft in exchange for a lower price.

Instead he claims to suggest that Microsoft is not charging a higher price due to constraints that somehow only he can imagine. This despite testimony from Microsoft witnesses and documents that prove they did not in fact view any other constraints in their analysis.
 

June 24, 1999 - Thursday (Beginning with transcripts from Tuesday, June 22 AM)

5:26 PM PDT - Linux is a counter example and even it suffers from the lack of applications and significant barriers to entry

q. now, i may have asked you just a few moments ago, and i want to make sure that i made it clear. has your study of the level of investment and the nature of applications development with regard to Linux, led you to conclude that professor Fisher's positing of the applications barrier to entry is well-founded?

a. it's led me to the conclusion that it's not. i think Linux--Linux is an ideal test case for that theory. in fact, it's almost an extreme case because the sourcecode is open. there isn't a vendor with the same sort of proprietary interest in growing that platform as, say, Microsoft has in growing windows or the b company has in growing that platform. so, it starts with a small base of users, starts with almost no applications, and is difficult to use, frankly, in its early versions, and still it doesn't have the simplicity of windows. it shouldn't be able to grow under the applications programming barrier to entry. users shouldn't use it because there aren't applications. isv's shouldn't write to it because there aren't users. it's far from the most--it was, a few years ago, far from the most popular platform. fewer users than apple, certainly. why did it manage to grow? it managed to grow because isv's write for promising platforms where there are profit opportunities. there is no inevitable chicken-egg problem. there is certainly no evidence of it. and Linux, it seems to me, is a counter example.

The existence of Linux does not prove barriers do not exist at all. Again, the Dean insists upon an absolute barrier or else it is a non-factor. That is simply false, wrong and even silly.

There are thousands of consumers would love to use Linux right now. But, applications are not available for their needs. So. Does Linux prove the Dean is right? Absolutely false. Linux proves he is wrong. An enormous number of computer users can not switch away from windows if they wanted to. And, a very large number of users most likely do wish to switch.

But, they can not become Linux users simply because of this barrier which the Dean swears does not exist. It is not an absolute barrier. But, Linux got started by servicing the internet. Linux systems did not replace Windows systems. Linux systems got started by serving a whole new application. An application that did not rely upon GUIs or a whole range of applications. It started as a highly specialized operating system. Patterned after Unix but more importantly put to use by people who did not have to run existing applications designed for other platforms.

Linux is a unique case. But, the very existence of Linux proves that the general market for consumer systems is very hard to penetrate. It could only surface because it avoided the barrier that applied to OS/2 and Apple. Both of which have been around for a long time but are limited by illegal acts of Microsoft and the natural barriers present in the industry.

5:08 PM PDT - Microsoft does not bar applications not dependant upon the OS (unless it can monopolize the internet too)

q. now, you testified a few moments ago about web-centric applications where the web actually becomes the platform. are these sorts of applications relevant to the consideration of this posited barrier to entry?

a. absolutely.

q. and can you explain why, sir.

a. yes. applications that run on servers and are accessed by users over intranet--or internet, for that matter--have the feature that the client and the server need not be using the same operating system. so, i can write an application that runs on a server using unix, or some flavor of unix. you can access it and use it using sun's hotjava browser, if you happen to be running solaris, using the opera browser, using mosaic, using internet explorer, using netscape, using any competent browser that conforms to the necessary standards. so, there is no need for the applications writer to ask, "am i writing for an operating system that has many users?" the only question is: can i use this operating system to produce an application that will be attractive to people who communicate over the internet, who use any full-featured browser, any browser with the necessary set of features to access it?

the court: and is that being done now?

the witness: absolutely.

The court: for example.

the witness: well, i would have to pause to give you a list, but Mr. eubanks's was, i think, very clear that many developers are doing it. certainly aol and netscape are in the process. that's the connected client.

The court: can you give me some example of such an application?

the witness: sure. aol purchased the company--i hate to come back to calendaring, but it is a clear example. aol purchased a company that does calendaring software that resides on a server. now, how it plans exactly to offer that, i don't know, but it's not hard to see how that would work. if you're an aol subscriber, you turn on the system, you have a set of applications, set of things you can do. you can reserve tickets, you can check airline fares, you can check news. another button would be check your calendar. push that button. it would invoke exactly the program i get now from mit, but you get it from a server someplace else.

the court: the concept sounds to me very attractive. i can't imagine why isv's aren't writing applications of that sort in droves.

the witness: what Mr. eubanks testified to is, they are. Mr. eubanks didn't provide an exhaustive list, and i don't have one as i sit here, but i will happy, your honor, to provide additional information.

Microsoft should be careful in quoting Eubanks too much. He testified that competition benefitted consumers. Microsoft has never made such a suggestion. They have only suggested "their software" benefits consumers.

However, this testimony again points out how important this case really is. It is absolutely essential that Microsoft be prevented from illegally gaining a monopoly on the internet or even internet browsers.

Sure, there is a real shift to internet applications. And, for many applications the internet will provide a better service to consumers than a PC. And, it is absolutely essential that all competitive companies can participate in this process fairly and equally. That means that Microsoft can not be permitted to force any consumers to purchase IE. Period. All consumers must be given a fair option to leave IE at the store and purchase superior technology from any company they wish. That must apply to browsers and all related internet technologies.

Otherwise some idiot company like Microsoft will suppress superior technology and harm consumers in the process.
 

5:03 PM PDT - Java does not rely upon replacing the Windows OS

q. and if Microsoft is, in fact, protected by the only barrier to entry posited by the plaintiffs' experts in this case, why is sun investing so heavily in a platform that it knows cannot succeed?

a. well, either sun is throwing away money, or it has a rather different perception of the world than plaintiffs.

False. Sun is not investing in an alternate OS to Windows. They confirm the point that barriers to entry in the consumer OS market are just to significant.

Java is an alternate approach. It is a cross platform approach. Java does not need to replace Windows at all.

4:49 PM PDT- Barriers to entry does not mean an absolute bar

q. Now, i think professor Fisher testified that he saw netscape and java as examples of technologies that could--or firms that could help overcome the applications programming barrier to entry. do you understand his rationale in that testimony?

a. No, because if netscape is to--if netscape were to succeed in becoming an alternative platform, it would have to attract applications writers. if there were an applications barrier to entry, it would have to overcome it. if sun is to succeed in becoming a platform, sun has to attract applications writers to java, to pure java in particular. they don't--they're not ways of getting rid of. they're potential platform competitors who need to attract applications vendors. if there is a barrier, they can't do it. if there isn't, then they're potential platform threats.

The Deans suggestion that if there is a barrier competitors can not enter is a false one. But, this answer does explain why he claims no barriers to entry exist. What he apparently means is that there are no barriers which absolutely preclude entry. Well. Unless Microsoft has a world wide exclusive franchise like they want, that may be true. But, if that is the standard, it is false to conclude that its absence means no monopoly exists.

Well I suppose Microsoft was only trying to increase the barrier to entry by sabotaging Java and making it much more difficult for Netscape by forcing all consumers to first buy IE and depriving Netscape of revenue it might over wise use to overcome the barriers.

But, the evidence in this case is that Netscape failed. Netscape failed not in trying to market an OS. Netscape failed in marketing an application that Microsoft did not want anyone else to market. So. Microsoft precluded competitors even in markets it did not yet participate in.

From that I conclude that all software markets on the PC, at least, have an enormous barrier to entry. Even if it is an empty market. Any entry has to overcome the illegal acts of the monopolist, Microsoft. Microsoft will spent half a billion or more in R&D to prevent entry in any market it chooses.

That may not be an absolute bar either, but it sure is an illegal one.

I pity the sole who relies upon the Dean's advice. Microsoft knows better than to take it. At least not the advice he is giving to this court.

4:29 PM PDT - Sounds to me like if the reign is very long, you have barriers to entry.

the witness: no, you don't rely on benevolence. i am with adam smith on this. you don't rely on the baker's benevolence to get your bread. you rely on the market's constraints. you rely on a firm that says, "if i'm not good, someone will come in and take the business from me." and once--if a firm begins to think like a benevolent despot and isn't protected by barriers to entry, it will have a short reign.

Seems to me the Dean is all messed up on his thinking.

The Dean is paid to conclude that Microsoft has no monopoly. So he decides that the only way he can do that is to never see any barriers to entry. Then he can argue that no monopoly exists and the reign of Microsoft will be short, therefor no problem.

But, Microsoft has paid him enough money and forced him first to conclude that no monopoly exists and then try to prove the conditions under which that might be true.

The reality is that the reign is not short. The reality is that almost no ISV would invest in Windows development if they though it might be short. No Microsoft ISV could possibly agree with the Dean and still invest in Windows software. They have stayed away from Apple and OS/2 simply because they did not have confidence in the long term viability of those platforms.

The fact that Microsoft's reign has lasted for many years and has in fact strengthened proves that the dean is incorrect. Enormous barriers to entry do exist and can be explained. Not by a blind person. Not by an economist paid by Microsoft to find nothing.

Sounds to me like the Dean has proven enormous barriers do exist simply because no company has succeeded in breaking into the market and all the smart money knows better than to even try.

Illegal acts by Microsoft also place rather significant barriers to entry too. But, the Dean refuses to acknowledge those as well. The dean refuses to see an awful lot of the evidence in this case regarding barriers to entry placed illegally directly by Microsoft.

4:14 PM PDT - Microsoft Corporation should take the Dean's advice and stop producing development tools for Windows?

q. now, you talked about the ways in which developers of platform software encourage isv's to write applications. and one of the things you mentioned was the investment in development tools and in other sorts of technologies that make it easy for people to develop applications. can you explain what you meant by that.

a. well, to write--you know, we all say "write to windows." in fact, writing to windows means, as a practical matter, employing a programming language, producing a program, testing it in the windows environment, debugging it. and in particular, if you're working with a new version--with a developing version of windows, keeping the development of the application in sync, if you will, with the development of the platform. all of this requires software, and can be facilitated by software. programming languages, editing tools, debugging tools, testing tools, perhaps porting tools to make it easy to move across languages. all of those investments make a platform more attractive to developers by reducing the costs of producing a quality application.

q. now, does the fact that vendors of new platforms or developers of new platforms have to invest or may want to invest in tools and evangelization and other phenomenon you discussed a few minutes ago, does that constitute a barrier to entry?

a. no, no more than the fact that they have to invest in writing the code.

I really would like the Dean to estimate the amount of money necessary for a new unknown company to develop a consumer OS and get 10,000 applications going on it. Or, for that matter, a sufficient number of customers to avoid having their OS declared predatory because the price is lower that the costs for the number of sales they are able to complete.

This testimony is not even worth the courts time.

4:02 PM PDT - And, just how many applications does it take before an appreciable number of customers will buy our OS, Mr. Dean?

q. is that assertion consistent with the study you have made of the marketplace?

a. no, i haven't seen any evidence that says that the mere number of applications counts for much, counts for anything. these counts are of very heterogeneous entities. most people use only a few. that much, i believe, is very clear. and exactly what a software platform needs to be successful, it's certainly not thousands of applications, but is a set of quality applications that will meet the needs of an appreciable group of users.

Well. It is not the mere number, Dean. You misunderstand the issue. You need thousands of applications such that your customer base is more than just a few users.

Most users only need a few applications. And, clearly no one needs 1000 applications. But, if you are a dentist, you need a dentist billing package. If you are a lawyer you need software for the law practice. If you are an economists, you might need statistical packages, etc. And, if you are a business you might need word processing and at least one industry specific application.

On one industry is going to have enough customers to support a specific OS that does not also have applications for a whole range of other industries.

The question asked whether he conducted a study of this marketplace. Since he has offered none, I assume not. Clearly if the Dean wants the court (or anyone for that matter) to accept his view that a large number of applications are not required, he is free to try to prove that.

Linux is an exception to the rule as far as getting a start is concerned. It has an excellent start as an internet server primary because of the interests of many of the early people in the internet industry. But, dentists can not use Linux until an application is available for their use. Neither can candlestick makers. Neither can the thousands of other users currently on Windows with their own selection of applications.

I guess the Dean just knows he is lying in this case. So, why bother trying to fabricate evidence. He will just conclude that the concept does not exist.

3:53 PM PDT - The Dean has the solution to the applications barrier to entry in the OS marketplace - sounds pretty simple

q. can you tell me how the chicken-and-egg problem gets solved in the real world.

a. it gets solved in the real world in a number of ways. they involve investing--investments by software vendors, by platform vendors, in providing information to developers in what's called commonly in the industry "evangelization," but it goes deeper than that. it's providing development tools to developers. it's involving developers in improving the platform. one of the things, for instance, with Linux, which is, if you think about it, if the Linux platform doesn't have a feature that a particular applications writer would like, the applications writer can put it in, subject to some constraints. Microsoft doesn't operate quite that well, but--that way, but it talks to developers about what features they would like in view versions. other applications, operating system and platform vendors proceed the same way. they involve developers, they invested information, they involve them in the design process, and work to improve the functionality of the platform.

Oh. I see. But, Dean, start at the beginning. In the beginning, you have no one who writes to your platform.

Dean's suggestion only applies to a very large company already intrenched in the business who is not otherwise blocked out of the market via illegal antitrust activities conducted by a monopolist.

Is the Dean really this simple minded or just ignorant?

IBM is not going to learn from this answer. BeOS is not going to learn from this answer. Caldera is not either. They have to sue Microsoft first and get Microsoft Corporation out of their illegal practices first.

Everyone else in the industry knows this answer is garbage.

3:17 PM PDT - The Dean just concludes there are no barriers to entry. Problem is the whole industry disagrees.

q. let me turn your attention, Dean schmalensee, to plaintiffs' monopoly power analysis specifically, and in particular to their analysis of barriers to entry. can you explain first, generally, what role analysis of barriers to entry plays in an analysis of monopoly power.

a. without a barrier to entry, there can't be long-term monopoly power. by definition, essentially, without some impediment to competitive entry, any monopoly power that might be present is transitory, is short-term.

And, do you suppose if the rewards of selling millions of copies of an OS is great but not one major company wants to enter that market than maybe just maybe they think the Dean has lost his marbles?

My guess is that the Dean testifies this way simply because he is paid to do so. To be honest I can not think of any other reason. There are hundreds of venture capitalists that must be laughing at this guy. And, there are hundreds of major corporations laughing at this suggestion. And, there are thousands of Microsoft ISVs that avoid entering the market (any market) with Microsoft.

Why? Does the Dean really think no barriers exist? Highly unlikely. He himself testified earlier that bundling the browser and other technology raised the bar for competitors. But, then he claimed that was not the same as barriers to entry. Bull.

q. and how many barriers to entry have the plaintiffs and their economists identified in this case, sir?

a. well, they may have mentioned more than one, but the only one that i have seen analyzed or discussed at any length is the so-called applications program or programming barrier to entry.

Well. You can not buy an OS if no applications are available for it.

q. and can you explain your understanding of the nature of the plaintiffs' contention that there is such a barrier and how it supposedly protects Microsoft's, in their words, operating system monopoly.

a. plaintiffs and their economists pose it as sort of a chicken-and-egg problem that would face a potential entrant. the argument is that independent software vendors won't write for a platform unless it has a large number of users. and, of course, it is difficult or impossible for a platform to obtain a large number of users, unless it has a large number of independent software vendors writing for it. therefore, of course, according to this analysis, no new platform can ever grow, can ever enter. its independent software vendors won't support it. without applications, it can't grow.

Well. Line up the ISVs who write for the Windows platform simply because it is the most prevalent. Some use other reasons. But, almost all of the Microsoft ISVs choose windows for this very reason.

q. just to make sure the point is clear, let me ask you to take a look at professor Fisher's testimony from the afternoon session on june 2, at page 21, line 3, and ask if you, Dean schmalensee, could read into the court the question and answer that begins on line 3 and concludes on line 7.

a. certainly, (reading): "question: and just so it's completely clear, the applications barrier to entry, you said, was the principal or dominant barrier to entry that protects Microsoft's, in your words, monopoly; is that correct? Answer: yes."

q. and just so it is completely clear on this record, Dean schmalensee, what is the implication of that testimony for this case if one is able to demonstrate that there is no applications barrier to entry?

a. if there is no applications barrier to entry, there is no monopoly in the sense normally used in antitrust context--in an antitrust context. there is, at most, transitory market power. there isn't monopoly that has durability.
 

So the dean in all his wisdom decides that he will prove Microsoft has no monopoly by refusing to acknowledge barriers to entry? If there are absolutely no barriers to entry, that might be the case. But, nobody believes the Dean when he claims no barriers exist. Everyone in the industry knows that the opposite is true. Real, significant barriers do exist. And, as a result almost no body even attempts to enter. BeOS may be the only brave sole out there. Linux almost counts but Linux is a free product.

q well, let me ask you, then: do you believe there is an applications barrier programming--an applications programming barrier to entry in the market as plaintiffs have defined it?

a. well, of course, this barrier applies, by its nature, to platforms. this has to do with platforms, so it doesn't, strictly speaking, relate very nicely to the market as plaintiffs define it. it's a broader concept. but the answer in either case is no.

The whole industry laughs here. If nothing else did it, this statement invalidates the Dean's entire testimony. If he does not understand this concept, he really should ask someone.

q. can you explain to me initially in broad terms, or explain to the court in broad terms, why it is that you and professor Fisher so fundamentally disagree on the existence of this barrier to entry.

a. that seems to invite a rather deep level of analysis, and i'm not sure i can address it in adequate depth. let me do what i can.

Well. It is not just Fisher that disagrees. Try the entire computer software industry.

It is deceitful to even suggest here that Fisher is the problem with the disagreement. It is common knowledge.

q. okay.

a. i have tried to concentrate on what i see in the marketplace, and the facts are inconsistent with that story. it's a very nice, tidy theory. it explains why no one can ever grow a platform. and, of course, it explains why no one would ever try, because this being a well-known phenomenon, that you can't--you know, you can't have the chicken without the egg, you can't have the egg without the chicken, so therefore it's impossible, has all kinds of implications about how applications writers behave, what happens to new platforms. it just has a whole host of applications that seem to me absolutely inconsistent with the facts. it's a good theory. it's just wrong.

And, this explanation is supposed to convince the board of directors to invest millions in R&D for a consumer operating system? This answer is completely devoid of any understanding of the computer software industry.

My guess is that Gordon Eubanks refused to answer this question for Microsoft. Clearly, Symantec is company whose expertise would put it into a position to enter this market if they though it was remotely possible. (I think they even bought DESQview.) Yet, the answer is so obvious and so well understood by the industry that even Gordon Eubanks, the good friend he is with Bill Gates, would most likely refuse to answer that question or try to convince the judge that barriers do not exist for entry into the consumer OS marketplace.

I find it amazing that Microsoft even bothered to tell the Dean to say this in court.

3:01 PM PDT - Again, the Dean is making up evidence. Testimony and documents in this case disprove his suggestion

q. now, just to follow up briefly on the discussion you had with the court a few moments ago on the notion of web-based or network-based applications, professor Fisher has suggested that the development or the prospect of such technologies do not affect Microsoft's pricing or its behavior because they're not fully developed today, and they do not involve pc operating systems specifically. do you agree that that is the appropriate way to divide a market or to analyze competition?

a. certainly not in this business. we've all seen a lot of Microsoft internal discussions of its environment. now, it is impossible to read those without coming to the recognition that Microsoft, like any well-managed firm in a technology business, looks down the road and tries to do what it can to deal today with what's likely or possible or frightening about tomorrow. so, today's behavior is clearly constrained by and shaped by the future. or expectations about the future, let me be a little clearer.

Well. The Dean is paid to view future competition as real because that is the only kind of competition Microsoft has.

You could evaluate future competition, but Microsoft said basically that they considered no other operating system when they made pricing decisions.

It would be improper for the court to consider future speculative competition when Microsoft itself did not.

Does Microsoft look ahead when it decides whether to bundle or combine products? Sure, I suppose. But, remember, IE 5 was just released as a stand alone application. No price was put on it. Not even $1.50. But, if you buy any Microsoft product you must buy IE too.

Microsoft has made IE a prerequisite for all of their products whether those products relate to the internet or not. And, they have brown nosed a number of other companies to force the same arbitrary pre-requisite.

So. Are internet applications important in the future. Yes. And, Microsoft is using every ounce of it's monopoly power to make certain no one competes for that space. They are not very happy that AOL has not been frozen out. And, they are not very happy that Sun has not been frozen. But, they tried and continue to try to make absolutely certain that no competitor can market a browser or any related technology unless they approve of it. No exceptions. Even if you are IBM you are disadvantaged unless you go along.

2:46 PM PDT - Operating systems do not serve user's needs, applications do

q. And i would like to focus on what i believe is the seventh line in the first paragraph, the paragraph marked "internet." and you will see a sentence that begins, "we think the big challenge to Microsoft, Microsoft's operating system franchise, is that there would be many computers that are not running windows that are simply net devices on which aol could effectively be the operating system." do you see that?

a. yes.

Well. Alternate operating systems should right be given every opportunity to run applications that serve users. But, Microsoft needs to come up with more than ghost stories.

q. is that statement of opinion by the merrill lynch analyst who followed this sector consistent or inconsistent with what you have seen in aol's documents about aol's business strategy?

a. that's quite consistent.

Great. In the future competition might surface. Perhaps we should pass some laws now so that monopolies who currently dominate the market are prevented from using their raw power to preclude new competition? (Oh, we already have them. Microsoft just ignores those laws.)

q. and is it consistent or inconsistent with the way you have chosen to analyze competition in this case?

a. well, it's consistent with my understanding of the way competition is developing in the marketplace, and thus with the way i have chosen to look at it, yes.

Well. Future competition does not count. Only real products that consumers can buy instead of Windows count. Any service that still requires the consumer to buy Windows will never count.

Microsoft is trying to confuse the operating system with applications. Only applications serve the user. Operating systems do nothing. All they do is run the applications.

q. and is the proposition or the expression of merrill lynch's opinion that the big challenge to Microsoft's operating system franchise comes from aol and similar firms identified later in the document, is that consistent or inconsistent with the manner in which the plaintiffs' economists have chosen to define a market in this case?

a. it's inconsistent, because, of course, aol does not now produce an operating system. and as this is written, there is no indication that aol plans to produce an operating system. it does, however, plan, according to this and the documents i have seen, to be the effective--to effectively be the operating system. so, strictly speaking, this does not suggest that there is even a contemplated production of an operating system, but there is, on this opinion and consistent with the aol plans, a planned challenge to Microsoft.

AOL might have such a plan. IBM may have such a plan. Hp might have such a plan. Symantec might have such a plan. Thousands of ISVs might have such a plan. It is the duty of this court to make certain that the antitrust laws are applied such that those plans have a fair chance of succeeding.

Microsoft incorrectly assumes they have a right to harm consumers by suppressing technology from other companies. They do not.

2:32 PM PDT - But, Dean, that will not be a constraint if Microsoft holds the monopoly on browser technology

Mr. lacovara: i would like at this time, your honor, for the witness to be shown defendant's exhibit 2785, which is a document prepared and published by merrill lynch, the investment bank, entitled "technology bits and bytes," dated 7 june 1999.

the court: before you do that, would you have him, because i'm anticipating it, have him identify the third future constraint?

Mr. lacovara: yes. this one goes specifically to aol, but the third future constraint i would ask the Dean momentarily are the subject on which we had some discussion, which is internet-centric and web-centric applications.

the court: okay.

Again. This testimony points out the important of preventing Microsoft from using its monopoly power to gain yet another monopoly position (browsers). Suggesting that the internet is a constraint to Microsoft when Microsoft forces all consumers to buy IE is rather stupid.

Would it be a constraint if Microsoft were prevented from offering a browser under any circumstance? Yes. Then it would be a constraint.

Maybe the court should consider that as a remedy in this case. Preclude Microsoft from internet technologies just to make certain they always have some competition.

Remember antitrust law is designed to protect competition.

Strangely enough every instance in this trial where Microsoft tries to point out a threat, what they are really pointing out is a benefit to consumers.

Microsoft characterizes consumer benefits as "threats". Competition is a threat to any monopoly. And, that is why the laws protect it.
 

2:13 PM PDT - Microsoft wants to expand the market to cover the internet too?

q. Dean schmalensee, just to complete our discussion of market definition, i want to ask you a couple of questions about two other long-term constraints on Microsoft's behavior that you've identified. the first of those is aol and portal sites generally. Do you recall yesterday i displayed a document that talked about aol becoming a de facto user environment in the, in your words, effective operating system?

a. i recall seeing something to that effect. i have certainly seen such phrases in aol documents.

q. and can you tell me how, to the extent the documents discuss that phenomenon or the intentions of aol, that you believe constitutes a constraint on Microsoft's long-term behavior, or long-term constraint on Microsoft's behavior.

a. well, to the extent that aol follows through on the strategy, as i understand it, it would become an environment that--in which a user would spend most of his or her time, perform most of his or her computing functions. i guess in some sense be a--be a more comprehensive environment than, say, communicator is. such an application in which the user would spend most or all of his or her time, would, if it ran across operating systems, perform the sort of function that plaintiffs have been talking about. it would render the operating system less important. it would be the entity that developers sought to augment. it would be the entity that consumers felt they had to have to function. that's a direct threat to Microsoft's platform position.

q. and your testimony about aol's intention or just the documents that you've seen that suggest that aol intends to become de facto user environment and to embed productivity applications into its service, do you understand that to be limited to aol or a broader phenomenon for portal sites and portal operators?

a. oh, it's my understanding that, again, there is a general movement among portal operators to expand the amount of time that users spend in their environment. it's a somewhat different, though closely related phenomenon, Mr. lacovara. with portal sites, the notion is one adds functionality to the site to the server, as it were, and the notion would be that the user would spend most of his or her time connected to the site, performing various functions.

the court: that means on the internet?

the witness: on the internet, right. but on the internet connected, say, to netcenter, where one might keep one's calendar. one might have rough drafts of documents stored at netcenter.

the court: can you do that?

The witness: there are software offerings that have that capability. i would say nobody has gone as far as one reads that some intend to go. but certainly there is calendaring software that functions that way on the net.

the court: does anybody who has access to the net have access to your calendar, for example?

the witness: no, no, no. you would want to password-protect it. i don't know the system. i know the mit system which runs on the mit server--and i can analogize to what it would look like if it were not setting at mit but were sitting at netcenter. There are a lot of people who have access to the mit intranet. only a small number have access to my calendaring information, and i control that. the system sees sort of who they are. i don't know if they have to use--yeah, they do have to use password.

the court: contemplating a situation where a pc user would do routine type functions on the server, the server? for example, following a stock portfolio?

the witness: well, that happens now. if you want to track your portfolio using quicken--i don't do this, some do--you can use quicken. quicken has a web site where, again, you go to quicken--you go to the web, you start quicken, you ask quicken to check your stock. quicken uses the IE functionality of windows, goes to the quicken web site, and gives you the information on your stock. that is, as i understand it, is today.

the court: okay.

the witness: and you can use the quicken web site, i believe, to do things like calculate mortgage payments and so forth. i have looked at the site. i haven't done this.
 

the court: word processing?

the witness: i don't know if anybody offers that. there is no reason why you couldn't. and some may, your honor. i don't claim to follow all the details. it's a very rapidly moving field. but it would have the advantage that instead of having to carry around a laptop with all your files, you could carry around a smaller device, the files would be on the web, or would be on the server, or as people point out to me, i'm about to take a trip to china, it would be nice to have the files in cambridge and be able to access them from china from a hotel computer, not have to carry mine. that would be an advantage. it's certainly feasible.

the court: okay, thank you.

I know that Microsoft is bringing all this up hoping to fabricate competition.

Microsoft characterize competition as a threat. Well. That is fine for Microsoft. But everything that Microsoft identifies in that way is a benefit to consumers. Microsoft's interests and the consumer's interests are diametrically opposed. All this new competition would help drive down prices and expand services. Yet Microsoft incorrectly labels them as "threats". Those are benefits to consumers. The fact that Microsoft labels them that way proves they do act in the interest of consumers. They only act in their own financial interest.

This Q&A also points out why it is so important that the remedy in this case guarantee active and real competition for not only browsers but all internet related services.

The absolute worst scenario is to permit Microsoft or any one company to dominate browser technology or anything even close to internet services.

Microsoft thinks it should be able to use its raw monopoly power to preclude competition from Netscape, AOL, Sun, Real Networks and everyone else including those ISVs who publicly favor Microsoft. The ISVs in particular are wrong. All ISVs should be dead set against any domination by Microsoft. They may not be today because they think they are riding the coattails of a monopoly. But, all they are doing is suppressing their own potential.

All ISVs, OEMs, ISPs in the industry should be sitting in the chairs behind the DOJ hoping that fair competition is restored to this industry.
 

1:55 PM PDT - Linux does disprove a lot of the garbage that Microsoft has been saying

q. now, Linux, as i think Mr. maritz testified, is an example of the open-source movement. have you studied the open-source movement in preparation for your testimony?

a. I have studied it a bit, yes, sir. it is a fascinating phenomenon.

q. is it one that you think poses long-term competitive constraints to Microsoft?

a. i think it does. the most striking example--Linux is one striking example of the source--the success of the open-source movement, but the most striking example is the apache web-server software. this is an open-source product that is the leading web-server product. it has more users than Microsoft's products, more users than netscape's products. and it is not produced for profit. it is produced by a group of worldwide group of volunteers operating on the web. Linux is a similar endeavor. there is a loose connection and interesting governance structure that basically pulls together a set of volunteers. to an economist, it is a little bit surprising that this works, frankly, but it does seem to work. Linux's testimony to that, apache's testimony to that, and the movement has strong adherence. that's an incredible threat. this is entry into complicated product categories with successful products, without capital investment. quite extraordinary. and made possible by a number of things, but importantly by the development of the internet, which permits this kind of wide-ranging yet highly effective and rapid collaboration. so, this is a fascinating development.

Fascinating yes.

Linux proves that GUIs do not need to be bundled with the OS.

Linux proves that more than one GUI may be appropriate for an OS and offer real advantages to consumers.

Linux may prove that the price for Windows is too high.

Linux proves that a browser does not need to be bundled with the OS.

Linux proves that the browser does not need to be developed, written, nor sold or supported by the OS maker.

Linux may also prove that the only way for non-Microsoft products to exist in this industry is for them to be free. (Navigator and Linux)

Linux may prove to be a long term constraint but documents in this case show it was ignored or laughed at by Microsoft so far.

And, I think Linux proves that the barriers to entry in the business are not technology in nature. The barriers are directly related to illegal acts by a dominant or monopolist supplier who will readily violate almost all law if it means precluding a competitor.

And, I think Linux proves that new products that might compete with Microsoft are limited to zero revenue products. In other words, it does not only take a few programmers and some money to pay them. The industry is so unbalanced that it takes a whole bunch of people who are willing to contribute without compensation in order for the technology to be distributed.

I think Linux pretty well proves that the Dean is all washed out. It is seems to disprove just about every silly argument Microsoft has made in their effort to justify their illegal acts.

I really think the Linux movement should take the trial testimony from the Dean and use it for promotional purposes.

1:45 PM PDT - Linux might be competition, but Microsoft material proves they ignore it during pricing - the Dean is making things up

q. now, i would like to review with you briefly three of the phenomena or products that you have identified as long-term constraints on Microsoft's pricing and innovation decisions, and i would like to start with the Linux operating system. in january, professor Fisher called Linux a joke. do you share his view?

a. no. serious companies are investing serious money in the Linux environment.

q. and can you review very briefly, Dean schmalensee, your understanding of what is going on with the Linux operating system and the investment to which you just testified and how that constrains Microsoft's behavior.

a. it's a challenge in deciding which order to go through this, but the system--the operating system is gaining popularity among users. number of users continue to rise. Linux has attracted support from more oem vendors. to be sure, as it was in january, penetrating more on the server side than on the desktop side, but there is increased penetration now on the desktop. dell, I believe, offers Linux pre-loaded. IBM is supporting Linux. other large vendors are supporting Linux in desktop systems, not to mention a whole host of smaller firms that are pre-installing Linux and hope to become large firms as a result of the success of that environment. Linux continues to attract application writers. wordperfect runs on Linux. corel has talked about and, i guess, has planned to move its office productivity suite on to Linux. other vendors, i think oracle, perhaps, but other substantial vendors have applications for Linux. there are a couple of office suites already available for Linux that have been widely reviewed and well reviewed. the two--one of the interesting issues with Linux has always been ease of use, and that issue is being increasingly addressed in two ways: first, by vendors shipping--oem's shipping Linux pre-installed, which deals in part--which deals with Linux's traditional difficulty of installation; and second, with the development of a couple of graphical user interfaces that makes Linux more attractive on the consumer side. and finally, i guess i would just mention on the side of capital markets, again, the list of investors in Linux hardware producers like va research or Linux software vendors like red hat or caldera, is almost a who's who in the technology arena with intel being an important player. So, capital is plainly flowing directly into applications, hardware development. it's flowing into people who provide Linux packages. there are graphical user interfaces that are being developed. it is still--to be sure, it has a smaller number of users and applications and developers than windows, but that number is growing rapidly.

I wonder if Microsoft would mind if RedHat uses this testimony in this court of law for some of its advertisements?

It might be that Linux might constrain Microsoft price in the long run, but in this trial evidence only shows that no other systems did that.

1:31 PM PDT - Well. A monopolist does not need to wait to recoup at all.

q. and just so it's clear, when does the recoupment process begin under antitrust theory and antitrust cases with which you are familiar?

a. when the prey has been removed from the market, or more precisely, when the prey's assets no longer pose a competitive constraint on the competitor.

Yes. Recoupment could occur later. But, a monopolist does not need to wait. Windows can be price high while IE is given away.

If that recoupment is not fast enough, they windows can be raised in price. I love how this economist always uses examples and model where competition exists. The situation is not the same for a monopoly market. There are not even close.

Is the price of Windows high or low. Well. The Dean always says low and then goes on to say that is proof of competition. But, it is not. If it was competition, a consumer could buy one of those other ghost units, right?

The real question is "what would be the competitive price?". You know, sell the windows code base to 6 or 8 major players in the industry and let them compete price wise and quality wise. What would it be then? Well. Bill Gates is afraid of that "commodity" price he always refers to. The commodity price would truly benefit consumers.
 

1:12 PM PDT - But, Microsoft Attorney, Microsoft is not charged with a predatory price for Windows.

q. Dean schmalensee, is there anything unique to operating systems or to software about pricing low to deter future entry?

a. no.

q. now, do consumers benefit if Microsoft prices low because of the fear of entry?

a. absolutely.

(Only preditory prices are considered to harm consumers due to the removal of competition in the long run.)

q. and just so it's clear, is pricing low, even if its intention is to deter entry, is that the same as predation?

a. no. predation, as generally defined, involves incurring losses. a program of incurring losses to deter future entry one might call predatory. it's an interesting hypothetical. but a program of pricing low, particularly when that low price is plainly profitable, is not predatory, by any reasonable definition.

Microsoft is not being charged with pricing windows too low.

Microsoft is being charged with pricing IE too low. Of course since they are bundled, you have to be real careful what you try to prove. Microsoft tells consumers that IE is free to fool them. Then Microsoft tries to avoid the predatory rap by suggesting some source of money to cover that half of a billion dollars in IE. Well. Guess who pays that? Consumers. But, is it in an overpriced Windows? Or a fairly priced windows bundled with a fairly priced IE? Well. We do not know for sure. Microsoft will not say.

Low prices is not the problem. Zero prices are. (Notice how Microsoft has not even offered any evidence to cover the absurdly low cost figure of $1.50.) So, even if you accept the Dean extremely low cost figure of $1.50 a copy for IE, the price is still predatory. They have not proven sales will increase because the browser is included. How can it. Everyone has to buy Windows whether or not it has the browser.

The zero price may have ruined the market for browsers and therefore the monopoly lives on for a few more years, but that is monopoly money. Anything that furthers the monopoly may be illegal.

1:06 PM PDT - Microsoft's own witnesses disagree with Dean Schmalensee on pricing constraints

q. how is the existence of the platform threats that you've identified, how does that constrain Microsoft's pricing of its operating system?

a. in the real world, in this business, Microsoft responds to actual and potential competition--it historically has--responded to actual and potential competition by improving the quality of its platform and trying to have its platform used widely. one of the ways it does try to have its platform used widely is to hold the price down. i think there is really no alternative to the--to that explanation for Microsoft's pricing policy, that the threat of future competition, the presence of current competition, requires Microsoft to innovate rapidly, to evangelize and so forth with the independent software vendors, to invest in product improvement, to invest in persuading software vendors to use its functionality, and to try to grow the platform, make it better, make it more popular. holding down price is part of that.

Testimony and documents in this case prove that Dean Schmalensee is incorrect in this answer. According to the documents, Microsoft considered no other operating system in making its pricing decisions.

The Dean is just making up facts to fit his false world.

12:57 PM PDT - Just who does Microsoft think is going to believe that Microsoft bundled IE in Windows to compete with OS/2?

q. and to focus on the examples you just raised, did Microsoft wait until there were commercially available browsers in the mass market before it started developing its own browsing technology?

a. no. at the very latest--i mean, there is obviously--there is obviously a dispute about what decisions were made when. but certainly, when IBM announced that it was going to include browsing technology in os/2, it would have been foolish for Microsoft to say, "well, but they haven't done it yet, let's wait until they do." the evidence i have seen suggested that Microsoft reacted as one would expect the company to react to an announcement like that from a major competitor. "let's move forward on our own." indeed, they were doing it at that time.

Was Bill Gates thinking about OS/2 when he threatened Mr. Clark with a bundled browser should any company enter that market? I doubt is anyone believes that. (Maybe that is why Microsoft tried to get IBM to drop OS/2? Because it had this great browser with it?)

12:47 PM PDT - Microsoft is constrained how?

q. and how is it that the competitive threats and challenges that you have identified constrained Microsoft's behavior in terms of product innovation?

a. Microsoft clearly saw the emergence of the internet as an opportunity, and it somewhat later saw the emergence of netscape's browser--very popular, very good browser--as a potential--as the nucleus, if you will, of a potential platform threat. both, i think, plausibly affected--certainly the first affected, but plausibly the second did as well, the vigor with which Microsoft pursued product improvement related to the internet.

Huh? How is competitive product development a constraint on Microsoft? Would they have design poorer systems but for the "threats"?

Does this mean that the Dean thinks that Netscape made Microsoft invest all of those R&D dollars?

Sorry, Dean. But, that idea is not a constraint on Microsoft.

I guess the dean calls all competition a constraint and all illegal acts of Microsoft competition?

12:25 PM PDT - Possible constraints do not define markets -

q. now, in defining a market, do you believe it is appropriate to focus only or primarily on the full-dress substitutes to windows 98 that are available to pc oem's at this moment or in the very short term?

a. no. the focus of competition in this business isn't on production capacity or things of that sort. it's on product development. and what's available now has to do with products that were developed in the past. the current competition has to do with products that are being developed for the future. so, to merely say, as plaintiffs' analysis would seem to suggest, netscape doesn't produce an operating system; therefore, netscape is not--does not now produce an operating system; therefore, netscape doesn't constrain Microsoft, is to fly in the face of the realities of this case, which is that Microsoft regarded netscape as a threat, and reacted.

The Dean does not like the idea of a consumer OS market. Microsoft has a monopoly there. Clear as day.

There may be competition on product development, but that does NOT define markets for antitrust purposes. The Dean might wish that were the case, but it is not.

Neither does the market include products developed in the past. (Besides, all those products have Y2K problems and can not be used shortly, right?

Does Netscape constrain Microsoft? (Assuming constraints defined markets, which they do not.) If the Dean wants to suggest they do that is fine. But, no evidence in this case seems to prove that at all.

Microsoft saw the browser as a threat but that is not same as a constraint. And, acting illegally to remove a constraint is not justified either.

Microsoft still thinks it has an absolute right to its monopoly. It does not. Nor is the consumer OS market expanded by Microsoft visualizing future competition.

Possible constraints are not the same as competition. Mainframe computers certainly act as constraints on Microsoft as much or more than Java and Navigator. But, mainframe computers are not competitors to consumer PCs. Why? Because the consumer can not buy them. They can buy a PC or communications terminal and access them. But, they are not in the same market.

There is one more observation that needs to be made on this topic. Microsoft is free to compete head on with Java with its own run time environment that works on all platforms. That is called competition. Microsoft is free to write a browser and sell it as an application on one or more systems. That is called competition. What Microsoft wants to do and they really really want to do this is to leverage their monopoly power to eliminate competition. If they only wanted to compete fairly, nothing stops them. They can write a middleware product that runs on all platforms just like Java does. They can write and sell an internet browser.

But. Microsoft does not want to do that. They want to insist upon their ability to cheat.
 

12:01 PM PDT - Cars and buses are not in the same market even though they do compete in part for similar services

q. you have an opinion on that testimony, sir?

a. it doesn't make sense to me. sun and netscape, as i understand everything that plaintiffs and plaintiffs' economists have said up to that point, were platform threats to windows. now i'm told they don't threaten windows at all, but in some sense they are vehicles for other unidentified threats, operating system threats to windows. and i simply don't understand--that view of the world does not reconcile easily or at all so far, in my mind, with the world as i see it.

q. now, when an isv writes an application to sun's java runtime environment, is java competing against windows in the sense indicated in the plaintiffs' complaint that windows is a platform?

a. yes. sun would like isv's to write pure java so that their applications can run anywhere, in principle. Microsoft would like isv's to design applications that would run on windows. it matters to those companies what choice the isv makes, assuming it's a good application.

q. now, assuming, Dean schmalensee, that netscape and

Cars and ferries are not in the same market either.

Microsoft wants to define its markets based upon all possible products that might compete with it. It if bundles IE then it wants to count all possible browsers as competing with windows. It does not work that way. Consumers can not buy a browser instead of an OS. If Microsoft thinks Java is a threat, then it wants to define the market to include everything related to Java. It does not work that way. Java does not substitute nor replace any operating system.

Java and operating systems do compete for developers. But, developers are not consumers. There is no market for "eye balls". Microsoft wants to define the market based upon all possible alternatives to the full windows package.

Sorry, Dean. But, that suggestion really makes no sense.

Lay consumers know better. The Dean aught to visit a computer store. Hint: There is your market.

Phones substitute for cars, right? As phone get better and cheaper, consumers need cars less. Too bad. That does not put phones into the same market with cars. Ferries are not in the same market as cars. Ferries carry cars just like operating systems run applications. But, it makes no sense at all to combine ferries with cars in a single market. Likewise it makes no sense to combine Java in the same market as operating systems. Neither does it make sense to combine internet browsers or any other middle wear with operating systems.

Does one reduce the dependancy upon the other by consumers? Sure, or at least they might. But, they do not substitute.

11:44 AM PDT - Vague competition does not create substitutes for products.

q. now, do you understand professor Fisher or dr. warren-boulton to quarrel with the proposition that netscape and java posed, at least in their words, competitive threats or competitive constraints to Microsoft?

a. no, i believe we are in agreement on that.

q. and you do understand professor Fisher and dr. warren-boulton define the market in a way that excludes at least those two firms; is that correct?

a. yes.

q. now, professor Fisher testified that his market definition of approach was--i believe his word was "standard." do you agree that the approach taken by the plaintiffs' economists is standard?

a. i think the standard approach in antitrust economic analysis--let me stop there. the answer is no, and the elaboration is i believe the standard approach in antitrust economic analysis is to identify the competition that's at issue, to look at the arena in which that competition occurs; and if it is sensible to treat that as a market, to do so; if it is not sensible to treat that as a market, to nonetheless maintain a focus on the competitive interactions at issue.

Let's identity the competition that is at issue: Operating systems. What are the choices? Windows.

What about Java and Navigator? You still need to buy Windows or some other OS. But, no other OS is available to the consumer.

Look at the arena in which that competition occurs: The computer store down at the corner. This is a consumer OS marketplace, afterall.

Is it sensible to treat the consumer OS market as a market? Absolutely. Hundreds of millions of shoppers show up and can only buy from the choices they see. But, the Dean does not think the consumer computer market exists? Or, it is not fair to treat it as a market?

It is the only place consumers can go. How else does the Dean suggest a consumer buy a computer if they do not go to that marketplace?

It is absurd for anyone to suggest that the consumer OS market is not sufficiently defined. It is defined both in the physical sense and in a very large number of transactions within carefully defined limits.

This witness just refuses to testify. He just does not like the obvious and only answer.

11:27 AM PDT - Netscape and Sun do or did require Microsoft to respond. But, Microsoft chose illegal means to do so.

q. so, to follow up on that response, Dean schmalensee, is it your opinion that netscape and sun, and sun specifically through the distribution and development of its java environment, that those firms constrained Microsoft's behavior?

a. absolutely.

q. just so it's clear, where an economist in an antitrust case talks about constraining behavior, what is it that you mean, sir?

a. it means that it affects business decisions. it was forced to compete more intensively by lower pricing, by more intensive promotion, by more intensive product development, but that required a competitive response.

I really like this answer, "absolutely". When this witness is asked to comment on illegal acts by Microsoft and how that might restrict competition his answer is always "no impact". But, when asked if Sun and Netscape made Microsoft respond, his answer is absolutely. Well. The evidence from Microsoft suggests that no competition was considered in making pricing decisions for Windows 98. So, I guess the Dean's "absolutely" is a bit fabricated for the moment.

But, the real observation is that none of the activity engaged in by Netscape or Sun is considered to be illegal. And, whether Microsoft thought it had to react or not is not relevant when it comes to testing the legality of those acts.

In other words, you do not get to violate antitrust law just because some competition might appear on the horizon. Microsoft wants you to think that its acts are justified due to possible competition from Sun or Netscape. They are not. Nor do other technologies that might compete down the way with windows attention by developers expand the OS market into everything that Microsoft thinks might compete with it.

Windows with a browser might compete with the Netscape browser, but Navigator does not compete with Windows. Navigator requires Windows or some other operating system.

How Sun and Netscape constrained Microsoft's behavior is beyond me. Did they not raise the price for Windows to $400 because of Java? Maybe, but we see absolutely no evidence of that in the record despite Dean's claim to have regained his eye site. Have they dropped the price of Windows and just bundled IE in order to keep the price the same? Perhaps they did. But, I rather doubt Microsoft is going to adopt my suggestion that the OS costs $60 and IE $140 per new license, right? That would be a "constraint" as far as the price of windows goes. But, then they bundled IE without any worry about their prices scaring off customers.

If the Dean is going to suggest that Microsoft was restrained in any way due to Netscape and Sun competition, he better offer some proof. (I have not read ahead in this transcript, but I bet he does not have that.)

11:08 AM PDT - Is the Dean really confused about market definition? He should not be.

q. okay. at this point, i would like to move to the question of market definition. and you're aware, Dean schmalensee, i take, it, that professor Fisher and dr. warren-boulton have claimed that the relevant antitrust market in this case consists of the market for operating systems for intel-compatible computers?

a. yes, i am.

q. how does the market definition to which plaintiffs' economists have testified comport with the case that you understand plaintiffs have pleaded?

a. not well. that market definition rules out the competition and competitive threats on which plaintiffs have concentrated.

q. and can you explain to me what you mean by it rules out the competition and competitive threats on which plaintiffs concentrate.

a. certainly. netscape's browsing software, netscape, does not make an operating system--did not make an operating system--for intel-compatible pc's; therefore, netscape is not in the market. sun, to my knowledge, doesn't make such an operating system. more importantly, sun's java language in java runtime environment is not such an operating system; therefore, java is not in the relevant market. so, plaintiffs have discussed a case that centers on Microsoft's conduct as it relates principally to netscape, but secondarily to sun's java, and defined a market in which those entities are not present.

The Dean is confusing the issue here.

The monopoly market Microsoft is accused of having is the consumer OS market. Browsers nor Java compete with operating systems. They do not replace operating systems. Rather they rely upon operating systems.

It is Microsoft that has argued that Netscape and Sun are somehow competitors and therefore fair game to remove from the market.

Can a consumer go down and buy a browser instead of Windows? Can a consumer buy a Java machine instead of windows? No and No.

Microsoft is charged with using its monopoly power in Windows to preclude competition from browsers they do not own and from Java technology that does not require Windows technology.

The market definition is real simple. It is comprised of the products that consumers from pick and choose from as substitutes.

The targets of the illegal acts do not need to be in the monopoly market. Often times they are not. In this case, there are not.

I guess this Q&A is an attempt to muddy up the market definition so that somehow browsers and java compete with operating systems in the same market. Well. Microsoft wants everything to be in the same market so that it looks like they do not have a monopoly or somehow their illegal acts are justified.

Even lay consumers know better.

10:49 AM PDT - The Caldera case and this case are based upon many of the same principals.

q. and do you, sir, know of any principal basis on which to distinguish the benefits to consumers that inured from this integration--namely, the integration of functionality in windows 3.x and ms-dos--from the benefits that inured from the integration of browsing functionality into windows 95 and windows 98?

a. i'm not aware of a principal basis for making that distinction, no.

q. and are you aware of any distinction, any principal distinction, offered by professor Fisher or the plaintiffs that would separate this testimony from the analysis of the integration of browsing functionality into windows 95 and 98?

Well. As is typical for the Dean. He fails to see an awful lot of evidence. For starters Microsoft did release IE 5.0 after this trial was under way and after Allchin even testified in court that the OS and IE were a single product. At least Microsoft no longer did that and released DOS and the 95/98 GUI together.

The similarities however are important. A competitor to Microsoft was rubbed out by both instances of bundling.

Microsoft precludes competition by bundling. There is no more effective means to accomplish that. Monopolist can prevent almost any competitor from selling their products via the bundling process.

Do you think you have a choice of a cell phone provider? You do? Now, perhaps. But, what if Microsoft bundled cell phone service with their OS/Browser? No way, you say? Microsoft does not sell phones, you say? Check again. What about your choice of ISP? What if Microsoft begins to rent software and bundles internet services with it? But, they would not rent software, would they? Check the trade press about 3 months back.

It is not a question of what they will do. They will do whatever it takes to preclude competition.

Cell phone and internet services can easily be integrated into your OS purchase, right? Of course it can.

What is the point here? Do not look to the technology to get antitrust answers. There are not in the technology.

Focus upon the act of precluding competitors from their own chosen products and markets.

10:26 AM PDT - The issue of whether Microsoft harmed Dr-Dos or consumers when it bundled DOS and Windows will be decided in the Caldera case.

q. in the examination beginning at line 22 begins with, (reading): "question: did Microsoft harm consumers when it combined the dos"-- should have said "ms-dos." --"operating system and windows technology and created windows 95? answer: i don't think"-- then the question continues: "question: and integrated them into one product? answer: sorry, i don't believe so. question: did Microsoft harm consumers, even though when it began to include and to engineer together a graphical user interface in an underlying operating system into one operating systems that essentially put other graphical user interface manufacturers out of business? did that harm consumers? answer: as i say, i haven't studied that particular question. i would say not."

q. do you agree with professor Fisher's conclusion--

a. yes.

Of course the Dean from MIT will agree with that. He is paid by Microsoft to always say no harm has been caused.

And, the Caldera case will try to answer the question of whether Microsoft violated antitrust law when it tried to remove DR-DOS from the market.

By the way, the correct answer is that consumers were in fact harmed by that bundling too. How so? Dr-Dos is all but gone is it not? Was not Dr-dos driven from the market once DOS and the GUI were bundled? Is Dos still around? Yes. Almost. But, since Microsoft prevented Windows 95 from running on top of DR-Dos, its market dried up. And, of course, any superior technology that DR-DOS might have ever offered consumers was suppressed by Microsoft.

Do operating systems and GUI have to be technically combined or integrated as Microsoft likes to say? No. Clearly not. Witness Unix and Linux and Dr-Dos and MsDos and PcDos and others as well. Bundling non-OS programs is simply an anti-competitive act. Why is that? Because they can simply be sold separately, sold in suites or both. There is no technical reason why GUIs or browsers or any other application or run time environment must be sold as a package with the OS.

Microsoft says differently, but only for marketing purposes. Technical reasons do not exist. Any OEM or end user can install any GUI any time it is needed if the OS maker permits that to occur.

Do marketing people like to bundle products? Sure they do. Monopolists insist upon it. All to the detriment of consumers unfortunately. Consumers always want the choice. Buy the bundle (suite) or buy individual products. Buy everything pre-installed or buy them separately. Consumers always benefit from the choice.

Dean Schmalensee is lying when he answers that consumers benefit from the bundling of packages. Some do, yes. Not all of them. Some are harmed.

Again, "Just how much is Microsoft charging for IE?". Does not the real answer to that question relate to the consumer benefit or harm caused by product bundling? Absolutely it does. That is why Microsoft in its deceitful campaign tries to fool the consumer into thinking IE is free and therefore no harm, right? But, if the OS is part of the price and IE is part of the price, then consumers are harmed financially on the day they buy Windows.

This is why the Dean dances around trying to show some revenue for IE so that it is not predatory. But, it is only "not predatory" if the monopolist can force a very high quantity of sales (100,000,000). It is wrong for an economist to argue a non-predatory price counting upon the high quantity of sales forced by the monopolist. But, then the Dean has been paid a lot of money.

10:07 AM PDT - Despite illegal intentions and harm to consumers, everything that Microsoft does just improves the product?

q. and do you recall yesterday the court asked you, when we were discussing Microsoft's integration decisions, whether Microsoft had ever integrated into an operating system software that, i think, in the court's words functioned as a platform? do you recall that?

a. yes, indeed. i do recall that.

q. and have you had an opportunity to think overnight about that colloquy?

a. yes. the obvious example is the development of windows 95.

( a GUI written to run on top of DOS, right? Or, least Caldera thinks they can prove that.)

q. and why is it your testimony that windows 95 is an example of a situation in which Microsoft has made a design decision that resulted in the integration of software that functioned as a platform?

a. well, Microsoft combined the functionality of its ms-dos products with the functionality of its windows 3.x products, and some new features. it wasn't combining code. it was combining capability. and produced and integrated--an integrated product. it offered additional benefits to consumers and to isv's.

(For the purpose of removing Dr-Dos as a competitor?)

q. and prior to that development of windows 95, were both windows 3.x and ms-dos platforms in the sense in which the plaintiffs have used the word "platform" in this case?

a. they have both exposed api's. they have both competed for the interests of software vendors. yes, indeed.

q and is it your opinion that consumers benefited from the development and distribution of windows 95?

a. absolutely.

Some have. Some have not. But, as Dr-Dos got rubbed out the chances of superior technology benefitting consumers was reduced due to the reduction in competition due to the bundling.

q. is it your opinion that independent software vendors, isv's, benefited from the integration through development and distribution of windows 95?

a. yes.

Those who were beholden to Microsoft. All others were harmed. No wonder so many ISVs today ride the monopoly horse.

q. do you believe that Microsoft improved its platform when it developed windows 95?

a. without any doubt.

q. and do you believe that the development of windows 95 discouraged the entry of new software--platform software vendors, or, to use professor Fisher's construction, discourage the entry of new intel-compatible desktop operating systems?

a. well, however you pose it, the answer is yes. it raised the bar by Microsoft becoming a more competitive--more effective competitor. it discouraged entities that might have sought to compete with it. i want to be clear: there is no barrier to entry at issue here. it is simply more difficult to compete with a better product.
 

I know. The Dean does not know what barriers to entry are. The Dean at MIT is paid to testify that absolutely no barriers to entry exist in this market despite the fact that almost no company dares enter it. Pure garbage.

Yes. All barriers can also be characterized as "raising the bar". That is what they do. But, the combination or bundling of existing products always raises barriers to entry and blocks out competition from any competitor that does not product both products. Witness the bundling of office suites. Once, one company created a suite, all companies had to do likewise. So. If you were in any of those markets you had to enter them all.

Is this good or bad for consumers? Well. Assuming all competitors can actually enter all markets that might be good. But, when you bundle the OS with applications and make a suite out of the OS, that is not the case. All companies just can not just enter that market.

Microsoft has bundled the browser with the OS to preclude browser competition from everyone, not just Netscape. Microsoft stole the browser market illegally and will keep it since it is almost impossible for anyone to enter the OS market that it dominates.

9:51 AM PDT - Does the Dean really think that removing competitors from markets helps consumers?

q. And would your analysis differ if it were the case that there were one a and one b, and that the reason that a took the functionality from b and made it part of its product, was because it perceived b to be a threat to its business?

a. no.

q. Why not?

a. It's still competition. it is reacting to an opportunity, and in that case, a challenge. The result of that kind of competition benefits consumers.

Well. Gordon Eubanks would disagree. Gordon testified that competition in the anti-virus market was beneficial, but he assumed that Symantec would stay in business, not be driven out.

Whether Microsoft thinks products threaten their monopoly power or not is only relevant in understanding the motivation for its acts. Right or wrong.

Microsoft likes to express competition as a "threat" only because of the connotation that threats are bad. They are not.

Competition is not bad. If Microsoft insists, the antitrust law is written to make certain that Microsoft is always "threatened". Why? Because when Microsoft is always threatened, then consumers always benefit. Sometimes from Microsoft products and sometimes from competitors products. But, that is why acts that preclude competition are illegal.

The Dean either does not know what anti-competitive acts are at all or simply ignores that concept because his is being paid to do so.
 

9:35 AM PDT - Is the Dean suggesting that Microsoft is more efficient than Netscape ...or just that Microsoft can force the sale of 100 million copies and Netscape can not do that?

q. now, let me follow up on the question you just raised. why isn't it bad for consumers and bad for competition that the pricing strategy adopted by firm a in case two, this hypothesis we are talking about, has driven out a competitor or an entrant from the market?

a. well, again, the touchstone is, is this an outcome that could have happened, could have been expected to happen in a competitive industry. the key here is that b is a high-cost entrant. so, it is a good thing for consumers that price was reduced. it is a good thing for consumers that the efficient firm, a, is the one that remains. there is nothing anti-consumer, anti-competition. there is a little difficulty answering whether or not it's anti-competitive. it is competitive. it's the competitive process operating.

The problem is that you can not use a model that assumes both companies are not monopolists, both companies have approximately the same ability to market products and then conclude that competition must exist fairly because Microsoft is selling above costs. Microsoft is only selling above costs because it can force 100 million units in sales.

The illustration submitted here by the Dean is both illusionary and deceitful.

If you are going to use a model to suggest a conclusion in the real case, you absolutely must put into the model all of the realities of the real case.

The Dean is not doing that here.

Netscape was not being driven out because it was an inefficient producer of software. It was driven out because all consumers had to first buy the monopoly product. The Deans model avoids that situation completely. This case is not about a "free" product that consumers are able to refuse. This case is about a product all consumers are forced to take. This case is about a market ruined by one company forcing the distribution of its product to all consumers.

The Deans models avoid that scenario completely. Yet, his analysis assumes a 100,000,000 unit distribution to get the per unit cost down real low.

It is just very deceptive and deceitful testimony. Dean Schmalensee's testimony is just not relevant to the facts of this case.

9:21 AM PDT - The Dean just supported my contention that Microsoft is charging more for Windows with IE included?

q. now, taking this example to the facts as you understand them in this case, Dean schmalensee, do you believe that the conduct of Microsoft in the manner in which it developed the internet explorer technologies and then distributed those, is an example of what we are calling case-one conduct?

a. no, i do not.

q. and can you explain to me why you do not have that opinion, sir.

a. the analysis, as we've discussed, needs to take into account all costs and revenues associated with the actions at issue. in this case, it's most important to recognize that internet explorer generated revenues as a part of windows. so, the first thing that one needs to ask is, is the--is it plausible to assert, based on the information that we have, that Microsoft, taking into account the improvement in its platform, lost money on the development of internet explorer? now, on its face, the notion that an investment of, i think, two and a half percent of windows sales to develop functionality in what was plainly the hottest area in personal computing would be an automatic money-loser, is implausible. so, as i understand the evidence, it's quite clear--and we discussed this yesterday--that Microsoft thought it would, and did, make that investment profitably in improving the quality of its windows platform.

I happen to agree that IE generates additional revenues as a part of windows. (I allocate up to 70% of the cost of Windows for IE.) But, Microsoft is telling the consumer that they are not paying more for IE.

You know. I can figure out just what Microsoft's position is on the cost of IE. First they say it is free. Then they say the price of windows is increased due to added features (including IE, I assume). Then the Dean here tries very hard to argue additional revenue attributed to IE. Well. How much sir?

However much additional revenue is attributable to IE comes from consumers pockets, right? Without choice, right?

Microsoft Corporation can not have it both ways. Either consumers pay more because IE is included or they do not. If they do not, then no revenue can be counted to remove the charge of predation.

And, no, maintaining the monopoly money stream does not count toward the predation problem. Maintaining the monopoly money stream is itself a violation.

The Dean is taking in circles. He is trying to use monopoly power to force a very high sales quantity to get the cost per unit very low to avoid the predation charge. And, then he is trying to suggest "additional monies" for the IE technology without it coming from consumers pockets.

9:10 AM PDT - Ah, but a monopolist could be recouping at the same time predatory activity is taking place

q. have you ever seen any theory or any case or any testimony that suggested, outside the contours of this case, that a firm could engage in a predatory strategy where it was recouping at the same time that it was engaged in the predation?

a. None that i can think of, Mr. Lacovara.

Well. The dean does not think too hard when it comes to understanding the power that Microsoft has.

A monopolist such as Microsoft could easily overcharge for Windows while selling IE real cheap. Even if not bundled. Just price IE for a $1 or so separately (as Microsoft has in fact done with IE) and overcharge for the monopoly product. The predatory losses can easily be recouped simultaneously. The same is true with the losses associated with the Unix versions of IE. And, even the Apple version.

If the two products are not bundled the predatory losses are even less. So it would be easier to recoup predatory losses if the two were not bundled. But, of course, Microsoft can not ruin the demand for browsers if customers have any options to refuse the product. Thus it is bundled.

And, as the Dean was kind enough to point out, if a monopolist can force the sale of 100 million copies, the cost per copy to the monopolist can actually be quite low. But, that low cost figure presupposed the force sale of a very large quantity.

8:50 AM PDT - Again, Micrsoft is too late with too little - Microsoft lawyers have really done a pretty bad job in this case

Mr. Holley: your honor, the second matter i would like to address is that, as your honor will recall, during professor felten's testimony, he suggested that the demonstrations that i took him through in the courtroom would have been different if we were using a so-called virgin windows 98 machine. And at the end of the redirect -- or i guess recross -- i suggested that the court instruct professor Feltento appear, and your honor denied that motion. Microsoft then informed the government that we intended to conduct a demonstration, that they were welcome to attend, performed by michael wallent, who is a senior program manager at Microsoft. The government declined the invitation to attend the demonstration, but we conducted it, nonetheless. Mr. Wallent was put under oath. The court reporter prepared a transcript, which was timed so that you can see every second that expires. And we made a videotape of that demonstration, which has been marked for identification as defendant's exhibit 2787. the transcript itself has been marked for identification as defendant's exhibit 2788. on saturday morning, i provided a copy of both the videotape and the transcript of the demonstration to the government, and i now offer both defendant's exhibit 2787 and defendant's exhibit 2788.

Mr. Malone: your honor, we object to introduction of this for the same reason that the court denied Microsoft's motion to have professor Feltenappear to do a new demonstration. this demo, too, is way too late. Microsoft has had now four bites at the apple -- two depositions and two chances on the stand to do the demonstration they wanted. they didn't do that. So to try to offer one now that professor Feltenis off the stand, without foundation and without a chance to cross-examine the person who did it, it is just much too late.

the court: all right. The objection is sustained.

The demonstration that Microsoft wants to repeat here attempts to prove that IE can not be removed from the OS. Of course, that is what they have attempted to prove all along. The problem is that the demo does not prove that point at all. Felten's program only showed that IE could be removed without affecting the operation of the OS. Any one in the business knows for a fact that the OS does not rely upon any application unless the Os is specifically written to require it. No Os is going to fail because a browser is missing.

The real problem is the deceit offered by Microsoft in this demo. It was offered to prove one thing. But, the demo does not prove it. It is not that their demo failed. The demo worked and showed that Felten's program failed. But, Felten's program failing is not relevant. Sure. All of IE was not removed as 98Lite does. Therefore the Ncompass browser (and I think the browser from Disney) still worked because they use the components in IE. It is a meaningless demo.

And, here, Microsoft lawyers are just to late. The proper place to introduce this demo has passed. I also suspect that the judge feels the demo is meaningless anyway. He was following the live demo in front of Felten and clearly understood that the parlor trick by Microsoft was pretty much worthless.

8:34 AM PDT - The "big communist plot" defense?

Mr. Warden: i would first refer your honor to defendant's exhibit 2514. is this page on the public record, stephanie? it's bates number 450 at the end. ms. Wheeler: yes. Mr. Warden: and it's numbered 17. And this is able to be published.

the court: all right. Give me the bates number again.

Mr. Warden: it's 450.

the court: all right.

Mr. Warden: i direct the court's attention to the last bullet point on the page. This is under the heading, of course, "value of connected client." it says, "apollo and odyssey each are already used approximately 25 percent of a user's total computer time. we can extend further our percent of user desktop time by embedding more and more features and functions, such as community and productivity applications. "as we approach os levels of usage, we can begin to act as the user's de facto os with associated benefits (this will require" -- aol/sun -- "apollo/zeus to open its platform to enable third-party developer extensions.)" then going to defendant's exhibit exhibit 2518, which Mr. Malone used -- and the rest of the ones i am using are the ones he used, your honor, so you have them all in front of you.

Or, is this just another ghost competition story?

What if AOL-Netscape is holding off their secret plans until after the big monopolist is strapped down on the gurney? So what? Corporations hold announcements all of the time until the most opportune moment. If that is what AOL is up to, that is fine. Microsoft still holds a monopoly and has acted with the specific intent to preclude competition. It is the attempt that is illegal. If it fails, no excuse. If the victims regroup and take another tack after the antitrust laws are applied, that is what is supposed to happen.

The antitrust laws are in place for a very important reason. They are in place so as to support and foster competition.

Microsoft Corporation is just so arrogant that they think they have a right to monopoly power and all those illegal gains. They do not.
 

8:25 AM PDT - Maybe Microsoft Corporation is "trying" to lose this case?

Mr. Malone: the title or the overall heading is "Microsoft relationship." Heading numbered 3 is "impact on perception of how apollo views operating systems." and the first bullet point there reads: "apollo is not in the operating system business and has no plans to enter that business. Our strategy is to work with multiple vendors where possible, so we are not totally reliant on any one." and, again, your honor, Mr. Schuler was asked about this in his deposition at page 112 of the public portion. Beginning at line 8, he was asked: "now, Mr. Schuler, does aol consider its aol client software to be an operating system? "answer: no. "question: does aol consider any client software that aol may be developing, as a result of the netscape/sun transaction, to be an operating system? "answer: we're an application software company that does software and also has online services. And our success has been based on running on top of windows and macintosh. And we're in the application software business, and that's what all of our future plans are predicated on. "question: does aol have any future plans to develop and market an operating system? "answer: we have no such plans. "question: you said that as an application software company, your success was based on running on top of windows. How, if at all, does that make aol dependent on Microsoft for the success of its software and its business? "answer: well, it makes us very dependent from the standpoint that Microsoft controls the feature direction of the operating system. And it kind of goes both ways. We depend upon the operating system to run our software upon. at the same time, any time that features of our software may be incorporated into that operating system, it can negatively impact our product. So the relationship is one where there is an absolute dependency on what the future of that operating system is as well."

Well. I am rather mystified as to why Microsoft thinks this material is so important as to read it into the written record. Have they concluded that they are losing so badly that they need a whole new approach? Do you think they would be so arrogant as to argue that since AOL is conceding control over the OS functionality that they (Microsoft) should therefore be permitted to control the browser product as well. You know. Sort of just appoint Bill Gates the King.

Why Microsoft sought to read this material into the record while claiming not to be a monopoly escapes me.

I am sure we will find out the reasons. It could make for some pretty humorous material.

8:09 AM PDT - Maintaining the Windows placement is very important to AOL

Mr. Malone: and in connection with that question, your honor, Mr. Schuler was asked at page 111 of the public portion of his deposition -- page 111, line 12: "question: why did aol decide to renew its agreement, and the accompanying virtual exclusive agreement, with Microsoft and continue to use internet explorer for the client software in the aol service in january of 1999?" there is an objection. "answer: the answer is that our position in the online services folder as a part of the desktop of windows is a very important contributor, a very important part of our member acquisition program, and represents a fairly large percentage of our overall acquisitions. And so the strength of that position inside of the operating system is very, very important to us."

Is Microsoft going to drop its argument that AOL is using IE because of superior technology? Or, are they going to argue that technology must be the only reason why anyone buys all of the Microsoft products and every comment related to any other reason is simply to "set up Microsoft"?

You know, there is a complex, I do not know what it is called. But, people who abuse others fail to understand why everyone turns against them and blames them for what they did. They just do not understand why everyone is picking on them. They do not understand why the IRS is out to get them. They do not understand why the police keep arresting them. And, they do not understand why people say bad things about them in public.

Microsoft Corporation looks like they have developed that complex. All their legal problems are caused by Netscape and AOL and now AOL-Netscape out to trap them.

Well. I am sorry. But, Microsoft Corporation is not the victim here. The consumers are the victim. And, the computer software industry is the victim. Microsoft Corporation and all those companies that do as Microsoft says just because they say it, are the perpetrators.

Microsoft Corporation does need to be split up. The monopoly power needs to be eliminated. It is going to be difficult for the court to muster up the courage, but it is absolutely necessary.

7:54 AM PDT - The Microsoft attorneys have lost their minds - maybe they have a trick up their sleeves?

Mr. Malone: your honor, i would then go ahead and display this page and read just two portions -- one or two portions to the court, under heading "2. Impact on our licensing deal with Microsoft, where we use internet explorer as our primary browser component in exchange for Microsoft bundling apollo with windows and in the online services folder." below that, your honor, the second bullet point, which reads: "in exchange for using IE as our primary browser component, Microsoft bundles apollo in the online services folder on the windows desktop. This is an important valued source of new customers for us, and therefore something we are inclined to continue. Microsoft has made it clear that they will not continue to include us in windows if we don't agree to continue our `virtual exclusivity' provisions for use of IE within apollo. While the resolution of the d.o.j. Case may change all that, resolution is not expected for a long time, further strengthening our inclination to leave the existing deal in place and not exercise our termination provision."

The court: all right.

I think the Microsoft lawyers think they have a right to monopoly power and a right to be free of all competition for all products they produce?

This material focuses upon the "virtual exclusivity" provisions of the IE deal with AOL?

I guess Microsoft is going to argue they are being set up by AOL? That AOL would act differently were it not for this case? Well. They might have. But, Microsoft dug their own grave here. And, right now they are digging it pretty deep. They have just given the judge all he needs to be certain that court action is absolutely necessary to stop antitrust violations. Microsoft may also have given the judge all he needs to go with a major remedy rather than just a cosmetic one.

The truth of the matter is that AOL should feel the deal with Microsoft has to remain short of results in this case. A lot of ISVs right now are thinking precisely that. A lot of ISVs are thinking they have to go with Microsoft Corporation unless this case substantially changes the industry.

That supports the need for court action. It does not excuse Microsoft. Nor does it justify the court holding back. Microsoft Corporation dug the grave here if that is what they are trying to suggest.

Microsoft is coming across just like a criminal who always blames the victim for their own crimes.
 

7:43 AM PDT - Again, Microsoft reads into the record deposition material which does not support their case

Mr. Malone: continuing on the same subject, your honor, on page 31 of Mr. Schuler's -- the public part of Mr. Schuler's deposition -- he was asked beginning at line "question: were you involved in discussions at aol about the feasibility of purchasing netscape in the early september 1998 timeframe? "answer: yes, i was. "question: and can you tell me what involvement you had in those kinds of internal aol discussions? "answer: i was consulted by miles gilburne about my general feeling about the notion of such a transaction. "question: and what did you tell Mr. Gilburne? "answer: i was relatively lukewarm about the idea. "question: why? "answer: i felt that there was a part of their business which was compatible with ours and another part that was outside of our core competency. And i felt that the browser part of their business, as a business, was dead. "question: the part of their business that you thought was outside your core competency was the enterprise e-commerce piece of their business? "answer: not e-commerce per se, but the sale of software to enterprises." and then the subject is returned to on page 106, still of the public portion of Mr. Schuler's testimony. beginning at line 11 on page 106, he is asked: "now, you testified earlier that you recalled some discussions during aol's consideration of the deal that netscape was scrambling in many ways and that its business had been decimated. Do you recall that? "answer: yes." there is then a question and an objection or a clarification. And then the question again at line 25: "question: in the discussions you described, can you describe what was meant by the reference that netscape's business had been decimated? "answer: yes. A major part of netscape's revenue stream in prior years had been derived through the sales of stand-alone browsing products and extensions to those products, site licenses, et cetera. And when Microsoft made the decision to offer internet explorer for free, bundle it with the operating system, the market share or the demand for a stand-alone browser that was paid for went down very rapidly, i think even more rapidly than the management of the company anticipated. And they were faced with reinventing their business, figuring out what assets they had and how to redirect the business. And that ended up taking the form of going in two directions, essentially having two businesses: one going after the portal market and figuring out how to take the browsing technology and making it a client, and then, secondly, going after the enterprise software e-commerce marketplace."

the court: all right.

Sounds to me like Microsoft has just proven they ruined the browser market for all companies except the monopolist, Microsoft.

Microsoft attorneys need to re-evaluate what they think is important in this case. This AOL-Netscape stuff is deadly against them.

7:22 AM PDT - Obviously Microsoft wants the court to think that the AOL-Netscape merger somehow excuses Microsoft's antitrust violations?

Mr. Warden: Mr. Malone, i think, is going to read some documents. I just want to note for the record that Mr. Burt will act as the corporate representative this morning.

the court: that's fine.

Mr. Malone: good morning, your honor. i think this will be quite brief -- probably a fair amount briefer than Mr. Boies' half-hour estimate last week.

the court: all right.

Mr. Malone: with any luck, 15 to 20 minutes. And what i will be doing, primarily, is just bringing the court's attention to various portions of some of the exhibits that were used with Mr. Colburn -- parts of those exhibits that were not asked about or not read into the record at the time --

the court: all right.

Mr. Malone: -- as well as a few related deposition excerpts from aol witnesses.

the court: all right. These are documents you're going to be offering into evidence?

Mr. Malone: these are documents that already in evidence, your honor.

the court: all right.

Mr. Malone: they were either admitted with him or already in evidence when he testified. A couple of them are under seal still, and i believe, in at least a couple of cases, the page that i want to refer to has not yet been unsealed, or there is not an agreement to unseal it. In that case, i will simply call the court's attention to the page and the particular entry, but not display it on the screen and not read it into the record, if that's acceptable.

the court: all right.

Mr. Malone: i would like to start, your honor, with defendant's exhibit 2522. And we have additional copies of these for the court and for counsel. this exhibit is one of the things that Mr. Colburn was asked about during his examination by Mr. Warden. And Mr. Warden asked about, i believe, some entries on page 2 of the document. i just want to call the court's attention to the first page of exhibit 2522. About a third of the way down the page, there is an entry, "aol relationship with Microsoft," and then several paragraphs which i will just read quickly. "this acquisition and alliance is about using netscape's portal and e-commerce development businesses and sun's hardware, platforms and distribution channels to build on america online's portal strategy and take e-commerce to the next level. "it's not about Microsoft. We have always considered Microsoft both a tough competitor and an important partner. This deal doesn't change that. "our intention is to continue to use Microsoft's internet explorer within the aol service, because we believe it is important to have aol bundled with windows."

the court: all right.

This is suppose to buttress Microsoft's case?

The issue in this case is Microsoft's monopoly in consumer operating systems and their abuse of that power. The material just read by a Microsoft attorney disproves Microsoft's own argument that AOL bought Netscape for the browser. It also disproves any suggestion that AOL is offering an operating system to the market in order to compete with Windows. And, it strengthens the testimony that AOL intends to use IE technologies.

Microsoft Corporation is under a mistaken understanding of the antitrust laws. Just any competition does not apply. Yes. There is competition in the e-commerce space. And, there is likely to be more. But, consumers shopping the computer store for a Intel PC must buy Windows.

June 23, 1999 - Wednesday (Continuing with the Monday afternoon transcript on Dean Schmalensee)

5:25 PM PDT - The Dean adds additional tests in a vain attempt to try to disprove a predatory price - no banana

q. Just to conclude our discussion on this subject, dean schmalensee, professor Fisher testified several times that Microsoft had won the browser war, and you told me that you disagree with that. can you assume for the next few questions that that is true, that the browser war is over and Microsoft is the victor. Can you do that?

a. I believe I can, yes, sir.

q. Okay. Now, would you please take a look at professor Fisher's testimony from the morning session on june 3^rd, at pages 28 through 30. Given the hour I shan't read it, but could you review it and summarize what you understand professor Fisher to be saying at these pages.

a. May I have the page number again?

q. It's 28 through 30, a.m. Session, june 3rd, sir.

(witness reviews document.)

a. He's basically saying the war was over by early '98 or the middle of 98. This is on page 30, line 17 and 18. and then it goes on, "by early to mid '98, you believe Microsoft had won the war?" "answer: I think so." so, he says the war was over at the middle of last year.

q. Now, under predation theory, what is the, quote-unquote, predator supposed to do once he wins?

a. The predator is supposed to recoup.

Yes. I suppose. But, who said Microsoft had to raise prices to recoup? Maintaining the monopoly was in fact accomplished. Monopoly profits continue to flow.

Or, just because Fisher might think the war is over that does not mean that Microsoft thinks so. Lately they have found out about the AOL-Netscape deal. That changes things a little.

Plus do you really think Microsoft would raise prices when the DOJ is tuned in? I do not. Neither do I think they need to raise prices at all.

q. Would you expect Microsoft, if it believed it had won the war, or if, in fact, the war had been won, to keep developing and investing in IE technology?

a. I would certainly not expect it to do that in a vigorous fashion, no, as it is doing.

Really. Did not this same Dean testify that high tech companies would continue to invest in technology regardless if they had a monopoly or not? Or, was he the guy that tried to sell the judge on the bogus idea that investments in technology prove no monopoly exists? He might have been that fellow.

q. And do you have an understanding of the extent to which Microsoft is currently investing in new versions of IE technologies?

a. Well, IE 5 was recently released. It's my understanding that IE 6 and 7 are in progress.

As stand alone applications I presume? IE 5 was.

q. Have you seen any evidence or suggestion from dr. Fisher or anyone else that Microsoft is considering charging for internet explorer, to begin recouping?

a. None.

Well. The fellow from Compaq, Mr. Rose testified that the price of windows in going up due to added features. I believe one of the Microsoft employees also so testified.

Microsoft simply has not proven they are not charging for IE. An undisclosed price for a product within a bundle does not prove that product is free. It never has. It never will. Microsoft has falsely claimed IE is free to avoid incurring the rath of consumers. It might be free and predatory. Or, it might be $140 to consumers (non-predatory).

q. And have you--has Microsoft, in fact, to your knowledge, continued to distribute internet explorer for free for a year and a half after, according to dr. Fisher, had won the war?

a. Apparently so, yes.

Well. IE is free to Unix customers. But, sold to Microsoft and Apple customers. At least they have to purchase one copy each time they buy the OS. Clearly this suggestion does not prove competition continues to exist for browser sales. That has been eliminated by Microsoft. Only Microsoft gets money in exchange for its browser technology. (And, then forces consumers to actually use it.)

q. And are the continued investments and the continued distribution of IE in the manner in which it's being distributed, consistent or inconsistent with professor Fisher's suggestion that Microsoft engaged in the strategy of predation targeted at netscape?

a. They're inconsistent with that when coupled with his assertion that they won in the middle of last year, that's correct.

Nothing the Dean has said disproves predation. Why? Because predation is not proven nor dis-proven by external acts. Go back and look at your test, Mr. Dean. Your test did not require the monopolist to do any act nor to discontinue any act. It only required a plan to recoup. Well. Perhaps the plan has to be changed. Or, perhaps Microsoft can not recoup in fact. (Unlikely) But, it is incorrect logic to deduct that no plan of predation was engaged in by Microsoft on the basis of later acts that may have been adjusted for the scenario that unfolded as opposed to the Microsoft plan to remove competitors and remain in monopoly money.
 

5:15 PM PDT - Good. A hundred million copies of the Java JVM would be the best thing for the marketplace

q. Do you know of any contrary evidence regarding aol's and sun's intention to distribute as many as a hundred million of the updated java environments through the aol distribution?

a. No, and I have seen a document produced related to the merger that contains the same number and describes it as a big-volume win for sun as I recall, or some such phrase.

Significant competition in the future is the best possible outcome for consumers.

Does its possibility excuse Microsoft's violation of antitrust law? Absolutely not.

Precisely the opposite is the case. The antitrust laws are designed to assure competition exists, remains or can easily surface. It does this by making it illegal for companies like Microsoft who hold monopoly power from using that power to prevent competition from surfacing.

The possibility of future competition does not make the illegal acts of Microsoft moot.
 

5:06 PM PDT - Present or future competition is supposed to the way it is - Not a problem like Microsoft Corporation wants to paint it

q. Now, we haven't talked much this afternoon about the other ostensible platform threat identified in the complaint excerpt I read to you this morning. But do you have an understanding as to whether the alliance between aol and sun appears to have implications for the distribution of java technology?

a. Certainly. It's my understanding that aol has indicated it's going to distribute--is this number under seal, the number i'm about to say? The number of sun java virtual machines that aol is going to distribute?

So what? Future and significant competition is supposed to develop.

Does Microsoft Corporation really think it has some right to be free of competition? It does not.

Absolutely no present or future competition excuses violations of antitrust law. This is not a sporting event where one side can cheat just because they feel they might lose the match.

Using monopoly power to preclude competition is illegal. Period. It is not excuse because some future competitive is perceived or in fact real.

If Microsoft wants to offer evidence of competition in the consumer OS marketplace they can. They have tried. But, ghost stories do not count for much.

Microsoft Corporation makes it sound like competition is going to hurt consumers. Precisely the opposite is the case. Lack of competition (the current situation) hurts consumers.

4:53 PM PDT - The AOL merger might affect Microsoft's ability to recoup - just not this case - Microsoft may have just made a mistake in judgement

q. Now, professor Fisher and dr. Warren-boulton both have testified that aol's acquisition of netscape and its alliance with sun did not make any difference or any appreciable difference in their analysis of whether aol would continue to use internet explorer technologies. do you agree with that testimony?

a. No. It may, nonetheless, decide to continue to use internet explorer, but the documents make clear that aol, netscape and sun have embarked on a number of joint development programs, have done a number of things they would not have done, or perhaps could not have done independently. and the notion that that merger didn't affect anything and wasn't likely to have an impact on choices down the road strikes me as implausible in light of these documents. There are lots of discussions about things that are going to do together.

Nothing in the AOL-Netscape merger affects Microsoft's monopoly power. It might affect the ability of Microsoft to recoup losses caused by predatory prices assuming that is actually the case. Last time I checked Microsoft's profits were up not down.

Would it be too bad if Microsoft could not recoup losses for selling IE so cheaply? Assuming that is the case, perhaps that would be sad.

But, even assuming that is the case, the AOL-Netscape merger is not relevant. 1) it does nothing to reduce Microsoft's monopoly power in consumer Oss 2) AOL-Netscape is not offering a consumer OS at all 3) competition heating up in browser technology does not help Microsoft.

There is supposed to be heated and fair competition in all markets. That is the way it is supposed to be. In fact, the application of antitrust laws is supposed to make certain that is the case. The suggestion Microsoft is making is that future or present competition excuses their illegal acts. It does not.

Nothing excuses a monopolist from acting to further their monopoly or even to protect it. Monopolies just do not have any right to self protection. Public policy dictates that competition is supposed to surface and remove monopoly power. The AOL-Netscape merger (assuming it sustains some hope of future competition) supports the need to apply the antitrust laws against Microsoft. Microsoft should be forced to compete fairly.

Microsoft is not disadvantaged by being forced to sell products competitively. Everyone else has to do that.

4:40 PM PDT - AOL could swap out IE and use Netscape - but they have not - they have hung their hat on the monopoly rack

q. I would like to you read what Mr. Colburn said about that. Mr. Lacovara: and i'm quoting, your honor, from pages 41 and 42 of the a.m. Session of june 14^th.

by Mr. Lacovara: q. And he says, starting at line 14 on page 41, "as you see from Mr. Pittman's e-mail back to Mr. Case--and of course I report to Mr. Pittman--we have done the analysis, and the analysis is it does not make sense to leave the ie browser and to leave our exclusivity. And yes, as everybody keeps asking us, that potentially certainly steve wanted to revisit it, but we had done the analysis, and it was our belief in operations, right, that a, we had a consensus for a long time in staying with the browser; b, we really had no plans to switch it out, you know, a full plan, other than working on an alternative; and then c, we ultimately did stay with us--with it." does that testimony from Mr. Colburn affect your conclusion or your opinion that aol holds the key to 65 or thereabouts percent of what dr. Fisher calls the "browser market"?

a. No. They had a choice. They thought about it hard. they made the choice. They stayed with ie. one of the important reasons I understood Mr. Colburn also testified was that netscape didn't have a componentized browser ready to go, but the key thing is it was aol's choice.

Well. AOL going with netscape does not reinvigorate the browser market. It might change the percentages for IE. But, no browser from anyone has a market as long as Microsoft force feeds IE to all consumers.

Is it going to be easy for Microsoft to eliminate alternative technology? No. The AOL-Netscape deal and more importantly the effort to put Navigator into open source assures the technology will be around for awhile. But, that is not the same as suggesting that any company with superior browser technology might be able to sell it on the market. The market is ruined, truly ruined by Microsoft and will remained ruined regardless of what AOL does.

Microsoft must be prevented from eliminating the browser and other internet technologies. Only doing what Microsoft permits does not count.

So, if you are an ISV and you deal with Microsoft, your internet technologies are restricted by Microsoft. ISVs supporting Microsoft today are tomorrow's Netscape. But, the sell out might be for seats at the bankruptcy hearing.

4:29 PM PDT - Sounds like the price that consumers pay for IE is very very important

q. Now, in january, professor Fisher testified that he believed that Microsoft would become dominant in control of the web-browser market, a term he uses, by 2001. in light of the evidence that you have reviewed in the aol documents and elsewhere, do you agree with that prediction?

a. Well, there are a number of predictions in those documents. One that struck me was the goldman, sachs--i believe it was in the goldman, sachs document that projects--obviously, this is always hazardous, but projects netscape, I believe, by itself, with a hundred million users in 2002. certainly, I have seen no--no documents produced in connection with this merger that suggests any--in any sense, that Microsoft is inevitably dominant in any sense. there are documents that suggest that netscape's share can be maintained. There are lots of documents that talk about growth in the number of users.

If Microsoft is right and a hundred million users will prefer Navigator in year 2002, then Microsoft should be required to rebate about $30 or $40 or more to each one of those hundred million users who do not want to buy IE.

The forced sale of a product is incredibly harmful to consumers. I smell yet another class action law suit coming. And, this one will not accept Microsoft's weak arguments that IE is a free product.

This may seem strange but Microsoft really thinks it can force feed the consumer with unwanted products and stay within the law.
 

4:15 PM PDT - Not sure what evidence could possibly prove long term monopoly power -

q. Has professor Fisher undertaken that analysis and presented evidence on the question of whether Microsoft has long-run monopoly power in the markets he's defined?

a. No.

It is nice to point out all of the evidence that has not or could not be presented in this case. But, just how would you expect long run monopoly power to be shown? Are we talking about technology that has not yet been developed? Are we talking about technology that can not be developed.

If the Dean wants to invest his money and start a software company, good luck. But, he will have to do more than just come up with the bucks.

IBM has the bucks. Hp has the bucks. Symantec has the bucks. Sun has the bucks. Lots of companies have the money. But, for some reason, almost none of them suggest they will develop a consumer OS. Some say they will compete.

Sun developed Java. Netscape developed the market and product for internet browsers. But, look what steps Microsoft took to prevent that competition? Zero prices on billion dollar items and fractured technology on Java.

Even the Dean refuses to compete with Microsoft. Or, at least he has not announced his plans yet.
 

3:57 PM PDT - Microsoft may not have insisted upon recoupment in higher prices - Just precluding possible competition does it in a flash

Mr. Lacovara: q. Is recoupment, in some sense, a proxy for judging the intent of a corporation when engaging on a particular allegedly anticompetitive strategy?

a. It can be, and in a sense that's the case-one/case-two distinction. If you observe case one, you observe them selling below cost. You say that can only make sense if they think the competitive environment will be changed as a consequence, and they can earn those losses back. you look at one and say, "there must be predatory intent there. It doesn't make sense otherwise." Again, assuming you have gone through all the measurement exercise. in case two, you can't tell intent. In case one, I think you can infer intent from conduct.

q. Well, if there is no rational or reasonable likelihood of recoupment after the strategy has succeeded, do you think that that bears on the question of whether an entity reasonably could have had the intent to engage in a strategy that could be called "predatory"?

a. I think it does. and again, there is this sort of rational business behavior, reasonable expectation test about which a number of people have written. You look at the corporation and say, "all right, people wrote e-mail saying `let's kill them.'" you want to distinguish whether that's predation or intense competition. Let's ask the question, "suppose they killed them." First question, could they have? Is that a reasonable thing to think about? Is it possible? And in this case, I would argue it wasn't. but second, you ask the question, "could they have been thinking they would recoup it? Could they have thought reasonably that if they succeeded in killing off competition, they would earn the money back? And in some markets that may make sense. In other markets it doesn't. and I think to assume on the basis of strong language that a corporation intends something that on the surface is economically implausible, that may be where a point of tension arises.

the court: in the case-one situation, assuming we are talking about the same product as you do here, why doesn't company a recoup the same way netscape, aol/netscape, would recoup by realizing collateral profits even if they had to pay somebody $10 to take their browser?

the witness: your honor, that's about widgets.

the court: why isn't it about--

the witness: we could come to browsers, but i don't understand your question, if I may.

the court: fair enough. what i'm saying is, let's assume it's an operating system and a browser. Or a browser, let's say.

the witness: let's say.

the court: so what that they're selling at below cost? Because there is the prospect of recouping in a secondary market in much the same way that it's hypothesized by Mr. Lacovara that aol/netscape will recoup, even if they have to pay people to take their browser.

the witness: I think, your honor, in that case, if we had all the facts on the chart, which you would want to, to do the analysis right, you would say that the strategy is not unprofitable. They're engaged in a strategy that's making the money because of these other considerations. so, analyzing the conduct, you would say, "okay, maybe there are other ways they could make more money, maybe not," but this is a business justification, and it's profitable for that reason.

the court: I follow you.

q. Let me ask you the question to which the court has taken us. what evidence has professor Fisher or dr. Warren-boulton presented to show that Microsoft, assuming that it was embarking on a predatory strategy, had a high likelihood of recoupment, that it could make back the money it was leaving on the table?

a. None that I have seen.

Regardless of what the treatise may have already discussed, there is more than enough evidence in this case to show that Microsoft may have adopted a predatory price to protect its monopoly income stream. This is not going to be an increase in income, but rather removing Netscape and preventing them from having an revenue base upon which to developer further competition certainly would justify a predatory price. Did they think that?

Did Microsoft view Netscape and Java as a "threat" to their monopoly? Obviously they did. They even boast about that threat to this judge, right?

So. Good decision or bad, Microsoft could easily decide that a predatory price is going to be required in order to rub out the threat to their future monopoly profits. This is not a new idea. The antitrust law is written with this possibility in mind. It is called protecting the monopoly from competition (from what ever source) that might lessen the future income stream.

The suggestion from the Dean that lack of recoupment is required is invalid. Or, if you want to count the maintenance of monopoly money coming in as recoupment, there is no question about recoupment.

3:41 PM PDT - Does the Dean really think that any price above $1.50 is not predatory?

q. Let me ask a broader question, Dean schmalensee, implied by the discussion you just had with the court. do you think that the approach taken by professor Fisher and dr. Warren-boulton permits people to separate acts that are predatory from acts that are just healthy competition?

a. I think in practice, no, at least on my experience, because the notion of adding a below-cost component, again, in terms of the economic literature on predation, i thought as that literature was unfolding over time, that that was the key contribution of the rita turner piece in the harvard law review that said, let's have a line in terms of conduct, so that if you're on one side of it, we recognize it's a gray area, but if you're below cost, then it's only go to make sense if you can recoup. There, you know, we know there could be a problem, but as long as you're competing hard above costs--relying on intent, i was persuaded, and am persuaded, that that is not a test that doesn't have a heavy component of you lose money, it's not sustainable. Doesn't serve to separate predation from healthy competition.

Dean Schmalensee contines to assume sales in one year of 100,000,000 units. How you get that without being tied to a monopoly product that sells in that quantity is beyond me. Plus he only counted one years R&D. The total for IE is five times that or half a billion. If you assume half a billion is invested in IE and sales are only 10 million. That would require a sale price of $50. I think for the purposes of this analysis, the $50 figure is much more realistic.

Let me ask software developers and marketers: Which is more realistic for a product costing half a billion to develop? $1.50 or $50.

Of course if you can force 100 million in sales and do not have other costs, you do wash out.
 

3:25 PM PDT - Interesting dialog between the judge and Dean Schmalensee regarding "intent "

q. Now, from the standpoint of economic orthodoxy and policy, do you think that professor Fisher's approach to predation analysis is a good test for this court to adopt?

a. Well, I can speak as an economist, and I don't presume to tell--to instruct the judge in matters of law. I think the economic issue with professor Fisher's test is sharply posed by the--I hope sharply posed by the case two discussion on the easel. That test says that the response to seven could be predatory, presumably, to show that would require evidence that a could have made more money, but that could be predatory even though it's sustainable and benefits consumers.

the court: how about evidence of intent?

the witness: your honor--

the court: I see why you have trouble with it, but I could see for the court's purposes intent might be relevant.

You bet your sweet bippy that intend is important for the court's purposes.

the witness: it might be, but I think--and again, I defer to your broader experience, but the business documents i've read, if a is a sole seller, b enters, somebody is going to write a document that says "let's kill them." Somebody in the firm will inevitably do that.

the court: all right.

the witness: and as an economist, it's very difficult for me to say how am I going to distinguish that, the notion of "let's kill b" from the notion of "let's compete as hard as we can."

the court: I don't think it's any simpler for the court, for a jury to do that. But juries are called upon to do it all the time. And, in essence, they have to make a judgment based upon all the circumstances as well as the tangible evidence.

the witness: well, your honor, I can't argue the law with you. I find myself persuaded by judge posener on how hard this is for me, at least.

the court: and I understand perfectly well why, as a matter of an academic discipline, you would want to discount intent as much as possible, being a largely intangible, unmeasurable quantity, and your discipline is to measure things.

The intent in this case is not limited to a "let's kill them" statement. That statement combined with a fair price in the market would be meaningless. But, a threat to bundle a product made directly to a potential competitor for that product combined with a (claimed) zero price pretty well sews it up. Even on the stand one Microsoft witness begged the court to extend to Microsoft the right to bundle products and zero out prices just so that Microsoft could win.

Well, I am sorry. NO CORPORATION HAS THAT RIGHT. Non-monopolist might be able to do it, but find out product bundling reduces sales and zero prices just do not have any impact on revenue that quarter. So. They (the non-monopolists) do not do it. Even Microsoft sells Word separately so as not to lose the sales to consumers who only want a word processor. Unfortunately, computers do require an OS. So, if Microsoft bundles "peanuts" or "bubblegum" with the OS, consumers will have to buy it too.

Back on the issue of intent. If you think you can find a single person who is not aware of Microsoft's intent to rub out Netscape (even if it means violating antitrust laws) let me know their name. No. The Deans name will not count. Besides, even the Dean knows what the intent of Microsoft was. There attorneys do too, every single one of them. Anyone want to take a bet on that?

2:57 PM PDT - Well. It is possible that Microsoft is not giving up any revenue - it can ruin the browser market without doing that.

q. Now let's talk briefly about the evidence that professor Fisher has collected to support his conclusions in this regard. did he present any economic evidence to support the assertion that Microsoft could, in fact, have made more money by selling internet explorer separately or by encouraging the sales of netscape's browsing software?

a. No.

q. Did he produce a calculation that shows the additional profits that Microsoft could have made if it had sold IE separately?

a. No.

q. Has he estimated the price that Microsoft could have charged or consumers would have paid for IE had it been offered separately?

a. No, he did not.

q. Has he estimated the effect on windows sales or windows prices of the removal of the IE technologies in windows?

a. No, he did not.

q. Is it possible in your opinion, Dean schmalensee, to determine whether Microsoft could have, in fact, as professor Fisher asserts, made more money without estimating the quantities or the effects of the conduct we have just talked about?

a. As a matter of basic logic, no. You have to have those comparisons to do the calculation.

As a practical matter it is very hard to ascertain if Microsoft could have sold IE separately and made more money. One could easily argue that bundling IE with the monopoly product maximized the revenue. Remember that question? "How much is Microsoft charging for IE?". Well. What if the suggested retail price for Windows was $60 and for IE $140. Which products in what quantities do you think would be sold? All OS. No IE, right? So Microsoft has a problem. If they do not think that the OS plus a browser can sell at retail for more than $200 AND they want to make certain that all consumers buy IE, they have to drop the price of the bundle from what it might otherwise be, right? Of course. At retail, $200 might be the magic number. (Note that the court uses the wholesale price for Windows, but consumers do not pay the wholesale price. That price is marked up by the OEM. Does anyone pay $200 for Windows 98? I do not care. Microsoft announced the suggested retail price. And, consumers "pay" a retail price.)

We also know that Microsoft felt it could not dominate the market if it competed fairly against Netscape. Even with a superior browser, it may not have unseated Netscape's lead. (No way to know for sure.)

So what do you do if you insist upon selling a bundle but the maximum price for the bundle can not exceed $200 retail? Allocate the price among the products is the answer. That is the economic answer whether Microsoft used that logic or not.

But, the real point here is that what a monopolist does or can do with prices is really up to the monopolist. Monopolists can set price and always do, unilaterally. If no product requires them to lower their price, they can set it where they want. So. The point is that no person is going to be able to prove what prices would or would not be for monopoly products. Here the attorney from Microsoft suggests that the DOJ's failure to prove what prices would be separately is meaningless. No such study can be made in monopoly markets. Microsoft and Netscape did both sell their browsers at retail for around $40 each for some period of time. But, then Microsoft bundled IE. So. Did Microsoft drop the price of windows and just bundle IE to make up the loss in price? They could have. No reason why not. Or, they could do as they claim. Zero out the price and just make sure everyone must buy it but including it with the OS bundle.

There is no answer to this question. Except that Microsoft can do whatever it wants. After all, it has the monopoly power to do that (including possibly charging up to $2000 for Windows ... some customers would pay $2000 rather than switch to another OS that may not have the applications they need or already have).

2:39 PM PDT - Just not sure what the question was supposed to prove.

q. Professor Fisher suggested that make Microsoft could have made even more money than it did had it chosen to charge for internet explorer separately or had it chosen to encourage the sales of netscape browsing software. Are you familiar with that testimony?

a. Yes.

q. First question I have is: is that concept the concept of making even more money relevant to predation until analysis as you have seen it conducted in other cases?

a. No, it's not relevant to the standard test for predation.

The ability to charge more for IE and/or windows is not related to predation. Although one could argue that the price of windows could have been raised and consumers would have to pay. They have little choice. Compaq testified that it had little choice but to pay a higher price. IBM testified that it had little choice but to pay a price even higher than Compaq and others unless it was willing to kill off OS/2 and harm Lotus.

Maybe if Microsoft charged the same price for Windows that it claims it charges for IE, even more consumers would benefit. Does that make sense? Microsoft claims that it is not charging consumers 70% for IE and 30% for the OS but you have to buy both. That was my suggestion that they may be doing that. And, they may in fact be doing that.

If Microsoft is willing to charge a very low price for IE (according to them), then maybe consumers are only paying $60 for the OS and $140 for IE. Why such a low price for the OS? Old technology is one reason. Obsolete technology is another. Minimal R&D on the OS is another. And, of course you have the possibility of a very low price for Windows to defer competition to that platform. It all makes sense. Not necessarily the case. But, a monopolist could easy lower the price of the monopoly product and bundle in an expensive application to bring the price back up where consumers would never be the wiser. You know. Just not know any better. Used to paying the price.

Back on the point of the question. Nothing in the evidence even begins to suggest that Microsoft is not charging a predatory price for IE. They do say it is free. And, they pay OEMs to promote it. And, they even trade off some of their monopoly power to get other companies to disfavor or stop selling Netscape products.

Monopolists can do all kinds of harmful tricks to consumers. They can charge high prices. They can extract illegal deals from OEMs in exchange for normal prices. Or, they can simply bundle key products such that only they can sell products for money. Microsoft is being paid here. Microsoft is recovering their R&D. Netscape is not being paid for products and can not recover R&D despite the fact they develop the same or similar product.

Only the Dean seems incapable of explaining it.

2:21 PM PDT - Again, the Dean failed to answer the question asked of him

q. And can you tell me why it is you disagree that it was--that it did not make business sense for Microsoft to give away browsing software for platforms other than windows?

a. Well, there are two business reasons that are mentioned in the record in this case that Microsoft had for doing this. The first is a desire to spread the use of its technologies, say, activex in particular, but others as well. second, as it tried to promote--and that purpose is certainly served by having those technologies, having its browser on the apple platform--and second, there is, i believe, testimony that Microsoft was told by business customers with apple and intel networks with so-called mixed networks, that they would be unable to use internet explorer if it didn't run on the apple. and again, in the desire to spread its browsing technologies, it made sense to respond to that demand by producing a version for the apple, and also unix. The same issue holds for unix.

The question related to why the price was zero instead of a normal competitive price. Yes. Everyone in the business wants there technology out there. But, usually they sell it. Of course, if you put a normal price on it, consumers might not take it. So, Microsoft zeroed out the price to get the maximum penetration even on other platforms to deprive Netscape a market on those platforms as well. Wanting to distribute your technology does not set a zero price. Wanting to force consumers to take your technology might.

By the way, who pays for the R&D on the Unix versions of IE? Do you suppose Windows 98 customers pay that too? Clearly Unix customers do not. So if someone is going to pay for that, it must be the people with their credit cards out when Microsoft goes by. Bingo. Microsoft customers are harmed by paying the R&D for software that runs on other systems than their own. All thanks to Microsoft Corporation, the monopolist.

By the way, I do not think Unix users of IE get ActiveX technology. Is not ActiveX limited to Windows only? I thought that it was.

It is true that a lot of customers will not want IE if it runs only on Windows. Viola. Guess why IE is an application and can not be part of an OS? Applications are applications for a reason. Actually a number of reasons. Most of these Microsoft has demonstrated in regard to IE. 1) not part of the OS so that it can be easily updated on a different frequency and process than the OS. 2) not part of the OS so that it can be written for more than one OS. Microsoft has treated IE 5 only as an application. It has never treated IE as an OS. It has only bundled it with the OS. There is a big big difference.
 

2:05 PM PDT - There is a big difference between relying upon secondary sources of revenue and distributing product below cost to preclude a competitor

q. Let me ask you specifically, professor Fisher testified that Microsoft engaged in predatory conduct because it paid people to distribute its browser. based on the work that you have done, do you agree that it would be predatory for Microsoft to pay to distribute its browser or its browsing technology?

a. No.

q. Why not, sir?

a. Well, there are several reasons. First, again, the question is whether the conduct Microsoft engaged in the development and so forth of internet explorer, first test is, was it profitable? That test hasn't been performed. but the question of whether it is necessarily predatory or a sale below cost to pay someone to distribute, I think we have come around to a couple of times, first, Microsoft primarily distributed IE as part of windows. Second, the distribution, the paying of someone to distribute a browser was found to be profit-maximizing by aol, was engaged in by netscape, presumably, in pursuit of profit and not in pursuit of predation. so, we have examples of entities plainly not predatory that had good business reasons to do it. Microsoft had good business reasons to expand the use of its technologies in the case of, say, apple. Microsoft had good business reasons, given the demands of users with mixed networks, mixed intel/apple networks, to develop and distribute its technology for apple. so, there is nothing that I think suggests on balance that this is predatory.

Dean's answer does not address the question. Yes. Microsoft has reasons for distributing its technology. But, usually that mean selling it. Microsoft gave it away to ruin the market for competitors. And, Microsoft did not have nor does it have the portal business or secondary sources as Netscape did. If this economist wants to suggest that Microsoft has secondary income sufficient to justify free distribution of IE, then he could do so. He has not.

Wanting to distribute your technology never justifies giving it away. (Unless you happen to support open source, I suppose.) But, that is not what the Dean is trying to say here. What he wants to say is that Microsoft benefits from having technology distributed. That is true. But, why? Because it further protects the monopoly against the threat pointed out by Microsoft with the Netscape browser. There is no showing of any secondary revenue. Microsoft has failed to really make that argument. It might apply to Netscape. But, Netscape had little choice. It was take the marginal secondary income or none at all.

Microsoft clearly distributed IE with the specific intent to preclude competition. And as far as it being predatory, there is ample evidence to support that as well.

The Dean is simply not going to acknowledge any evidence that implicates Microsoft, no matter how obvious it is. The poor guy just can not figure out how a zero price could possibly be predatory. I guess he figures "predatory" can not exist unless the other company goes bankrupt. And, I suppose if Netscape did go bankrupt, the Dean could not figure out how that could be the case. Not having a revenue stream could not be a cause, could it? I mean, Microsoft was incorrect when they planned to focus upon the revenue sources that Netscape had going, right?

1:36 PM PDT - It is not hard to judge intent when Bill Gates threatens to bundle products publicly

q. Do you believe it is appropriate for an economist to assess intent in that regard, to make the distinctions between welfare-enhancing integration decisions and nonwelfare-enhancing integration decisions?

a. I think a focus on intent by an economist is difficult, slippery, and fraught with peril, frankly. it's difficult to formulate--it's difficult to know what the intent of an organization is, a multi-person organization. And it's difficult on the basis of the kind of evidence that's usually available to distinguish between the normal aggressive intent to take all the business, which is sort of what one expects competitors, if they are competing vigorously to exhibit, and an intent to wipe out the competition. There is a certain similarity in those sentiments, and making fine distinctions between them strikes me as very difficult.

The proof of intent in this case does not rest upon what the economist might think. But, what does the Dean think the intent was when Bill Gates threatened Clark with bundling IE should anyone enter that market? Bill Gates did not say "integrate". He said bundle. And, what does "bundle" mean to an economist? It means little more that packaging and marketing.

Dean Schmalensee is the economist who goes out of his own area of expertise and assigns cause and effect to specific technological differences in products which he is not capable of ascertaining and flatly ignores a whole package of illegal marketing activities and agreements which clearly have antitrust implications and more importantly antitrust affects. You know, the kind of affects that economists can comment on and can evaluate.

The threat that Bill Gates levied against Mr. Clark does not even begin to qualify as a "welfare-enhancing integration". Rather it would cause any antitrust lawyer to have hair raise itself up the back of the neck. That was a dead give away that the antitrust laws were going to be violated. Why so? Because product bundling only really works when one product is a monopoly. Plus, the purpose was to scare away competitors. Mr. Clark was a potential competitor and Bill Gates knew that. He also knew he had the raw monopoly power to preclude competition.

You do not need to be an economist from MIT to know what that comment from Bill Gates meant. However, it might take a big expert witness fee to get an economist to reword that comment and try to quote it as if Bill Gates was talking about product integration or welfare enhancing designs. Bill never mention any benefit to consumers at all. He does not think that way. He thinks about precluding competition. Bill Gates was right. Microsoft could just bundle a browser and preclude competition. That is exactly what they did. And, it was for the reasons first mentioned by Bill Gates.

1:13 PM PDT - NO OTHER VENDOR BUNDLES A BROWSER FOR THE EXPRESS PURPOSE OF PRECLUDING COMPETITION

q. Now, have you studied whether other vendors of operating systems, particularly IBM or apple--or sun, in fact--included browsing software at no charge with their operating systems?

a. All operating system vendors for desktop computers, as far as I know, do that.

q. And was Microsoft the first operating system vendor to announce that it would be including browsing functionality at no charge as part of its operating system offering?

a. I believe IBM made that announcement first. I'm not sure where apple was in this, but IBM, i'm fairly sure, was first.

Sounds like the question even assumes bundling. "..as part of its operating system offering"? Does that imply that IE is not the OS? Sure sounds like it does. In the examples given (IBM and Apple) it is just offered. IBM offers both its own browser and also promotes Navigator. Apple now bundles IE.

But, none of these companies bundle the application browser for the specific purpose of precluding competition. Sun does not compete for consumer OS business. So what it does matters little. Same with Linux for that matter.

And, you have to keep in mind that bundling IE is only one of the illegal acts. Forcing consumers to install it, maintain it and support and use it are other acts. Neither IBM, Sun nor Apple require anyone to use any browser. Microsoft requires its use, prevents its removal and forces all consumers to preload it into memory upon each boot up taking away valuable resources from all applications.

This case is not simply about including the browser with the OS. Microsoft has conducted a whole series of illegal acts all intended specifically to preclude competition. Not meet competition as this question suggests, but rather to preclude it completely. Microsoft has failed to bankrupt Netscape, but it has precluded any revenue stream from supporting the development of internet technologies (unless of course, you do exactly as Microsoft tells you).
 

1:04 PM PDT - But, Bill Gates knew that bundling IE would preclude competition - and he dropped out of school

q. Well, do you think that there is a principal difference in Microsoft seeking to maintain its leadership position in platform software by adding the features that are described on the exhibit we just saw and adding web-browsing functionality into windows?

a. Let me hear that again.

q. Do you think that there is a difference between Microsoft enhancing the value of its platform by adding the features that are indicated on the exhibit we just discussed and adding internet explorer functionality?

a. I don't know how one would or on what principle one would make a difference, one would decide there is a difference. In all these cases, the desire is to improve the platform. The desire is to get a lot of business, to sell a lot of copies of windows, to grow the windows user base and the volume and revenue and profits. all of those additions, from what i know--and i haven't studied each one of them in detail, but were made with that broad general purpose. similarly, ie. It grows the platform. It expands the business.

Not to mention that to force all consumers to buy IE, no one will care to pay extra for a competitor's possibly superior product.

It needs to be mentioned again. Product bundling always causes to things to occur. 1) the price is increased to cover the bundled product and 2) choice is removed from the consumer in both the short and long run.

It is nice to argue that all these great products that Microsoft is forcing consumers to buy have some value. But, it is wrong and illegal to force their sale.

12:56 PM PDT - Dean Schmalensee does a good job of testifying for the DOJ from time to time

q. And what is professor Fisher's basis, as you understand it, for saying that the integration of internet explorer functionality into windows was predatory while all of the other comparable decisions that we have seen were not predatory?

a. Well, i think the last sentence states it. Used to maintain a monopoly, and that is the reason for which it is done. So, this last sentence appears to be anchored in the issue of the intent of Microsoft in integrating features and functionality.

Well. First, the question assumes the other acts were not predatory. Some of them may have been. Caldera thinks so. Lantastic might decide to file suit. Even Stac Electronics may have a claim here on this very issue.

But, the Dean mentioned a key point. "The reason for which it is done."

Bill Gates himself threatened Mr. Clark that if anyone offers a browser for the windows market, Microsoft will "bundle" its browser to preclude that kind of competition. Microsoft carried out the very threat for the precise reason it was first made. Even the Dean acknowledges that the intent behind the act is important. And, the intent in this case is clear as a bell.
 

12:47 PM PDT - But, I thought Dean Schmalensee said in his direct testimony that barriers to entry did not exist in the consumer OS marketplace - Now he says they are in fact increased? ...sounds like the testimony from the DOJ economist, Mr. Fisher.

q. Do you believe that the inclusion of those features into windows made it less likely that other firms might enter the operating system business?

a. Yes. It raised the bar for competitors. The more features and functions the consumers valued that were part of windows, the harder for competitors to enter the operating system business. Absolutely.

"Raising the bar" and "barriers to entry" are really the same thing. And, clearly if Microsoft bundles Microsoft Word with the OS, the "bar" is raised even higher and all consumers pay for the higher price.

Clearly, product bundling by Microsoft is enormously harmful to consumers in both the short and long run.

12:34 PM PDT - Gordon Eubanks testified that competition was good BUT he assumed that Symantec would remain viable and be able to sell products

q. Did you read the testimony from Mr. Eubanks last week?

a. Yes, i did.

q. Did he testify about this phenomenon and its effect on the firms who made these products prior to the inclusion of their functions in windows?

a. He did. He testified primarily from the point of view of the firm of which he had been ceo, symantec, which made--makes, as far as i know, norton commander. And he indicated that it wasn't always the most comfortable thing, but the firms moved on, added new features, added new products. And consumers, obviously, benefited from it enormously.

Gordon Eubanks testified that consumes benefitted because Symantec was able to stay in business and sell their products. If Bill Gates tried to do to Gordon Eubanks what he did to Netscape, Gordon Eubanks would be in court alright, but as plaintiff. You do not think so? If Norton Commander could not be sold because Microsoft bundled PCTools or even wrote their own comparable utilities? You know, spend half a billion on R&D and force all consumers to take it?

q. Putting these features and the features previously provided separately into windows, did it make windows a better product?

a. Absolutely.

q. In your view, did it make windows more desirable for consumers?

a. Absolutely, because you could buy--when you got windows, you didn't need to go out and buy all this other stuff if you wanted to do a number of the functions that those programs provided.

Hey Dean! Consumers rather pick and choose their applications and utilities not be force feed.

Microsoft forces consumers to buy IE even they do not intend to use a browser at all. Just how is that supposed to help them?

Consumers can rest assured to know they will be forced to buy Microsoft Word when this case is over should Microsoft be given the green light to bundle whatever it wishes.

12:19 PM PDT - The Dean is right on one point, Microsoft has used bundling to preclude a number of competitors from the market

q. Now, professor Fisher has, on a number of occasions, referred to internet explorer as a no-revenue product. do you think that for purposes of performing a predation analysis that is the appropriate manner to characterize ie?

a. No, i think for purposes of performing a predation analysis, you have to ask, was the investment in developing, improving, distributing browsing functionality, that $100 million plus or minus any sorts of adjustments that are appropriate, was that investment profitable for the Microsoft corporation? And the obvious vehicle through which it would have been profitable was, as that chart indicated, making windows a better profit--a better product that could be sold at a higher price or that would command additional volume.

q. Has Microsoft made other improvements to its operating systems over the years that, given your understanding of professor Fisher's use of terminology, would be called "no-revenue products"?

a. Of course. Many.

q. Have you prepared a document that gives some examples of those?

a. Yes, i prepared such a document, exhibit whatever it is.

q. Let's see defendant's exhibit 2764, which i will show you at this time. is that the document to which you referred?

a. Yes.

q. Was it prepared at your direction, and does it summarize a portion of the opinions you intend to render today?

a. Yes, it does.

Mr. Lacovara: i would offer defendant's exhibit 2764, your honor.

Mr. Boies: no objection, your honor.

the court: defendant's 2764 is admitted.

(defendant's exhibit no. 2764 was admitted into evidence.)

by Mr. Lacovara: q. Can you explain for the court what's on this document and the purpose for which you assembled the information that we see here.

a. This is an attempt to illustrate, by a set of examples, how much additional functionality Microsoft has added to its windows product over the years. And the examples, we sort of have the icon for a Microsoft function on the left, with generally with a box, indicating a product that was sold commercially that performed a related function. Let me just mention a couple of them for clarification. "funk software sideways," up there on the top, i actually remember. It was a piece of software that sold for $104. As this indicates, that was the price given in an ad in pc--an ad from pc connection--in pc magazine in november of 1991. It was a piece of software that allowed the--you to print in what is now the standard landscape mode sideways. so, in 1991, for $104, you could buy a piece of software that allowed you to print in landscape mode. now, of course, you can print in landscape mode by a touch of a button within windows. similarly, on the bottom right there, "xtree" is a program that was very popular in the dos world and was clearly selling even when lots of people were using windows in 1993. It performed some file management functions. It did a bit more in some respects than windows explorer does, less than other respects. But it was basically a file management program that added a lot to dos, but has been largely superseded by the functionality of the increased power that's been built into windows. down at the bottom, the "norton commander" is a set of utility products. the "quarter deck desqview" provided a desktop. just a range of things here. An important product, the adobe type manager, which supported true-type fonts. That's actually a very useful feature in windows that Microsoft added, that one used to be able to get from adobe. I bought this package at least once for about $80. it's now provided automatically within windows. so, this is simply to illustrate that Microsoft has added to windows, over the years, functionality that it didn't have before that used to be sold separately, and it's been an ongoing strategy.

It is an ongoing strategy. And when Microsoft wants to preclude another competitor it will bundle more applications. Intuit is on the bubble. Real Networks is on the bubble. Lantastic's bubble has already popped. Novell's business has been reduced. Caldera is in court right now as a result of this same process of bundling products. (DESQVIEW had a similar legal claim until Symantec bought them out, right?)

But, none of them were so blatantly obvious as Netscape. Microsoft has boasted of its ability to preclude Netscape from the market.

A monopoly with the raw power that Microsoft has and has used can preclude almost any competitor from the market. All they have to do is "bundle" just like Bill Gates himself threatened to the industry in general and Mr. Clark specifically. Just as the Dean said. But, Gates used the "bundle" word not the "integrate" word. That idea did not even surface until after the DOJ showed up. Then it become "integration". Some attorney must have thought that was a better word to use in e-mail etc rather than the term used by the rest of the industry.
 

12:06 PM PDT - Actually Bill Gates said he would bundle IE not make the browser part of the OS - but go ahead Dean

q. Dean schmalensee, let me ask you to assume that netscape had never shipped browsing software, so we are in the situation in the fall of 1994, if you will. have you examined the record to determine--to come to a view as to whether Microsoft would have developed browser functionality as part of its operating system even if netscape had never existed?

a. Yes, i have seen at least three kinds of things that bear on this. First, there is the testimony that Mr. Gates told, i think, Mr. Clark in the fall of 1994 that the browser was going to be part of the operating system.

(And Bill Gates meant that as an illegal threat to the industry. He threatened to "bundle" IE should anyone enter that market for Windows.)

a. (continued) second, there is in Mr. Allchin's direct testimony a lot of internal Microsoft correspondence cited and then attached, so i walked through much, if not all of it, discussions within Microsoft during 1994 about the inclusion of internet functionality. And third, of course, IBM announced that it was what it was doing to os/2. It was going to make os/2 the gateway to the internet in the fall of 1994. In light of all that, it seems to me hard to come to the conclusion that they wouldn't have responded to IBM, given that they said they were going to, they had internal discussions. And IBM, as of the fall of 1994, was an active competitor in operating systems.

All of that and Microsoft still develops and distributes IE as an application just like all other applications totally independent of any OS. Witness IE 5.

Bundled is the correct term in the industry when the purchase of both products is required.

Microsoft still thinks it changes its antitrust liability via semantics. IE never was part of the OS. It still is not. Witness IE 5 released and distributed by Microsoft Corporation even after this trial began. In fact, they did so after Allchin testified that IE and the OS were a single product. But, then Allchin lied a lot during his testimony. (Maybe Allchin did not know IE 5 was about to be released?)
 

11:43 AM PDT - Question: If you knew you could sell 100,000,000 copies of a product with a zero marginal cost to develop, what would you sell it for?

q. Before you--if you could briefly explain what this document shows--and again, make clear for me, dean schmalensee, why it is you think appropriate to look at what the effect on windows sales would be in terms of the amount of money that Microsoft supposedly spent developing and promoting the internet explorer technologies.

a. Microsoft has been investing, since the firm began selling operating system products, platform since dos 1.0. it has been investing money in improving the quality of its products and adding features and functionality to its products. That has been an enormously profitable strategy. It has resulted in a windows product, which has been very profitable. so, to think about whether this is a plausible example of that continuation of that strategy, one has to ask, or one way to ask that question is to say, "suppose internet explorer resulted--made possible a price increase?" Suppose you could charge more for windows because it had all of this functionality in it for consumers and for isv's, how much of a price increase would you need to recoup $100 million? This is actually one-year recoupment, to be fair. This is the annual increase in profits. and what this says is, taking the 1998 price and quantity figures as a base, a dollar-fifty increase in price for 1998 would have recouped $100 million. similarly, suppose Microsoft didn't charge any more than it would have for windows, but because the product had all these features and all this functionality, the platform expanded. What kind of expansion would you need? Well, the last line answers that question, and we rounded to whole digits. in fact, you could be a bit below three percent, but at three percent in quantity for one year pays back $100 million. And that table just again gives some illustrative calculations for purposes of orders of magnitude. Everything is rounded, with the exception that all of those do generate increases of at least $100 million.

the court: and the quantity you're referring to is the quantity of operating systems sold; is that correct?

the witness: quantity of windows, yes, 95 and 98, i believe.

the court: all right.

Well if you force the sale of 100,000,000 copies, the price necessary to be above costs is very low. And, I suspect that the judge noticed that the quantity of IE sales is fixed to OS sales. The $1.50 figure is bogus however. Yes, it does just recover R&D for one year. But, Stockholders are not interested in a wash, right?

Plus, you have to realize that the pricing of the OS is not being done using the same set of rules. If you apply this logic, you will also have to carefully sort out the cost of R&D on the OS itself. The $1.50 figure is highly deceitful. How would the price for the OS compare? $5? $10? Or, $2.

I know that Microsoft will argue that forcing all consumers to buy IE for say $1.50 is fair and not predatory. But, the old version used to sell for $35-40.

This is a hypothetical figure. And, I hope the judge does not buy the premise that a forced sale of 100 million copies means that the price is not predatory. And, if Microsoft only sold 5 or 10 million competitively, what price then? $15 or better right?

The one think that Microsoft likes to do is misrepresent the economic factors. They always pick competitive industries to try and convince the court how a monopoly works. They always pick the auto industry to try to secure their right to preclude competitors by bundling products. Well. Ford Motor Company could never bundle a GPS unit with all cars because consumers would run across the street and buy the cheaper Chevys. But, Microsoft bundles IE and claims it is similar to an engine for a car. It is not. All cars must have engines. Not a single computer needs a browser. It is just an option.

Here, the choice of 100,000,000 sales for the purpose of estimating a predatory price is deceitful. This guy is an economist. He knows better.

Also keep in mind that Microsoft spent half a billion on IE not only $100,000 as this example suggests.

.

11:22 AM PDT - Does Microsoft really think that competitors better be happy with secondary sources of revenue but Microsoft has the absolute right to force the sale of its products for money directly? Or, does it just look like they are that arrogant?

the court: and leaving aside professor Fisher's test, why is it what Microsoft did in this case a more egregious version of case one? It went to zero.

the witness: well, the question here is whether it was, to use professor Fisher's words, a money-loser, and i think, your honor, that the aol document, for which i can't mention the figure, suggests the distribution of browsing software is substantial negative price because that's what that document was about.

the court: the one we saw this morning?

the witness: the one we saw this morning but can't talk about. is profitable. Netscape itself found it profitable to be distributed through compaq at a negative price. In this case--this isn't a widget--you have to consider all the other benefits, the portal benefits and the platform benefits and so forth.

the court: I follow you.

There is nothing wrong with secondary sources of revenue. But, it is harmful to all consumers to force them to pay money as the primary source of revenue. Microsoft is truly arrogant and deceitful in this respect. Yes, it is conceivable that browsers would be developed and distributed with the source of that technology gaining only secondary sources of revenue.

But, Microsoft forces consumers to pay for IE directly. So even if Netscape can survive, consumers are harmed directly by Microsoft.

Microsoft Corporation just laughs on its way to the bank with consumer's money. Not so? Then why is Microsoft stock being bid up?

11:01 AM PDT - Sounds like even the predation test from Dean Schmalensee is met

(previous to this question, the Dean did not like the test offered by the DOJ)

q. In contrast to this test, what do you think is the appropriate test?

a. Well, i think the appropriate test has two parts, two or three, depending on how you count, but the first involves an act that is a deliberate money-loser, as the phrase is there, pricing below costs in the classic instance. And the second component of the test is that that act makes sense--only makes sense--as part of a strategy that, a, will extinguish or has extinguished competition; and that b, will permit recoupment of the losses after competition has been extinguished. so, the deliberate money-loser is part of it, but it's only sensible because of the elimination of competition and the recoupment period permitted thereby.

Well. If IE is "free" as Microsoft argues, then it is clearly being sold below cost. (Hint: IE cost half a billion in R&D)

The second part qualifies too. "...part of a plan to extinguish competition".

Does the Dean think it is not the case simply because some code still lays around?

Clearly Microsoft intended to extinguish Netscape. They even boasted of the plan. And, a predatory price was the key component of that plan.
 

10:50 AM PDT - Again, Dean Schmalensee acts dumb.

q. Now, as a general matter, Dean schmalensee, has professor Fisher or dr. Warren-boulton presented any economic evidence that netscape is a less viable competitor to Microsoft today than it would have been but for the actions of Microsoft about which the plaintiffs complain?

a. No.

This testimony is getting pretty sick. Bill Gates and his boys adopt a plan to preclude Netscape from being a competitor. I mean they have it all figured out. They will turn the OEMs. They will turn the ISVs. They will turn the ISPs. They will force Apple, Intuit and AOL to use IE and disfavor Navigator. They will bundle IE with 100% of all PC sold (including Apple).

And, this guy, who claims to be an economists testifies that no evidence was presented that Netscape is a less viable competitor? Hint: Any economists can figure out the viability of a company when they are unable to sell their products. (Unless they are paid to close their eyes completely and ignore their own training and expertise.)

10:37 AM PDT - Again, the Dean falsely values the Netscape browser (hoping to lower the damage claim by AOL to follow this case?)

q. Let me ask you both by reference to that page and to the other documents that you've reviewed in thinking about the significance of this transaction, to comment on some testimony given by the plaintiffs' economists that suggests that the actual number of users of a particular kind of software, including browsing software, is less important than, quote, market share? Are the documents you have seen consistent with that way of looking at this business?

a. No, the documents that i've seen discuss both, but stress numbers.

Mr. Lacovara: now, i would like to have placed before the witness some testimony given last week by Mr. David colburn of aol, june 14th, afternoon session at pages 31 and 32. And it's relatively brief, so i will read it into the record, (reading): "question: then you would agree that the major reason for the acquisition of netscape is aol would gain ownership of the world's second-most-used connected client after the aol classic service? answer: yeah, i'm not aware of the statistics, but the tie of the client to the portal was very important." what does that testimony suggest to you on the subject of the prospective and the actual viability of netscape and its client?

a. Well, it's consistent with the document we just looked at: the emphasis on the connected client, the tie of the client to the portal means that the client, the browser, is an important reason, very important here, of why netscape was of value to aol.

Not necessarily. AOL could tie IE to the NetCenter Portal without using the Navigator browser. I appreciate the effort that Microsoft is making to increase the value of the Navigator browser but the truth is they ruined the market not only for Netscape but for all future browser technology. This case is not just about harm to Netscape. And, it is not about the fact that some of Netscape has survived Microsoft's intentional and illegal acts. (Survival does not excuse attempted murder as Microsoft wants to suggest.)

This case is about the preservation of competition and the preservation of competitors. This case is about the right of every company in this business to develop and market internet technologies. Microsoft (and many of its ISVs) are precluding that.

I really would like to know how much money Dean Schmalensee will invest in a company developing browser technology to compete with Microsoft. He claims to be testifying that is a great opportunity. Is he just lying? Or, does he believe that?

10:28 AM PDT - Again Microsoft misrepresents the law by suggesting that Netscape had to be killed before predation occurred.

q. Now, i would like to ask you to take a look at page 27 of this document, which remains under seal, and you will see a section there called "browser share trends." and given that it's under seal, i would have to ask you not to reveal any numbers or to talk with a great deal of specificity. let me ask you first whether you would regard the shared trend discussion on that page as consistent with the proposition that the purported target of Microsoft's predation is dead?

a. No, it's inconsistent with that proposition.

The proposition is Microsoft's not the DOJs. The DOJ has not argued that Netscape is dead. The DOJ has not argued that Netscape must be dead before antitrust violations apply. In fact, the antitrust laws say nothing about a competitor being completely removed from existence.

IBM is not going to go bankrupt if it can not sell OS/2, right? But, IBM can sue Microsoft for antitrust damages just the same.

What Microsoft is trying to do is draw a line in the sand out pass the breakers.

10:16 AM PDT - I guess Microsoft is really disappointed that they have not completely removed the Netscape browser from the market - All they can do is ruin the market for competitors... oh gosh...how limited their power is

q. Now, professor Fisher also testified that, in his judgment, the netscape browser business was broken at the time that netscape was purchased by aol. based on your review of aol's own internal documents and the documents of its bankers when it was considering buying netscape, do you regard that opinion as justifiable?

a. No.

q. And let me ask you to look at defendant's exhibit 2518, which is under seal.

Mr. Lacovara: although this morning, your honor, I was able to obtain the consent of aol's counsel to unseal some additional pages, the ones about--at least the first several of about i will examine the witness.

the court: all right.

by Mr. Lacovara: q. And this document, Dean schmalensee, has previously been identified as the presentation made to the aol board of directors at the time that the board approved the purchase of netscape. first, i would ask you, have you ever seen this document before, sir?

a. Indeed, i have.

q. Is it one of the documents to which you referred in your answer a few moments ago?

a. Yes.

q. Could you turn to page five of the document, which now has been unsealed, and i ask that it be displayed, which is entitled "summary of proposed transaction, review of deal strategy." The bates number is 15007.

the witness: 150007. You omitted a zero.

by Mr. Lacovara: q. You are the numbers man, sir. i would like to ask you about the first item listed under strategic benefits. And what--what was aol's board told was the first strategic benefit of this transaction?

a. Assuming the presentation followed the deck here, the first strategic benefit mentioned was client ownership.

q. Now, there has been some suggestion on this record and otherwise that the acquisition was about just the portal business of netscape and netscape's e-commerce possibilities. do you regard this document as consistent or inconsistent with that statement?

a. This is inconsistent with that statement for a couple of reasons. First, the document recognizes in the first bullet point under "client ownership," you see the phrase "connected client," which has to do with the link between a client, the browsing software; and the web site, netcenter. So, this recognizes clearly that the client is an integral part of the portal business, of the netcenter business. and it goes on to discuss other advantages, other assets of client ownership, but the link to the portal is obviously key here.

q. Now, let me ask you about the last bullet point under client ownership where it says that one of the strategic benefits of owning the netscape client was a viable alternative to Microsoft as a browser provider to us. do you see that?

a. That's what it says.

q. Leaving aside the question we will address later as to whether aol will, in fact, choose to use that netscape software as the basis for its client, have you ever seen a document from the files of sun, aol or netscape that suggests the contrary; namely, that netscape had not--excuse me--that aol had not acquired a viable alternative to Microsoft's browser?
 

a. The only thing, Mr. Lacovara, that might be construed as pointing in the contrary direction are documents that indicated that aol wanted a componentized browser. And as of the time of the acquisition, netscape hadn't yet produced one, although netscape had been engaged in that process. And documents make clear they will be working with sun in that direction, but certainly nothing suggests that it's not a viable browser provider.

q. Let me ask you to turn to the next page of the document, which is also--has now been unsealed with the consent of aol's counsel. And again, this is the strategic overview by segment, and i would ask you to again focus on the first item, which is again labeled "client." And can you focus, please, on the first bullet point and explain to me what you think the significance of that bullet point is for purposes of evaluating--for the purposes of evaluating the viability of netscape and aol going forward.

a. Well, this outlines a very interesting strategy--and i think in pretty clear terms--it says, "extend browser to be a comprehensive desktop application, bundling communications and productivity applications." the clear implication is that the browser would become part of a desktop suite that would presumably include communications, as netscape communicator does, and proactivity applications. And that's normally used in this business to refer to things like word processing and spreadsheets and sometimes presentation software and database, depending on the context. but certainly to make it a broader application with more functionality, more things the user can do, and then it goes on to absorb more share of computing time, the user's computing time, and then with the goal of becoming users' de facto environment. and the vision, i think, is pretty clear that this would be an application that the user would turn on and basically stay with as opposed to, say, bouncing around the windows shell.

q. And do you regard it as consistent or inconsistent with the proposition that netscape's browser business is broken to suggest building that sort of strategy on netscape's client?

a. I can't imagine that an intelligent, well-managed firm like aol would contemplate a strategy like that, which is going to require a substantial investment in building a comprehensive operation, that they would do that on the basis of a business that was broken.

Well. Perhaps the Dean should put his money where his mouth is. If he really thinks that the browser technology has value, he can make AOL an offer. Oh, but the Dean is an economist. He could figure out that if no market exists for the product, the technology value is really limited. Being an economist he should be able to calculate the difference in value between a product that sells 100,000,000 copies at $35 each and one that must be given away or even distributed at a net expense. Certainly, the Dean can do that.
 

9:58 AM PDT - Dean Schmalensee continues to mislead and deceive the court with his testimony

q. Now, professor Fisher testified in his written direct testimony at paragraph 24 that if Microsoft were successful, quote, in its anticompetitive actions, that success will serve as a disincentive to other firms to innovate in areas that Microsoft may stake out as its own property, closed quote. do you think that netscape's experience in competing with Microsoft will serve as a disincentive to future would-be innovators?

a. I don't think so. I think netscape's investors have done very well. I think Mr. Clark's investment of something on the order of 5 million around five years ago became 1.4 billion or thereabouts. That doesn't sound like deterrence to me.

Netscape chose to compete with Microsoft straight up. They even had a head start. However, illegal acts by Microsoft ruined ...absolutely ruined...the browser market for everyone except Microsoft who continues to force the sale for money of IE upon everyone. The residual value of Netscape was not in the browser technology as the Dean attempts to deceive the court by suggesting.

This testimony is not believed by anyone in the industry. Not one person. Not Bill Gates. Not Microsoft attorneys. And, I doubt the judge either.

Keep in mind however, that Netscape (AOL) has value in its possible suit for damages against Microsoft due to antitrust violations. And, those damages may exceed the value that AOL paid for Netscape.

The Dean sounds like a criminal that wants a light sentence because the body was not kicked after it fell to the ground from the gun shot.

His suggestion is "sick". Microsoft violates antitrust law, ruins the market for browser technology from all companies except Microsoft, forces all consumers to buy unwanted products and then suggests "no harm no foul" because the company removed from competition was able to bale out? No where in the law does it say that successful companies can not sue for antitrust damages. No where in the law does it say that a company can not be subject to antitrust abuse unless that company is made bankrupt and all investors loose their money.

The antitrust laws are designed to protect competition. And, competition has clearly been precluded by Microsoft. At least they tried with all their might and power despite obvious antitrust violations.

9:51 AM PDT - So. According to Dean Schmalensee, predation is not possible in the computer software industry because the intellectual property can be eliminated?

q. What is the relevance of the fact that the assets of netscape are, as you say, "in play," when thinking about predation?

a. Well, it's easy to focus on corporate entities, and it's a mistake, because from the point of view of economics--let's suppose there are two factories. Factory owner a decides to engage in a predatory strategy to destroy competition for b. Well, even bankrupting b's owner won't do it if somebody else can pick up the factory at fire-sale prices and operate it. So, in effect, the factory has to be removed. The asset that gives rise to competition has to be removed. how the intellectual property in navigator would plausibly be removed escapes me, but in any case, the intellectual property is present, and the personnel and the brand name and so on. All of those assets are still present.

This suggestion of the Dean Schmalensee is hogwash. But, if he wants to use the persistence of the technology as the test, then maybe the court should prevent Microsoft from selling for money any and all OS products. The technology is going to not go away, right? According to the Dean, that would be fair.

The Dean is not an idiot. He just testifies falsely and contrary to his own thinking in order to support the party who hired him.

9:39 AM PDT - I hate to call someone an idiot who has managed to get a degree in higher education...but....Dean Schmalensee gets real close...

q. And can you tell me in very summary terms what the basis for that opinion is.

a. Well, we discussed earlier netscape's browser business. Aol/netscape are investing in improving browser technology, new versions coming out, substantial distribution and use of the product. but just at the most basic level, netscape's intellectual property, netscape's personnel, netscape's organization remain in play, remain in the marketplace. netscape is now part of financially healthy firm: aol. it was acquired for, at the time the transaction was executed, something like $10 billion. It's alive and well and living with netscape--living with aol and allied with sun.

This guy is an idiot. Microsoft adopts a plan to remove the ability of Netscape to be paid for its products (not just the browser, mind you), Microsoft carries out that plan, Netscape can no longer sell browser software, Netscape gets acquired on the basis of other business interests, and Dean Schmalensee calls that "alive and well".

Let's ask the Dean if he would approve an order by the court that Microsoft be prohibited from selling any OS product for the next 5 years. That should leave Microsoft alive and well just like Netscape, right? After all, they could still sell Word.

"Living with AOL and allied with Sun does not mean that Microsoft has not acted with the specific intent and purpose to remove competition and in fact did so. Certainly "alive and well" means that the product can be sold profitably.

I am sure Microsoft would still be here 5 years from now. So. According to the Dean, such a court order would be just fine, right?
 

9:12 AM PDT - Bankruptcy not required for predation. Removal from the market not required for predation. But, since Netscape is still around Dean Schmalensee argues no predation?

q. And is it generally your understanding that a successful predation--well, let me ask: what is the result of a successful predation strategy, according to the theory of predation with which you are familiar?

a. A successful predatory strategy, or a strategy that's anticipated as being successful in advance, should have the result that a competitor, actual or potential competitor, is removed as a constraint on behavior; that it is destroyed or rendered ineffective; and thereafter, the predator enjoys a period of reduced competition.

q. And based on your analysis and the study you have performed, do you have an opinion as to whether netscape has been removed as a competitor or a threat?

a. Yes, i do. No, it hasn't.

Huh? Sure, Netscape still exists to Microsoft's disappointment. And, Navigator, the product they tried to preclude is still around. It just can not be sold. I thought the Dean was an economist. Does this economist really think that when the price for a product is forced to zero and a company is no longer able to sell that product at a fair price, that "predation" has not occurred? The Dean did say, "No, it hasn't".

I guess the Dean would be happy if Microsoft was order to give away its OS for the next 5 years. After all, Windows will not go away just because Microsoft can not sell it, right? And, Microsoft will not go away. It can sell other products.

This guy is blind. Accepting money to appear blind would be more accurate. Does not Microsoft enjoy reduced competition from Netscape? They absolutely do. They removed the revenue stream for browser development. They forced Netscape to put the technology into open source. They forced Netscape to be sold without any value for the browser product (according to AOL). Even AOL does not plan to replace IE and go with Navigator.

And, this economists claims under oath that Microsoft has not caused this?

Actually this answer is more interesting than it first appears. Why? Well. Remember the question I keep raising that none of the columnist and the DOJ itself does not raise? "Just how much is Microsoft charging for IE, anyway?". Remember that? Well. Microsoft has said "zero". And, the DOJ has gone along with that because it supports the charge for predatory prices on IE. Well. Why does not Microsoft say "we charge consumers 50% of the cost for Windows for IE"? Why do they not claim that? Here, if they did so, they could claim IE is not sold at a predatory price, right? Charging OEMs $37 or so for IE would be a fair price. Remember, I have suggested that as much as 70% of the retail price for Windows 98 is attributable to IE. That would be costing consumers as much as $140 for IE. Clearly that would not be predatory.

Now. Look at the Dean's answer again. He clearly, unequivocally claims IE is not being sold at a predatory price. So, is Microsoft charging 100% of its customers for IE? Sure, they are. But, why do they not say so?

Well. If IE is being sold for $140 and the OS for $60 (to reach Microsoft's suggested retail value for Windows 98), then Microsoft would have to put all its arguments behind the suggestion that IE and OS are not bundled or tied. And, that would be real hard to do if they have separate prices. It is also true that consumers would complain about paying $140 for any application they do not want. So, Microsoft uses deceit to keep the dumb consumers at bay.

So what is it, Microsoft? Is it bundling and gauging consumers for IE? Or, is it predatory prices for IE just to ruin the market and preclude Netscape from competing. The suggestion that the Dean has made that no predation has taken place because Netscape is still around is bogus. He himself does not believe that statement he made.

9:06 AM PDT - Good. The Dean claims to be knowledgeable about predation

q. I would like to move the examination to a new topic now and talk to you about the allegations in this case that Microsoft engaged in what dr. Fisher has called "predatory conduct." I would like to begin by asking you questions about the purported target of that so-called predation, namely the netscape corporation. you have an understanding of predation theory, do you, sir?

a. I believe I do.

We will see if the Dean thinks a zero price for a product is predatory. Or, more accurately, forcing all consumers to pre-purchase a product from one vendor such that no market exists for any other version of the same product. (We have to leave this open since we are not sure just how much Microsoft is charging consumers for IE. It may not be zero. It may be $140 or so, right?)

8:35 AM PDT - Sometimes I am just not sure what Microsoft thinks it is proving

q. Could you explain what defendant's exhibit 2762 shows and why you prepared it.

a. Well, 2762 is simply an attempt--not attempt--simply focuses more directly on that basic question. To do that, to deal with the issue of quarter-to-quarter and month-to-month variations that reflect sampling error, we again divided the entire sample period in the three subperiods--the same divisions we used in an earlier chart--and looked at the estimates of the average number in use for each of those periods, and indicated again with the dashed lines--dotted lines, rather--the 95 percent confidence intervals around those estimates. The estimates are the solid balls, and the confidence intervals are as shown. The connecting line is simply a connecting line. that exhibit shows very clearly that these data support the basic point: that the number of browsers in use, the number of netscape browsers in use, that individuals obtained with their computers has risen over time.

q. Thank you.

Thank you? I know the point being made here is that the number of Netscape browsers used that were obtained with their computers has risen over time. But, this supports the DOJ contention that the bundling of IE with the OS will force a domination or monopoly in browsers for IE.

Even if the percentage of computers that ship with Navigator increases, 100% of all PCs ship with IE. Of course, this is due to the force applied by Microsoft.

I am sure that if consumers knew how much there were being charged for IE, they might have a different opinion on this forced sale. So far, Microsoft has used deceit to suggest that the browser is free. It is not free. Evidence in this trial proves otherwise.

This is a key point. Too much time is spent looking at these weak surveys. If IE were not bundled with the OS, they might be important. If OEMs and ISVs were not forced by Microsoft to promote and sell IE, they might be important. Actually, if it were not for the illegal acts of Microsoft, the surveys may not be relevant at all. Why? Well. If competition was fair, then the surveys would only show who is winning fairly. But, when Microsoft's brown-noses OEMs, ISPs and ISVs, looking at the survey data is almost meaningless.

No survey results are going to prove technology made the difference like Microsoft would like to suggest. There are violating the law with their agreements. And, survey results are not going to spring back into line as soon as illegal acts are discontinued. Note if you will the agreement with Intuit. Microsoft got Intuit to switch to IE for a one year agreement. What happens after the year? What happens after Intuit agrees to disadvantage Navigator? Well the harm to Netscape remains. Intuit would need a pretty good reason to switch back again. It is not very likely they will do it. And, Microsoft could deal much harder one year later. They already have Netscape rubbed out.

The problem is that marketing and marketing share is a lot like a boa constrictor. The snake tightens up each time the mouse lets out air to take another breath. But, the snake prevents the new air from entering. The mouse suffocates. The same is true with illegal monopolist practices conducted by Microsoft in this case. They contract with an ISP or ISV or OEM to drop Navigator and then when the heat gets turned up, they release the contracts (remember that?). It does not matter. The illegal harm was done. The OEM switched. Once a dominant position or an established position is lost in the marketplace, it takes "real reasons" to overcome that loss.

In this case, real reasons mean monopoly practices. Monopoly practices can cut down or remove a dominant product in the market place. And, once that occurs it is all but permanent.

Dean Schmalensee likes to argue that IE position in the market is due solely to technical differences in the market. Unfortunately, that is not true in the computer software industry. A whole range of other factors override that factor in almost all markets. Monopoly power is most likely the most significant of all other factors. Yet. Dean Schmalensee, as a so-called economist flatly ignores it. The Dean knows all about raw monopoly power. He is just paid to ignore it during his testimony.
 

7:53 AM PDT - And the Microsoft attorney quickly changes the subject. No reason to run right into the rocks.

q. Now, do you believe that it is possible to evaluate the precise dollar value of placement in the online services folder to any online service, including aol?

a. I think in the nature of this sort of component to a transaction, it is possible to make rough estimates to get orders of magnitude. I did that. I have seen documents in which AOL did that. I think that's all one can do, because there are a whole lot of variables at play in a calculation like that, and I think getting a rough order of magnitude is about all one can do.

q. Thank you.

By Mr. Lacovara q. Let me shift slightly ...

Sure. You can change the subject. The only reason left for AOL to remain with IE is to keep that desktop promotion by Microsoft. They have confirmed as much.

The reason this economist keeps harping on the technical reasons for all events is simply because those are safe ground. And, when you have fair competition those are normally the reasons why deals are made. Price is also a factor. But, when you have a monopoly that is considerably less likely to be the case. When Microsoft holds a monopoly on the promotion space, it requires an idiot as an economist to minimize that fact. Or, it takes someone willing to testify falsely.

Any economist and any player in this industry would readily recognize the benefit and power of being able to offer AOL a promotional spot in exchange for making AOL switch browsers. To think otherwise is to think that Microsoft employees are all idiots running around trying to sign up deals based solely on their technology. Give me a break. Do not be so dumb.

7:36 AM PDT - Dean Schmalensee again testifies outside the area of his expertise in order to deceive the court

q. Now, you testified in january that the analysis you had done suggested that the fact that Microsoft could offer a componentized browser to aol but netscape could not, was of some significance to aol's decision making as you studied it; is that correct?

a. Yes. And everything i have seen since confirms that. in fact, it's my understanding from Mr. Colburn's testimony that aol does not yet have such a browser. And i have seen documents from aol--i think, perhaps, from netscape--talking about their doing some work together last year in the hopes of developing such a browser. In any case, Mr. Colburn indicated they hadn't done it; it was clearly of interest to aol. And it's not available, or it certainly wasn't available from netscape.

Dean Schmalensee again ignores the power that Microsoft possesses having the only desktop on Intel PCs. Instead, the Dean argues that technological differences between Navigator and IE are the sole reason that AOL went with IE. Well. The witness from AOL said otherwise. Microsoft in their many comments about axing MSN said otherwise. And, since then Colburn confirmed that promotion by Microsoft remains the key reason why they are staying with IE. Heck. They now own Netscape. If they wanted to convert Navigator into components, they could easily do so.

The Dean is not only testifying falsely out of his area of expertise, but more importantly he intentionally ignores the very powerful impact of Microsoft's illegal acts (I.E. trading promotion on a monopoly platform for helping rub out a competitor).

Does the Dean not understand what the antitrust laws refer to? Does the Dean not understand what illegal antitrust acts are? Or, does he just believe that antitrust laws are inappropriate and therefore ignores all the facts that support its application?

q. You performed some analysis in january, for your testimony in january, on the question of the value to aol of placement in the online services folder. and just to recapitulate, what is your opinion about whether that folder was of value--placement in that folder was of value to aol?

a. It certainly was of value to aol. Placement in that folder was one of the things that aol took into account in deciding whether or not to sign with Microsoft.

Oh. Now he says that might be of "some value". Now, what is the antitrust significance of Microsoft trading a monopoly position to rub out a competitor?

The technical reasons for using IE are not gone at AOL's discretion. So why are they sticking with IE?

(Just to let the judge hang Microsoft? Perhaps. But I doubt it. Being on the only desktop is pretty good placement for AOL.)

7:27 AM PDT - Dean Schmalensee refuses to look at the economic reality of this case as it applies to antitrust law

By Mr. Lacovara: q. Dean Schmalensee, i would like to begin this afternoon's examination by asking you some questions beginning on the subject of distribution about the online services channel, and specifically about distribution of browsing software through aol. in your earlier testimony, did you conclude that Microsoft had not engaged in anticompetitive acts in terms of its dealings with aol with regard to distributing internet explorer technologies?

a. Yes.

Well. There you have it. Microsoft uses its monopoly power directly with AOL to get them to drop Navigator and use IE and Dean Schmalensee claims not to see any anti-competitive acts. To the Dean, there are no such acts, apparently. So when he says he does not see anything, what he really says is no acts would ever qualify in his mind.

Dear Dean: The antitrust laws forbid a monopolist from using their monopoly power to further that power or gain another monopoly market position. Wake up!
 

June 22, 1999 - Tuesday (Dean Schmalensee returns to the stand for rebuttal. Mr. Lacovara will conduct the direct examination.)

4:08 PM PDT - Dean Schmalensee again turns his head simply because he is paid not to see

q. Now, in your review of the materials produced by aol and netscape, do you believe that aol's view is that netscape's problems -- excuse me -- that the degree of netscape's distribution through the oem channel was a function of actions by Microsoft?

a. There is no mention in the documents of anything that sounds like foreclosure. There is mention of inconsistent marketing, minimal effort -- fuzzy marketing, i think, may be one term. There is a lot of discussion by aol of netscape's business -- "mistakes" is too strong -- but netscape's business decisions in this area and its actions in this area simply lacking force. There is no mention of Microsoft prevents any more, of course. Nothing like that.

I find it absolutely amazing that any economist would avoid thinking about the harm caused directly by Microsoft in the markets and then get on the stand and try to suggest that the only reason Netscape is having a little problem in the market is because they made some "mistakes", etc.

If Microsoft had no specific plan to preclude Netscape from the market, perhaps that might be the case. But, here Microsoft has the stupidity to suggest to the court that its acts did not foreclose Netscape when AOL itself testified that it was pretty much forced to disadvantage Netscape just to get onto the desktop.

Well. I would not trust this witness to find anything at all in the records.

3:57 PM PDT - Just how much is Microsoft charging consumers for IE?

q. Now, dr. Fisher testified that his estimate had been derived prior to a decision by compaq to distribute netscape's web-browsing software on its presario line of machines. Do you remember that testimony?

a. Yes, i do.

q. And he pointed out in his testimony this june that netscape had paid $700,000 for the placement on compaq. Do you regard that testimony as evidence that it was difficult for netscape to get oem distribution?

a. No. Two things. First, i believe the compaq transaction postdated the 22 percent document. So it's not included there, just to keep things clear. second, as i recall, his testimony had to do with the provision by netscape to compaq of advertising, with a list price, i think, of $700,000, involving, presumably, no out-of-pocket costs by netscape, but, in any case, the list price being probably -- being likely an overestimate of the actual cost to anyone of the advertising in the marketplace. moreover, the testimony wasn't clear as to what period the $700,000 referred to. But if it referred to a year, compaq sold -- now i am going to be stuck on the number -- but millions of units. And if you look at the annual sales of the presario line and divide $700,000 by it, you get something like 18 cents per unit -- something on that order.

q. Now --

a. A low number.

q. Is it your testimony that that is the actual cost of distribution of netscape through the compaq presario line, this 18-cent figure to which you just testified?

a. No, i'd have to know more about -- i think it's an upper bound, because i'd have to know more about the real cost and opportunity cost of that advertising. and i don't know the duration of the contract. So it's an estimate, but i think it's more likely to be high than low.

It is conceivable that Netscape has to pay for distribution of Navigator. They do not have a monopoly product (or a non-monopoly product) to sell it with.

Microsoft receives cash for every copy of IE it bundles with Windows. I would like to know what that cash amount is.

I wonder if Microsoft stockholders think they are being cheated out of possible revenues from IE or they just run down to the bank with their dividend checks knowing they are being paid with money forced from consumers? Which one do you think it is? Which do you think stockholders think it is?

3:42 PM PDT - If you cut off a persons legs, their arms do become very important.

q. Now, in your review of the documents produced by aol and netscape, did you find documents that indicated that aol viewed the download channel as a valuable channel for the distribution of Netscape software?

a. Yes.

Personally, I am insulted by many of the arguments that Microsoft makes in regard to alternative distribution methods.

Remember, before this trial began. Bill Gates made a big point of rejecting a possible settlement that might result in Navigator being distributed with Windows right along side IE. Remember that. Why do you suppose he rejected that idea?

Simple. He wanted to make certain that any competitor operate only under a disadvantage. No preloads. No ability to join with Windows at a OEM. This despite that Netscape was not going to be paid for their browser distributed that way. Oh no. Microsoft wants to be absolutely certain that no money can be paid to Netscape for Netscape products but also wants to make sure that distribution methods are inferior and come only at additional cost for the distributor.

Would Microsoft accept a court order limited the distribution of Windows for the next 5 years only by download? I am sure the Microsoft laywers would argue that would be unconstitutional or something. Yet, they argue in this court that it is fine for competitors. Well. No body believes the Microsoft witnesses anyway.

3:27 PM PDT - Complete foreclosure of all channels of distribution also not required to be proven

q. Now, let me turn your attention specifically, dean schmalensee, to the last quotation from the written direct testimony of professor Fisher at paragraph 214. Could you read that into the record, please?

a. Certainly. It says "Microsoft's response was to exclude netscape and other browser competitors from what Microsoft considers to be the two most important channels of distribution -- oem's and isp's."

q. Now, first, based on the analysis you have done and the materials you have reviewed prior to your testimony today, do you agree with that statement that Microsoft's actions foreclosed netscape from important channels of distribution?

a. Absolutely not.

q. Can you explain why you're of the "absolutely not" view of that question?

a. Netscape -- i can go into great detail or a little detail, but let me do a short version, which is that netscape achieved appreciable distribution through both those channels. It distributed its product through them. it was clearly not foreclosed from doing so.

q. Have you come to a view, based on what you've reviewed, Dean schmalensee, as to whether netscape was, in reality, foreclosed from any significant channel for the distribution of its web-browsing software?

a. I have seen no evidence that it was foreclosed from any significant channel. It used a wide range of channels to distribute its product.

"Foreclosure" is not the standard of proof required.

Was Netscape completely foreclosed? No. But, the acts of Microsoft ruined the market for any such product from anyone who could not force the sale buy bundling with a monopoly product.

Foreclose? No. But, in order to distribute, it had to also be a free product or such that Netscape pays for distribution. Netscape did pay Compaq to distribute Navigator. Then, of course, Microsoft gets on its high horse and points out that Navigator actually got some distribution. Well. Netscape had to pay for that. (I guess it was actually advertising money to Compaq. But, it was a package deal.)

And, there is substantial evidence that OEMs and ISVs had to either favor IE or disfavor Navigator or both. And, there is substantial evidence that quotas were established for IE relative to navigator.

But, just look at the Dean! Boy is he proud to announce that absolutely Netscape has not been foreclosed. Well, whoopee do. Microsoft Corporation is running run by a bunch of nice guys after all. They did not foreclose Netscape. (Everyone does have limits on what they can force.)
 

3:15 PM PDT - Microsoft lawyers continue to focus upon non-relevant observations

q. Assume that the record in this case supports the proposition that prices have not increased as a result of the actions of which plaintiffs complain, that there has been no foreclosure of distribution of netscape's web browsing software -- their ability to get it to consumers - and that there has been no constraint on output generally, or entry generally caused by any action complained of. taking those -- assuming that the record will support all of those propositions, Dean schmalensee, do you believe that there is any basis to conclude that consumers have been harmed by the actions of which plaintiffs complain?

a. No.

Harm to consumers is not the issue in this case. Harm to competitors is the issue.

And, Microsoft has intentionally harmed Netscape with the intent to drive them out of business. Microsoft was even so bold as to publicly announce their illegal plans.

If consumer harm was the issue, the DOJ may take a considerably different approach to this case. For one, they might contest the suggestion by Microsoft that IE is free. Clearly it is ridiculous to expect IE to be free but the OS (obsolete as it is) accounts for the entire price of Windows 98. But, since predatory prices are deemed to harm competition and in the end consumers as well, the DOJ has not seriously challenged that claim.

Clearly Microsoft wanted to drive Netscape from the business by bundling IE. There is no doubt about that. They failed. But, the market for all browser technology is limited to Microsoft Corporation. Microsoft Corporation has effectively and illegally precluded any competition in browser technology. That is the important issue in this case, not proof of consumer harm.
 

3:06 PM PDT - Remember evidence of harm to consumers does NOT need to be proven in this case.

q. Now, in any of the material that you have reviewed, has professor Fisher presented any quantitative evidence that Microsoft's actions up to this point have harmed consumers in any way?

a. No.

q. Has he presented any quantitative or empirically-based analysis that suggests that Microsoft's actions will harm consumers in the future?

a. No.

Present harm does not need to be shown. Nor, does proof of harm in the future require proof.

Indeed the antitrust laws are based upon the premise that the preclusion of competition will in fact harm consumers. It does so by the removal of choice and the eventual monopoly power exercised by a monopolist such as Microsoft has shown they do act to preclude even more competition.

Gordon Eubanks testified to the benefits of competition in those markets where they were permitted to do business. So. If you are going to suggest that competition does not result in superior technology at lower prices, then you can argue that a monopolist will deliver to consumers the best deal they can expect.

Dean Schmalensee may argue that monopolists will deliver the best deal possible, but I doubt it. I also doubt he actually believes that.

2:43 PM PDT - Do not forget. The testimony from Gordon Eubanks supports the DOJ suggestion that competition is best for consumers not monopolies. (Although even Mr. Eubanks had to argue that monopolies are fine if Microsoft owns them...)

q. Let me turn your attention now to a slightly different subject, which is what the plaintiffs and their economists have said about consumer welfare. And could you summarize for me, first, your understanding of what the plaintiff and their economists say Microsoft should have done to avoid, for want of a better phrase, being anti-competitive?

a. Well, it's a little hard to be precise, but i think they believe that Microsoft should have developed internet explorer, not as a part of the operating system, but as a stand-alone application -- made a different set of design choices. I believe they argue it should have sold it for a positive price. And i am not sure what arrangements it could have made to distribute it, but i think that is the core of the argument.

q. Now, in thinking about the plaintiffs' argument and the argument of their experts, have you compared the world that exists today to the world that would have existed had the plaintiffs and their economists had their way?

a. To the extent i have been able to, i have looked particularly closely at plaintiffs' economists's comparisons, but, yes, i have investigated that issue.

q. And, in your experience, is that a standard way for economists to gauge consumer welfare -- to compare the actual world and the "but for" world?

a. That's the only way. The question is how would things have been different but for the actions complained of, and in that alternative "but for" world, would consumers be better off. That is the only way to analyze the question of injury.

q. And in the course of your experience, Dean schmalensee, have you found it standard for plaintiffs in antitrust cases to specify how the world would have been different - indeed, better -- for consumers, but for the actions complained of?

a. Plaintiffs do a variety of things in antitrust cases, but i would characterize that as best practice, yes.

Does Microsoft really think that forcing consumers to buy Microsoft products is the best solution?

Does Microsoft really think the consumers should not have the choice to not purchase IE? At any price?

Does Microsoft really think that they could continue product development if they could not sell Microsoft products?

Here it comes. Microsoft's big argument that consumers are benefitted because Microsoft forced a product to be a non-revenue product that only a monopolist could bundled with its monopoly product?

Predatory products always benefit the consumer in the short run. But, their goal is to establish a monopoly in the long run.
 

1:59 PM PDT - Dean Schmalensee again tries to deceive the court

q. Now, Dean schmalensee, on a number of occasions, the court has asked whether it was appropriate, from an economic perspective, to think about oem's themselves as consumers. do you believe that, for purposes of evaluating consumer welfare or analyzing the economic issues in this case, it is appropriate to think of oem's as consumers themselves?

a. I think it generally is not appropriate. The oem's are distributing windows. They are reselling windows. It is not quite the same, but it's close to the way a Chevrolet dealer resells Chevrolets. One is concerned, primarily in economic analysis, with the welfare of those who use the product. There is a distinct analytical difference, and the focus is on ultimate consumers -- ultimate users.

Not exactly. A Chevy dealer could switch to Cadillacs or Fords. OEMs can not. Even IBM was brown nosed by Microsoft to disfavor its own products.

q. Now, you are familiar with the allegations in this case that concern the provisions of the windows license that set forth what oem's can and cannot do in terms of customizing the desktop or altering the first boot sequence of windows. are you familiar with those allegations and those provisions?

a. Yes, i am.

q. Do you believe that those provisions, on balance, hurt oem's?

a No, i don't.

OEMs clearly disagree. Again, Dean Schmalensee insists upon leaving his area of expertise. The Dean has no qualification to know or even have an opinion on what OEMs may or may not want in their business dealings with Microsoft and other companies. Testimony in this trial proves Schmalensee is wrong here.

q. Can you explain why?

a. Well, there's an important distinction to be made here between what might help an individual oem and what might help oem's as a group. If an individual, let us say, cadillac dealer, were allowed to choose whether or not to put the cadillac nameplate on or whether or not to put the cadillac engine in, my guess is that dealer would be better off, because the cadillac brand is quite strong and the dealer could differentiate in those ways and might well be better off, and might ask cadillac for that right. i think it's highly doubtful whether cadillac dealers as a group -- or certainly not general motors - would be better off if they could all do that, because it would weaken the brand and weaken demand for cadillac as a whole because the car would go from being one that always met certain standards to one that sometimes met certain standards. i think the same issue arises here. If any one oem -- even a large oem -- were to be permitted to make lots of changes to windows, that oem might well be better off. it's hard to argue that relaxing constraints on an individual won't generally make that individual better off. but if they were relaxed broadly, then the question of what windows was, what an isv could expect to see on a machine, what a consumer could expect to get, how Microsoft could advertise, the strength of the brand and the strength of the windows franchise would all be called into question. Weakening all of those would adversely affect oem's as a group.

Installing a different motor in an automobile in no way compares to what an OEM is faced with. Come on Dean, stop acting so naive. OEMs in this trial have testified about their willingness to customize the product they want to sell. Your analogy with the auto industry is a very poor one. Everyone knows how hard it is to replace an engine in the car.

IE is not the same. One click and it is gone. One click and it is back.

q. Let me ask, have you come to an opinion on whether consumers and isv's, as separate constituencies, both benefit from the stability and uniformity of the windows platform?

a. Oh, there's no doubt about that. They both benefit. there is a benefit -- there is a clear benefit to standards in this industry. That, i think, is apparent.

This answer is bogus and deceitful. Would WordPerfect users benefit from being forced to buy Word? I do not see how. The same is true with all applications bundled with Windows. If end users want certain capabilities they can buy them if given the choice. It is illogical and deceitful to suggest that a whole list of products must be forced upon the consumer for any reason.

Does the Dean believe that all auto buyers must invest in leather seats and a GPS unit? What if the customer does not want leather? The Dean suggests customers should be forced to pay. IE has nothing to do with the stability nor the uniformity of the windows platform. It only has to do with the forced sale of another product upon all consumers, a monopoly in other words.

Everyone must buy IE for reasons of "stability and uniformity". Bull. Those are not reason for forcing consumers to buy any product. This is particularly so for a product such as computer software. If the consumers finds out that this or that support is required, it can be added later. In fact, it is being added later now. Witness, the Windows update capability.

Dean Schmalensee is falsely testifying just to help Microsoft establish another monopoly and strengthen the one Microsoft already has. His argument clearly has not basis in economics.

q. And do you have an opinion as to whether consumers and isv's, analyzed separately, would be better or worse off if individual oem's, or all oem's collectively, were allowed to make separate decisions as to what features of windows they would or would not include when they shipped Microsoft's product to consumers?

a. I think it's crystal clear that they're better off now than if all oem's had substantial freedom to choose. If one oem individually had that freedom, it might be a more analytically interesting case. It would depend which oem, which freedom, and so on, but i think broadly there is very little doubt that both are better off because the product is well-defined.

An OS without a browser can just as easily be defined and would cost the consumer less.

I wonder if the Dean owns a GPS unit, yet? Do you suppose he would object if his son were forced to buy a car with a GPS unit because that is the only way cars could be pruchased? You know, "uniform and consistent product definition".

Do you suppose the Dean would go along with that?

q. And when you say "both are better off," you're referring to which constituency?

a. Oem's and consumers.

No customers wants to buy any product they do not choose for themselves. Bill Gates has consistently refused to allow me to pick any of his applications.

Why would an economist even think that consumers want choices to be made for them? The Dean makes his own choices. Bill Gates makes his choices.

q. And what about isv's?

a. Oh, and isv's quite clearly.

Bull. What Dean is suggesting here is that only Chevolets exist. Or, to be more precise, only Cadillacs can be sold. There is absolutely no reason why OEMs should not have the right to not only purchase different components from Microsoft as opposed to the whole bag but also combine products from other manufacturers when and if they thought it would help them sell products.

This whole argument about there being only one product or else is bogus. The existence of Apple harms no one. The existence of Linux harms no one. The existence of OS/2 harms no one. The existence of NT harms no one.

Forcing all consumers to buy IE does in fact harm consumers. Forcing all OEMs to package Windows only one way is simply a means for Microsoft to preclude competition. It is nothing more or less than that.
 

1:47 PM PDT - The Ncompass browser benefits OEM's but Navigator does not? How so, Mr. Economist?

q. And does the development of these shell browsers, the encompass and the other browsers, offer benefits to oem's?

a. Yes. It enables the oem's to differentiate their software -- differentiate their offerings in a number of ways. They could make the encompass browser point to their web site and point to -- provide -- and thus provide a source of automatic advertising updates or upgrades in a range of ways. But they can customize -- they can provide a customized browser that would perhaps connect to an internet service provider of their choice. They can sell that linkage. so it offers them a relatively low-cost way to differentiate their products.

Microsoft Corporation is not the only company in this business. OEMs can and should benefit from browsers from all possible competitors, not just Microsoft.

This testimony reads just like an advertisement or PR piece. The only difference is the guise this so-called economist has put over the court.

The other interesting point of this question is the focus that Microsoft now places on the ability of OEMs to differentiate their offerings. I swear that Microsoft was going to argue that OEMs should not be able to differentiate their products. Did they not claim to bring up a copyright issue of some sort?

Sounds to me like their copyright issue is totally bogus. It sounds like they only object to an OEM altering their own products when it might incorporate non-Microsoft technology. But, if the OEMs toes the line and uses IE, then that is okay? Do you know understand the split tongue offered by Microsoft in this case?

Recall the testimony from Gordon Eubanks? Competition benefits consumers in the anti-virus market but monopolies benefit consumers in operating systems.

Microsoft Corporation has offered no arguments based upon principal. They have only argued principals when they support Microsoft and then ignore those principals when they might support competition. Here an OEM using IE via Ncompass is a plus. But, any OEMs using Navigator is somehow violating some law somewhere.
 
 
 

1:34 PM PDT - Again, Dean Schmalensee testifies falsely about benefits to OEMs

q. Now, i'd like to ask you a few questions on the subject of oem's and how they play into the actions that have been discussed in this case. And you've testified that you believe that Microsoft's actions benefitted consumers and isv's. i'd like to ask you now whether you have a view, on the subject of oem's generally, as to whether they are better or worse off as a result of the actions complained of by plaintiffs in this case?

a. They are better off.

They are? Funny how the OEMs themselves disagree with Dean Schmalensee. Is the Dean talking about HP or IBM?

Remember, IBM? The Dean really needs to explain how IBM is better off having been charged a higher price for Windows than its competitors unless it drops OS/2.

q. And can you tell me why you believe that, overall, oem's are better off?

a. Certainly. Microsoft has provided them a better product to sell, most fundamentally. It's provided them with a better platform that offers more to their customers, and thus gives them something better to sell. it has offered them a product that includes browsing functionality. So if they wish, they do not need to acquire that separately. They may, but they don't need to. it's offered them a platform -- i said it was a better platform. It's better in two ways. Again, it's better directly for their customers and it's better indirectly because of its greater appeal to isv's.

How does an improved monopoly product benefit OEMs? This guy just makes conclusions without any basis for them.

I guess forcing OEMs to sell Word with all machines would benefit them too? Did the Dean consider asking the OEMs if they might want to sell a browser-less system or one with a Netscape browser? Or, does he falsely just assume that everyone is better off selling all Microsoft software and therefore they should be happy to oblige?

It is not better, just more expensive and without choice on the part of the OEMs and end users.

q. You testified -- let me ask, do oem's have to pay to deliver browsing functionality to their purchasers?

a. Not now.

This is false. They do not pay a disclosed amount for IE. But, who is to say that IE is not the entire price and the OS is "free"? Buy the way, which application in the office suite from Microsoft is the "free one"? Or, do you suppose they all contribute to the cost.

Dean Schmalensee is an economist. If he is going to testify that IE is free and the OS is not, then it is upon him to offer the proof. (Remember, Microsoft told Compaq and others that they are raising the price of windows to cover added features.)

The testimony from the Dean on this issue is deceitful.
 

1:29 PM PDT - Microsoft lawyers continue to question an economist on areas outside his expertise

q. And, to your knowledge, Dean schmalensee, is there any evidence in the record that navigator works less well when used with windows as a result of the fact that windows includes web-browsing technologies?

a. None that i have seen.

Actually, there is testimony to that affect. Edward Felten testified that when IE was removed by his program, the performance of the OS improved.

Dean Schmalensee is testifying here about what he does not know. It is almost as meaningless as his economic testimony.

I guess if you plan to ignore the important economic issues in this case, you might as well falsely testify about areas in which you have not read and have no understanding.

1:18 PM PDT - Again, Dean Schmalensee leaves his area of expertise and makes a fool of himself

q. Now, if a person chooses to use netscape navigator - and we'll talk about the question of the ability to make that choice later -- does the user who's using navigator benefit from having IE technologies in windows?

a. Yes.

q. And can you explain why a user would benefit from having, even if the user chooses to use a different browser qua browser -- would benefit from the integration of web-browsing functionality into windows itself?

a. Well, first, that functionality is drawn on, as I've mentioned, by other software vendors to write web-enabled applications. second, that functionality is used by the operating system itself to perform a variety of functions. it's shared code, the use of html as the common interface. so the operating system itself is better as a result of that code being included.

Huh?

Just how am I supposed to benefit from web-enabled applications that I do not buy? Secondly, the operating system runs slower and is inferior due to the larger amount of code. Shared code offers no benefit at all unless the particular user actually uses both applications that share the code.

Dean Schmalensee is out of his area of expertise.

This answer is really stupid when it put in the context of benefitting a user of Navigator. All applications are disadvantaged by Microsoft's decision to bloat the OS with an unwanted application. And I mean all applications. WordPerfect users are disadvantaged by this choice. Allocated memory is needlessly increased. Other system resources are also consumed needlessly.

This question and answer is pure garbage. It is outside his expertise and incorrect.

Microsoft Corporation is dead set upon putting into the record words and statements that a PR department would avoid.
 
 
 

1:09 PM PDT - Dean Schmalensee is getting real close to supporting my contention that Microsoft is charging plenty for the forced sale of IE

q. Have you attempted to do a quality-adjusted analysis of the price of windows?

a. Well, i think there is no doubt that the quality-adjusted price has gone up. I haven't attempted to do a formal analysis. but if you look at just the improvement in the browser, we now have in this platform a browser that is better, by any standard, than the browser that netscape was offering at a retail price of $39 in 1995, available as part of this package. So that additional feature alone would swamp a $2 price increase.

q. And have you done a comparison of what it cost consumers in 1995 to acquire an operating system and add browser functionality to it, versus what it costs consumers today to get that package of functionality?

a. Well, it's easily done if one uses a $63 number for an operating -- for the operating system, and to get a full-featured browser, the low-end number of $15 for netscape. That is, i hope, $78. And a better package is available now for $65.

q. Now, i may have misheard. I just want to make sure the record is clear. Has the quality-adjusted price of windows gone up or gone down over the last several years?

a. It's gone down.

Were it not for bundling IE how much would it have gone down? Microsoft has historically propped up the price of windows with added features. IE clearly fits that pattern. So the observation is not that Windows has gone down as it has improved but rather that Microsoft continues to bundle more and more applications in order to maintain or increase the minimum price that consumers must pay to Microsoft. It is classic product bundling.

Microsoft also sold IE for around $39. But, that was before they spent most of that R&D money.

So just how much is Microsoft charging consumers for IE? It is not zero. The price for IE is a component of the Windows 98 package. But, Microsoft refuses to unbundle the product or allow consumers to purchase only one of them.

If you must buy from Microsoft it is not a better deal, it is a monopoly deal.

12:59 PM PDT - It would help subsidize ISVs if all consumers were forced to buy Microsoft Windows too

q. Have you reviewed the testimony of Mr. Eubanks and Mr. Devlin of oblix and rational software, respectively?

a. Yes.

q. And, do you have a recollection as to whether they expressed an opinion as to the benefits to the isv's that flowed from the integration of web-browsing technologies into windows?

a. Yes, i think both saw clear benefits.

q. Are you aware of any contrary evidence in the record from software developers or the isv community on the subject of whether the integration of web-browsing functionality into windows helps or does not help?

a. I am aware of no such evidence.

ISVs would benefit from all consumers being forced to buy all other products. Unless, of course, they competed with those products.

But, do ISVs and consumers really benefit from forcing any one technology to be dominant in the industry? The answer has to be "no". You have to first assume that the forced technology in all cases is the superior technology. And, as the plan by Microsoft clearly points out, if you can force your technology, the likely hood that competitors will be capable of developing superior technology is greatly reduced.

So if you support Microsoft in this case, you support inferior technology in the long run. At least if you believe the testimony from Gordon Eubanks that active and real competition benefits consumers.
 

12:51 PM PDT - Does Microsoft think that Windows is improved when you have to buy Word with it?

q. Do you have an opinion as to whether windows has become a better platform for consumers as a result of the conduct in which Microsoft has engaged over the last several years?

a. Yes. It has become a better platform. It provides web-browsing software. It provides isv's the opportunity to enhance that platform, which they have taken by using that functionality to write web-enabled applications. And within windows itself, the integration of internet explorer technologies to perform such things as help -- the help function -- and a unified user interface have provided benefits directly.

No application improves the OS unless it replaces it at least in part.

I guess what the lawyer wanted to ask was whether a user is better served when they buy at least one application with their computer. That is clearly yes. But, that is what applications are supposed to do.

And, no application justifies requiring the consumer to buy it.

Microsoft wants to argue that all consumers should be required to buy IE because it is a nice product that provides a service to the user. Sorry. But, if that were true (I.E. IE had a value), then Microsoft should be happy to be able to allow the consumer to buy the product or not buy the product.

This case is about the decision on the part of Microsoft to deny all consumers that choice.

12:42 PM PDT - Dean Schmalensee and Microsoft again try to mislead the court

(this question relates to applications being written for browsers)

q. And are you aware of any contrary evidence in the record that people either are not writing this or this is not an important trend?

a. No. I find it hard to imagine there would be such contrary evidence.

Some applications are. But, as far as I have heard, Microsoft Corporation has almost no plans to write anything for use on the internet unless it requires IE or Windows.

It is incorrect for Microsoft to suggest that the DOJ is trying to argue no one is writing applications for browsers. Clearly Gordon Eubanks testified in regard to his new company.

But, this is why it is absolutely important that Microsoft not use one monopoly to achieve a similar status in internet browsers. It is also why it is so important that browsers be their own market segment. There are enormous opportunities for internet applications and technology. The absolute worst scenario would have Microsoft (or any one company) dominate that industry.

12:31 PM PDT - Dean Schmalensee again explains why Microsoft thought it was so important to rub out Netscape

q. And can you explain to the court why you believe that "the web as platform," as you've said it, is a threat to Microsoft's platform in the manner that the plaintiffs described it?

a. Well, it's a threat in precisely that manner. Again, the technology is -- let's take a simple example. Suppose i am in the business of writing software to keep track of somebody's calendar. I can write it for windows. That's fine. And windows users can buy it. I can write it to run on a web server and to store the data for each individual on the web. And, indeed, there are companies that do that, and aol fairly recently acquired such a company. if i write to the web server, i'm not limited in my audience to individuals who have windows machines. anyone with a browser can interact with the server. more interestingly -- and, again, this is a widely-discussed set of developments -- if the data are on the server and not on my desktop, the data can be used by others. In fact, at m.i.t., We run a server-based calendaring system for exactly that reason, so people can schedule meetings, but it doesn't have to be on an m.i.t. server. That could be on a server in china, but for security issues, perhaps. but the advantage of having the application on the server is it can be accessed not only by multiple individuals, but by the same individual from different machines. i can borrow somebody else's computer and check my calendar on the web. If i am traveling, i don't necessarily have to take my computer to check my calendar, if i can borrow one, and so on and so forth. As the internet becomes faster -

the court: how do you bypass explorer?

the witness: you don't need explorer. Any browser will do it. It doesn't have to be - the court: if you've got explorer and nothing else --

the witness: then you use explorer.

the court: you're using explorer.

the witness: if you have netscape and nothing else, you're using netscape. If you have hot java and noting else, you're using hot java.

the court: okay.

the witness: the point is there is no windows-related issue of attracting isv's. The isv could be writing for the apache web server that runs on unix on some machine in ecuador and never know anything about windows, except that there is the internet standard to which he must comply, and he can, you know, decide to meet those standards.

the court: all right.

I trust the court understands why Microsoft thinks it is so important to make certain there are no competitors in browsers.

Gosh. I mean. If there was a real market for browser technology, as opposed to forced feeding, someone other than Microsoft Corporation might get some business.

However, what is really interesting about this Q&A is that browser applications do not depend upon IE as much as Microsoft would want. Clearly they want all browser applications to required the pre-purchase of IE. Microsoft is working on that as much as they can. And, of course, as long as the market is ruined for such products, they will eventually succeed in the removal of all non-Microsoft technology. That is what they are trying to do. There is no question about that. Have they succeeded? No. And, that is bothering Microsoft very much. Microsoft wants all its products to be monopoly products.
 

12:18 PM PDT - I guess when Microsoft knows that competition does not exist they have to talk in terms of "threats"

q. Have you looked into the question over the last six months of whether the intervening months have made those platform threats to Microsoft more or less serious?

a. I have, indeed.

q. And what is your opinion, based on the review you've done in the last six months?

a. None of them have become less serious and a number of them have become notably more serious.

q In your estimation, Dean schmalensee, which ones have become more serious? And could you explain to the court the work you did and the materials you reviewed to come to those conclusions?

a. Well, i think the most obvious development here is the aol/netscape merger and the alliance with sun. Reviewing documents associated with that set of transactions makes it clear that the threat from that quarter has become more serious. second, it would be impossible, i think, to avoid the conclusion, reading the trade press -- reading the press generally -- to avoid the conclusion that Linux has become more serious and java has become more serious as a consequence of that merger as well. but i guess i would distinguish between aol as a platform threat and java as a platform threat. Both have been enhanced by that merger.

Antitrust law is supposed to help up and coming technology (which Microsoft likes to call threats) to be competition. That is what it is supposed to do.

That is why a monopolist is supposed to be prevented from precluding competition. So that natural competition can surface and play a role.

Microsoft Corporation incorrectly portrays possible competition as "threats". Well. To a monopolist, it might look like a threat. But, to consumers, it is a god-send. It is future or present competition and the antitrust laws and "fair competition" laws are designed to make certain that competition does surface and survive.

Microsoft incorrectly uses this "threat" concept to justify illegal acts. It never does. Illegal acts are not justified by up and coming competition or even the possible threat of such competition. Precisely the opposite is true.

Is Java more of a threat now? Is Netscape more of a threat now? Is the AOL-Netscape merger offering a threat of some kind? Is Linux beginning to offer competition? The answer should be "yes" to all of them. And, the proper application of the antitrust laws should buttress that situation. Nothing excuses illegal acts of Microsoft in trying to preclude competition.
 

12:11 PM PDT - Again Dean Schmalensee supports the DOJ case

q. Did netscape ever, to your knowledge, develop what you called the rich array of api's?

a. It never offered them. Whether it had them internally or not, i don't know.

Microsoft adopted an illegal plan to remove the revenue base for Netscape. Does the Dean think that maybe that is why Netscape never got around to offering APIs to developers? Or, developing a componentized browser?

Or, is this guy so arrogant to think that a monopolist can remove a revenue base for a competitor illegally yet still blame the rubbed out competitor for not developing better technology.

Comments coming from Microsoft clearly laid out their plan to preclude Netscape from competing by removing the revenue stream that ongoing development depends upon. So. Years ago a college drop out knew more about the economic impact the removal of an income stream might have that this so called economist.
 

12:02 AM PDT - Dean Schmalensee again testifies outside his field of expertise to deceive the court

q. Is there any alternative explanation of which you are aware for why netscape did not succeed, at least so far, in developing a more popular platform for applications writers?

a. It didn't produce a componentized browser -- as far as i know, still hasn't produced a componentized browser -- that would expose an array of api's that developers could use to write interesting applications.

This guy is an idiot.

He claims to be an economist. But, in answering this question he flatly ignores all economic forces and principals used by Microsoft Corporation to preclude a competitor from distributing their competing product and then goes one further and claims that the only reason Netscape has lost out and IE gained favor is because the IE browser was "componentized"? This is pure bull.

First, suggesting that technological differences caused the success of the Microsoft product is outside his expertise. Secondly, he flatly ignores a whole series of antitrust violations engaged in by Microsoft for the specific purpose of precluding Netscape from the market.
 

11:48 AM PDT - And, a way to tell if Microsoft is still violating the antitrust laws is to see if they still force all consumers to buy IE?

q. Now, professor Fisher testified a number of times that he believed that Microsoft had won the browser war -- by sometime early or mid-1998 was, i think, as close as he could get us -- when Microsoft's share of what he calls the browser market, as measured by adknowledge, exceeded that of netscape. have you seen any economic analysis or evidence that supports the proposition that the browser wars ended because, under professor Fisher's view, Microsoft had 50.01 percent?

a. No. At some level, the way to see if a war is over is to see if people are still firing. And both sides in this war are still firing.

The 50% figure is important legally. Case law generally holds that a company can not be accused of trying to achieve another monopoly unless they reach the 50% figure. Perhaps the war is not over. But, the war does not need to be over.

Antitrust law is violated by the acts conducted by a monopolist. No where does it say that the competitors need to have been eliminated from the market. Stac Electronics was not eliminated. Corel was not eliminated. Caldera was not eliminated. IBM was not eliminated. OS/2 was not eliminated. Netscape was not eliminated.

Do Microsoft lawyers really think they are free of antitrust liability if their competition is not completely removed? No. They know that is incorrect.

The sickening part of this testimony is the deceitful way that this so-called economist suggests that everything is fine as long as Netscape is still kicking. It is not just fine. Consumers are being forced to buy unwanted products from the monopolist.

Economically speaking, IE could be a perfect product, but if all consumers are forced to buy, they are directly harmed. Microsoft Corporation continues to harm consumers in their ongoing effort to preclude competition. The fact that Netscape may still be kicking is just not relevant.
 

11:40 AM PDT - Really? Microsoft offering IBM money not to compete does not count? And, getting Apple, Intuit and IBM to disfavor Netscape does not count.

q. Well, focusing on that space, do you believe that consumers have less choice among platforms than they did or than they would have as a result of Microsoft's conduct?

a. No, i don't believe they have. I believe that Microsoft's conduct has in no way reduced choice in that area.

q. Well, have the plaintiffs or their economists presented any evidence that there has been a reduction in competition among platforms as a result of Microsoft's conduct?

a. None.

This guy is blind. Microsoft has conducted a whole series of acts designed specifically to remove the Netscape browser from the market.

And, this guy can not see how that would reduce competition among platforms? Is the Dean really blind?

11:23 AM PDT - Again, Dean Schmalensee testifies to help out the DOJ

q. So based on your review of the government's complaint, of the testimony of the government's witnesses, and of your review of all the materials that you have reviewed, what do you think is the appropriate arena of competition to analyze and to assess from a consumer welfare perspective?

a. Platforms.

q. Well, focusing on that space, do you believe that consumers have less choice among platforms than they did or than they would have as a result of Microsoft's conduct?

a. No, i don't believe they have. I believe that Microsoft's conduct has in no way reduced choice in that arena.

And, which platforms can consumers pick and choose between when they buy their personal computer, Mr. Schmalensee?

Well. It is in Microsoft's interest to paint the relevant market in which they hold a monopoly as broad as possible. Microsoft would like to include all middlewear and all operating systems too. To some extent, yes, that is competition, or at least future competition. But, consumers still must buy the monopoly product. Only other operating systems can substitute for the OS. The fact that not all applications rely upon an OS as its platform is not that relevant. Except for the fact that Microsoft acted to make certain that only Windows provided that other platform capability. They failed. Navigator did not go away as Gordon Eubanks testified. So. The Netscape browser is still a "threat" according to Microsoft. So what? Monopolist can not use their monopoly power to remove threats whether they are real or imagined.

For the purpose of the monopoly determination, other platforms do not count simply because they can not be substituted for the monopoly product.

An application using a browser might not rely upon Windows, but all consumers must still buy Windows until there is real and effective competition in consumer operating systems. Until that occurs, Microsoft has a monopoly on that product category. And, consumers who want an Intel PC will either be forced to buy Windows by the OEM or be practically required to buy it simply due to the fact that no all applications run in browsers at this point in time.

Microsoft did not reduce the choice in platforms. There were none before. And, Microsoft maintained that situation. Well. The Microsoft lawyers know full well that maintaining a monopoly is also a violation of the antitrust laws.
 

11:08 AM PDT - Yes. But, baring court action Microsoft will continue to act illegally

q. Now, we will turn to this subject later, but there has been some suggestion on the record that the browser wars are over. Based on your review of both Microsoft and aol/netscape documents, do you think that that suggestion has a basis in fact?

a. No. Both companies plan on continuing to improve, continuing to innovate, continuing to invest and continuing to distribute. It does not look like a competition that has concluded.

It must be truly disappointing to Microsoft Corporation that they have not snuffed out improvements in technology coming from other companies. But, this is supposed to be an economic witness. A expert no less. For him to simply note that technology continues under these conditions is rather deceitful on his part.

Does the Dean really think that everything is okay as long as technology improves? Does the Dean really think that everything is okay if improvement only comes from a monopolist? These are not even economic questions.

Does the Dean think that consumers would benefit from the advancement of technology if it only comes from a monopolist? Gordon Eubanks does not. He testified to the opposite.

The deceit that Dean Schmalensee offers relates to his focus upon the ongoing development of technology hoping the court and public will be so dumb as to think that a viable economic model is not necessary. Microsoft Corporation knows that is false. Microsoft's monopoly profits are excessive.

The sad part is that the Dean wants to suggest to the court that Netscape does not need a revenue base yet Microsoft does and should be also permitted to force 100% of all consumers to buy Microsoft products.

11:00 AM PDT - Again. Dean Schmalensee proves he fails to apply his own expertise to this case

q. Now, specifically -- let me ask, generally, do you have an opinion as to whether consumers will continue to reap the benefits of competition between or among developers of browsing software?

a. Absolutely they will. As those products continue to be improved, consumers will continue to benefit.

What competition? I though Dean Schmalensee was an economist. Does he not understand simple revenue principals? If you can sell your products, you might have money to pay employees and you may be able to continue to further develop technology. If you can not sell your products, and you can not pay your employees, you may not be able to continue development.

Here Dean Schmalensee continues to ignored a basic economic principle acting in this case simply because he was paid money. That is the only reason I can think of that an economist would suggest that technology and improvement in that technology would continue despite only one company being able to earn revenue.

Whatever you do, do not believe a word this economist says. He is bought and paid for. And, he has abandoned his economic understanding and expertise in exchange for something from Microsoft.
 

10:54 AM PDT - Sorry, Dean. Sun has not indicated it is going to contribute to the browser at all.

q. Let me follow up on that, if i could. Do you have some basis for your testimony that both Microsoft and netscape, now part of aol, intend to continue investing in and developing new and better browsing offerings?

a. Well, i think it's clear, as regards Microsoft, from testimony, from the release of IE 5, and from documents I've seen that point to ongoing developments. It's also clear from documents produced in connection with the aol/netscape merger that aol, if anything, plans to intensify efforts and to bring sun into efforts to improve netscape's client, i.e., Browsing software.

I guess Microsoft is rather disappointed that it has not been able to snuff out development on the Netscape browser simply by preventing its sale. But, at least the Dean could get his facts straight. Sun's participation is with the server products not the client browser. The browser has had to go into open source just in order to survive.

But, then any economist could figure that out.
 

10:45 AM PDT - As an economist, Dean Schmalensee is sick.

q. Is it your opinion that internet explorer technologies will continue to be judged to be superior to netscape or aol's web-browsing offerings?

a. I can't know that, Mr. Lacovara. When you read the trade press, it's clear that communicator 5.0 or navigator 5.0 -- however it's going to be sold -- it is much anticipated it will have new features, promises to be smaller and faster, and may prove to be better than internet explorer 5. I don't know. It is pretty clear both companies are going to continue to work to improve their offerings.

Can the Dean really be this dumb?

Here the Dean says "it is pretty clear that both companies are going to continue to work to improve their offerings". Well. They might do that.

But, for an economist, the Dean is looking pretty sick. What does he know? Microsoft sells their product. Microsoft forces all consumers to buy the IE version. The market for browser is ruined due to illegal acts of Microsoft. And, Netscape is forced to develop whatever product it can under the limitation of being unable to sell it.

And, here you have an economist suggesting that everything is ok. The computer software industry is seriously sick as a result of Microsoft's action and all this guy can do is suggest that technology will advance just as well without any economic model to support it.

No person should believe a single word this witness has to say. His economic testimony is bankrupt.

10:31 AM PDT - Dean Schmalensee supports the DOJ position that competition benefits consumers

q. Thank you, Dean schmalensee. is it your opinion, based on the analysis you've conducted, that Microsoft's actions and conduct have resulted in consumers getting better browsing software than they would have gotten from netscape?

a. Yes. Microsoft invested significant resources in improving the quality of its product. Netscape invested significant resources in improving the quality of its product. And the result, as numerous commentators have pointed out, is consumers have benefitted by having rapid improvement in the quality of browsing software.

Keep in mind that the quality of the two products is not important.

What Dean Schmalensee is doing here is supporting the DOJ's argument that active and fair competition in the browser market is and will be necessary to benefit consumers.

Of course, the lawyer from Microsoft wants everyone to think that it was Microsoft's competition that improved things. But, you do have to have two in order to compete. Dean Schmalensee supports the basic premise behind the antitrust laws by this answer. It is very important that competition exist. And, that does NOT mean that Microsoft can drive out competition or drive prices into the ground.

It is for this reason that predatory prices are illegal. It is also for this reason that bundled or tied products are illegal. They ruin markets.

So. When Microsoft improves its browser, there were competitive. When they ruined the market for all browsers, they were anti-competitive.

Dean Schmalensee claims not to see this. Personally, I do not believe him. He knows full well that ruining a market harms competitors and consumers. He is only paid to ignore it. And, apparently willing to take the money.

10:17 AM PDT - Ruining the market for browsers is not a benefit to consumers

q. In addition to expanding a range of consumer choice, do you believe that competition has resulted in a change in the price that consumers had to pay for web-browsing software?

a. Absolutely. As that chart indicates, the average cost to consumers of netscape's product in 1995 was around $15. internet explorer came with windows, but wasn't particularly interesting and wasn't used much. now there are no separate charges for browsing software. So the price has fallen substantially.

There is little doubt that Microsoft has totally ruined the market for internet browsers and related technology.

If Dean Schmalensee wants to suggest that ruined markets are a benefit of some kind, he needs to offer rather substantial proof.

The Dean could start by assuming that all operating systems could not be sold. In other words, Microsoft could not earn revenue by developing and distributing a consumer OS. According to the Dean's testimony right here, that is a benefit for consumers.

He could than advance to other products such as automobiles, telephone services, what have you. Does the Dean think that education would improve if professors could not be paid by universities? Does the Dean think that manufacturers of hard goods could continue if they can not sell their products?

Economically speaking this is false. Dean is an economist. But, he continues to ignore basic economic principals. Dean Schmalensee would flunk a freshman economics course with his testimony. And, he is supposed to be a Dean?

The argument that the Dean is making here is that a lower price (even a zero price) always helps consumers. Economically speaking (and the Dean claims to be an expert here) that is a false premise.
 

10:03 AM PDT - Again, Dean Schmalensee a so-called economists ignores a very important economic concept - ability to earn revenue

q. I'd like to explore, if i could, a few aspects of your basis for this general conclusion, and, first, talk about the choices -- consumers' choices for web browsing software. are you of the opinion that consumers have more and better choices today as a result of Microsoft's actions?

a. Absolutely. In 1995, there really was one full-featured web browser, navigator. I think plaintiffs have claimed it had around an 80 percent share of browser use or usage early on. I think that may be too high, but, in any case, it was clearly the leading product. And the competing products were, frankly, not as good. Microsoft introduced internet explorer and, more importantly, improved it rapidly, putting competitive pressure on netscape to do the same. I don't think there is any possible alternative conclusion but that that competition made consumers better off.

Dean Schmalensee continues to ignore the economic aspects of Microsoft's act and focuses only upon the technology. Did Microsoft improve their technology? Yes. So what? That is not relevant in this case. What is relevant is the economic affect of one company forcing a zero price in a key market such that no competitor can earn revenue. These are the acts relevant to this case. The improvement of technology from Microsoft or anyone else is not.

"Economics" professor. Think economics.

You need to address the impact upon competition and upon consumers when a predatory or zero price is forced into a key market.

How could Microsoft continue to exist if all operating systems were required to be free? Would the consumer be experiencing great advancements if that were the case.

Another point to be made here is that the Dean does reference the benefit of competition. So, the Dean needs to answer how consumers are going to be better off if Microsoft is successful in precluding Netscape from ongoing R&D. Microsoft clearly tried to do that. They focused upon a plan to remove the revenue source available to Netscape and used their monopoly power to pull it off. Are those "acts" going to benefit or harm consumers?

9:49 AM PDT - Dean Schmalensee falsely attributes improvements in technology and the growth of the internet to Microsoft's acts

q. Could you walk the court through this exhibit, dean schmalensee?

a. This exhibit compares a number of aspects of interest to consumers as between 1995 and 1999. The first deals with the browser. And in 1995, there were two full-featured browsers. IE 1 was available at zero marginal cost. Very few people used it. Navigator was available, the other full-featured browser. It cost $15 -- at least $15. We'll come back to the question of measuring cost, but on average, at least $15. in 1999, communicator 4.5 is available. IE 5 is available. They are better products. They are available to consumers at zero incremental cost -- cheaper. the next line compares the price of the leading software platform, windows. In 1995, windows with IE 1, which was not particularly popular, was available for a price less than $63. in 1999, a better platform, windows 98, is available -- including IE 5, a better browser -- is available for $2 more, on average. in 1995, there were about 3 million web users and, in 1999, more than a hundred million web users. And this is not independent of the relations in the first two lines. in 1995, there were no componentized browsers available for use by independent software vendors. In 1999, internet explorer is and has been available as a componentized browser. Netscape's componentized browser is still on the way, i gather, but it is under development. in 1995, there weren't any applications -- at least none that i am aware of -- that were web-enabled in the sense that they easily used the capacity of the web to provide services and information to consumers. Now, there are many, notably quicken, lotus notes, eudora, and others as well.

q. Now let me focus your attention for a moment on the row labeled the "number of web users." Is it your contention, Dean schmalensee, that Microsoft is responsible for the growth of the web from 3 to a hundred million users over the last four years?

a. No, that would be a little hard to sustain. The web - the web was -- one hates to make a statement about historical inevitability, but the web was going to grow. the internet was going to grow. The only point to be made here is that the availability of better and cheaper browsing software and the availability to isv's of the functionality to write web-enabled applications contributed to that growth.

q. Has Microsoft made engineering decisions, other than the integration of web-browsing functionality itself, that contributed to the growth -- that made it easier for people to get connected and start using the web?

a. Well, certainly Microsoft's -- the way Microsoft exposed api's to developers enabled -- it made it easier to produce alternative browsers. So there are now things like the encompass browser produced, using the functionality provided by internet explorer in windows, and others, that enable software vendors to provide, if you will, customized access, enable oem's, in connection with software vendors, to provide access to preferred web sites, and to develop new portals with connected clients built on internet explorer technologies.

q. Are you familiar with the internet connection wizard and internet referral server technologies?

a. Yes. As part of its windows product, Microsoft has added features that -- automate is too strong, but facilitate individual users connecting to the web. The wizard you spoke of is one such.

q. Before coming to your conclusions at a greater level of detail, Dean schmalensee, have you formed an opinion as to whether, as a general or overall matter, consumers are better off today than they were in 1995 because of the actions taken by Microsoft?

a. I have. They are better off.

Unfortunately, the Dean's conclusions are not based upon the citing information at all. A lay person might conclude this way. But, the Dean is an expert. He MUST consider the fact that an alternative time line needs to be consider. What would have happened if Microsoft did not ruin the market for browsers? That is the comparison that an expert must make. An expert can not conclude that this act or that act made consumers better off unless a comparison is made. Here he only compares to the past. Well. I would hope consumers today are better off than 5 years ago. But, the issue is whether consumers are better off being forced to buy IE and use it or being permitted a choice.

Remember, Gordon Eubanks testified that the anti-virus market and the Java market benefitted greatly from strong and real competition. Well. So-called economic experts should be able to do a better job than simply looking at the historical improvement and falsely conclude that all the benefits were derived from Microsoft.

The testimony from Dean Schmalensee is worthless because he is ignoring any and all benefits that might be derived from active and fair competition. He only looks at the data as a lay person would. Even Gordon Eubanks knew better.
 

9:34 AM PDT - Does Dean Schmalensee really think that all consumers benefit from being forced to buy IE?

q. And can you summarize for me, sir, what you have found as a result of that analysis and study?

a. In brief, there is no evidence that Microsoft's actions -- the actions complained of -- have harmed consumers. On the contrary, Microsoft's actions have led to the availability of better and cheaper web-browsing software, better and cheaper platforms, and have contributed to the growth generally of the internet, and portal sites, and so forth.

q. And have you prepared a summary exhibit that sets forth, in general terms, your conclusions on the subject of consumer welfare?

The Dean is incorrect. There is lots of evidence submitted in this case that consumers prefer not to have to buy and use IE and are directly harmed by it. His conclusion here is false. OEMs presented evidence that they wanted a choice. Over half of the browser users preferred the Netscape browser. Almost half still do. And, they have to go to an extra effort in order to get it.

For an economists, Mr. Schmalensee is failing. Notice how quickly he just ignores all of the economic costs associated with the user being required to either switch browsers or support two versions should they prefer the Netscape version.

His testimony his is simply falsified.

Do you suppose he would have a different opinion is all consumers were required to switch to OS/2? OS/2 is a superior product. So, his reference to the benefits of IE also apply to OS/2. But, an economists can not ignore the real costs associated with forcing a consumer to change products. He does. He does because he is paid to ignore the economic realities of what Microsoft is doing to consumers. When consumers are given a choice to switch and most importantly the option to switch or not, then they can decide in their own situation. Microsoft denies that choice for all consumers causing a direct and significant economic harm today. Dean Schmalensee ignores it.

9:24 AM PDT - Judge Jackson introduces the "joke" e-mail he received

court: very well. I think, however, before we get started, i would call your attention to an e-mail that i got that is somewhat dated, but i think it's apropos. and this is a hypothetical letter to Microsoft support. "dear sirs: last year i upgraded girlfriend 1.0 to wife 1.0 and noticed that the new program began unexpected child processing that took up a lot of space and valuable resources. No mention of this phenomenon was included in the product brochure. In addition, wife 1.0 installs itself onto all other programs and launches during system initialization where it monitors all other system activity. Applications such as pokernight 10.3 and beerbash 2.5 no longer run, crashing the system whenever selected. "i cannot seem to purge wife 1.0 from my system. i am thinking about going back to girlfriend 1.0, but un-install does not work on this program. Can you help me?"

the response is as follows: "dear sir, this is a very common problem men complain about, but is mostly due to a primary misconception. Many people upgrade from girlfriend 1.0 to wife 1.0 with the idea that wife 1.0 is merely a `utilities and entertainment' program. Wife 1.0 is an operating system and designed by its creator to run everything. It is impossible to un-install, delete or purge the program from the system once installed. You cannot go back to girlfriend 1.0 because wife 1.0 is not designed to do this. some have tried to install girlfriend 2.0 or wife 2.0, but end up with more problems than the original system. Look in your manual under `warnings: alimony, child support.' "i recommend you keep wife 1.0 and just deal with the situation. Having wife 1.0 installed myself, i might also suggest you read the entire section regarding general protection faults. You must assume all responsibility for faults and problems that might occur. The best course of action will be to push apologize button and then reset button as soon as lock-up occurs. System will run smooth as long as you take the blame for all gpf's. "wife 1.0 is a great program but is very high maintenance." "sincerely, Microsoft."

Not a bad joke. Interestingly enough it is relevant to this case. Microsoft is being charged in part with preventing individual consumers and OEMs from being able to remove unwanted and undesired features of Windows 98. It is very clear that Microsoft is doing that simply to make it much more difficult for all users to benefit from other non-Microsoft applications. They have even gone so far in this case as to testify that it is not possible to remove IE because it is only one application with the OS. Of course, that has been proven false by Microsoft itself in releasing IE 5.

You do need to keep your humor as well as your intelligence.

9:17 AM PDT - The focus of the review of the rebuttal testimony will be upon the sound or un-sound economic principals that Dean Schmalensee addresses. It is a given that he is paid by Microsoft to testify. That is true with almost all expert witnesses.

June 21, 1999 - Monday

11:54 AM PDT - Microsoft Corporation does not know which way is up

Take a look at the suggestions being made by Dean Schmalensee and compare them to the suggestions made by another Microsoft witness just last week, Mr. Eubanks. Today, the Dean is suggesting by his testimony that somehow consumers are better off with a monopolist forcing all consumers to buy one product without choice, yet Gordon Eubanks testified on behalf of Microsoft Corporation that competition in the anti-virus market was highly beneficial to consumers.

Well which is it, Microsoft? Does competition benefit consumers or does a monopoly make all consumers better off? Microsoft Corporation can not argue both ways. Microsoft Corporation can not argue that the monopolist, Microsoft does not harm consumers yet at the same time present witnesses in their defense who testify that competition greatly benefits consumers.

Are they both lying? Is Dean Schmalensee testifying falsely or is Gordon Eubanks? Would Gordon Eubanks fail a class taught by the Dean? Would the Dean disagree with the testimony from Gordon Eubanks that competition in the anti-virus market was beneficial?

The testimony being offered by Microsoft is meaningless. It is worthless. Microsoft has paraded one witness after another before this court and required them to testify in a manner that they themselves do not even believe.

11:28 AM PDT - But, harm to consumers is not required to be proven.

Microsoft continues to present non-relevant evidence.  When a monopolist acts to preclude competition, harm to consumers is presumed to be the case.   Harm itself does not need to be shown nor proven.

If Microsoft wants to try to prove they are not charging consumers for IE I would like to have them try.  Testimony in this case has already been submitted by Microsoft that they have increased the price of windows over time for "added features".  Microsoft can argue that IE is free.  And, the DOJ can let them argue that point simply because it strengthens the case for predatory prices.  But, no proof that consumers are not being charged a monopoly price for IE has been offered by Microsoft.

Dean's suggestion that somehow consumers are benefitted by Microsoft forcing a zero price for browsers is bogus.  Zero prices for entire markets (predatory prices) are harmful not benefitial as he suggests.  Why?  Because competitors are removed from the market leaving only the monopolist to profit.  A competitive price for browsers does benefit consumers .  A competitive price did exist just before Microsoft bundled IE and forced the hand of all consumers.

If you are going to buy the false argument that ruined markets benefit the consumer, you better start with the product you or your company sells to pay your wages.  Windows is not free.  Only the product a competitor was trying to sell was forced to the zero price level.

If Microsoft actually believed their own witness, they will drop the price for Windows to zero.  When they do not do that, they are only presenting false evidence.  The Dean is only suggesting that competitors be deprived of selling their products.  He is not suggesting that Microsoft Corporation be required to live without a salable product.  Therefore his argument is false, misleading and deceitful.  "Paid for" in other words.  But, his words do not reflect his own thoughts.
 

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